Hey
Lets say I have a property that throws off $1,440,500 a month in gross in come for residential and $26,700 in gross income for retail. The cap rate for residential is 4.75% and retail is 5.5%. How would you blend these cap rates to show the one blended cap rate in excel?
Thanks
Personally, I like to have these pieces bifurcated, but I get why you'd want to do this. I would probably just do a weighted average based on square footage, but I guess you could do it on income as well. Mechanically, that would be a simple sumproduct formula.
Going off from above, we use blended EGI.
Quick run through would be resi is 98.2% of total EGI and retail is 1.8%. Multiply 98.2% by resi cap of 4.75, and 1.8% by 5.50 retail cap. Sum those two products and you should get a 4.76% bifurcated cap.
I like this method. Out of pure curiosity, where are you U/W retail at a 5.5% cap, seems aggressive for ground-floor retail on a midrise? I'm usually 100 bps higher on the entry, mainly due to pretty conservative assumptions.
Why EGI as opposed to NOI? Any deviation in expense ratio between product types is going to distort your weightings. I get this isn't an exact science but that just seems cavalier with the math
Historically, mixed usage being its own asset class will be underwritten with a single cap rate, not a blended or mixed based on MF vs Retail income.
Blended Cap Rate Math Question (Originally Posted: 07/23/2017)
Hey everyone, I was taking a look at a mixed use property where the store front generated an NOI of 26,700 while he MF portion generated NOI of 1,440.500 (respectively 1.82% of NOI and 98.18% of NOI). When calculating the blended cap rate, I do (98.18% times 4.75%) + (1.82% times 5.5%) where the 4.75% and 5.5% are the cap rates for the MF portion and the retail portion, respectively. This gives me a blended cap rate of 4.7636%. When you factor in the NOI, I arrive at a valuation of $30,800,235.
This is where I am running into a predicament. Theoretically, if I value both portions separately and add them up, I should get the same result as when I get the blended cap rate. However, when I value both portions separately, I get $30,326,315 for the MF portion and $485,454. Add these two up and you get 30,811,769 which is off from the above valuation.
I was hoping someone here could find a flaw in my math and maybe explain why I am getting this? It can't be due to rounding error or anything of that sorts so it has to be a mistake on my end 100%.
Thanks guys.
I would tend to agree - unless of course you're sectionalizing the 2 portions and selling them off independently.
I think this is definitely on a case by case basis. If I'm underwriting something with a larger retail piece, I prefer to do it as a sum of the parts. I've done it both ways with a bifurcated cap rate and with just baking the retail NOI piece (generally smaller that 5,000 sf) in as an income line item.
I like to think of them separate sometimes to plan for TIs/LCs and other unique situations. This is my perspective (equity side) and not how everyone does it, and not even I do it this way all of the time. I'm sure lender's look at it differently.
Wouldn't you just value the two separately as you did to get a total valuation of $30,811,700? This approach would yield a blended cap equal to total NOI/total valuation = 4.76%. This is indeed equivalent to 98.18% * 4.75% cap + 1.82% * 5.50% cap...
I mean I understand that if I take each portion's NOIs and divde by the blended cap rate, then I will get the 30,800,235. I just want to double-check my work which is why I am taking each portion's respective NOI's and dividing by their respective cap rates. I'm just not arriving at the same results.
I think this depends on the quality of tenancy in the retail space. If it is a mix of mom and pop tenants I would probably just roll it into the NOI and cap it after the fact. If there is a McDonalds with a 25 year lease on the ground floor I am breaking it out and applying a different cap rate.
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