Loaded Cap Rate?
Hey All - are you typically using loaded cap rates and adding property taxes back into NOI when looking at a deal/presenting to investors? I’ve seen it done both ways at different firms, wondering what the general opinion is.
Especially commercial vs multifamily....
I feel like that taxes are an integral part of the NOI so it should be standard practice to include it in the cap rate calc. I think the term should be rephrased to indicate an NOI without the taxes as opposed to this where they are included. Why would taxes not be included in the NOI calc? Let me know if I’m understanding your question correctly
When doing a next buyer/exit analysis, for example do you add back the property tax to the forward 12 NOI, and add the millage rate to the exit cap rate? Or do you just use the market cap rate including your current tax burden in the NOI?
For a next buyer analysis, you can factor into the future NOI what the property taxes would look like if/when they're reassessed upon sale. For CA properties could make a big difference with Prop 13 depending on length of hold. Every state has different tax reassessment practices though.
For jurisdictions that re-assess, we do it the way you describe with a loaded cap rate for next buyer/exit calcs (take F12 NOI less existing tax expense, then cap it at market cap rate + effective tax rate (reassessment ratio x any secondary AV ratio x levy rate). Avoids any circularity
For imputed (non-reassessment) jurisdictions we obviously just cap the F12 NOI (with then-current taxes plus some inflation factor) with market cap rate.
On our going-in cap rates, we always report what our Year 1 cap rate will be including reassessed taxes. If somewhere has a cyclical assessment (i.e. every 2/3/4 years, etc) we'll show our committee both the cap with current taxes (i.e. what your "true" Year 1 will look like) as well as post-reassessment. If something is a 5.0% cap on current taxes but in two years would be a 4.5% after a big hit to taxes, that's something we'd all want to know.
We're also pretty honest about how heavy concessions are these days along with depressed occupancies in a lot of markets, so in addition to the above going-in caps, we'll show "stabilized" cap rates, i.e. what yields look like if you can burn off concessions, push occupancy, lower bad debt, etc once the property/submarket can stabilize.
I hope for the sake of you are a new grad.
why
I’d much rather see questions like this versus asking people to rank national developers
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