Question

TRUE OR FALSE

In calculating NAV, Green Street Advisors uses an “Economic Cap Rate” that is different from capitalization rates used by appraisers, in that the cap rate is applied to NOI after deducting a reserve for recurring capital expenses.

Answer 1

Answer- The statement is TRUE.

Explanation-A cap rate is the yield generated by a property or group of properties. Cap rate is the net operating income (rents minus expenses), or “NOI,” expressed as a percentage of a property’s value. Cap rates have an inverse relationship to asset value, so when asset values rise, cap rates fall, and vice-versa.

Net operating income (NOI),can be calculated including or excluding capital expenditure. Capital expenditures are the costs associated with the long-term ownership of commercial real estate that are capitalized, not expensed. Green Street Advisors uses the cap rate is applied to NOI after deducting a reserve for recurring capital expenses. They call these expenses cap-ex or contingencies.