The Overall Capitalization Rate • Section 14
Band of Investment or Mortgage Equity Technique should generally bracket the concluded market cap rate. These tools are useful because they allow for comparison of equity dividend returns and equity yield returns to be compared to alternative investments. Alternatively, a Band of Investment can also solve for returns to land and building.
In general, market derived data is best. However, the data represents historical views. Survey research represents what investors view now going
forward and is the best estimate of current market sentiment.
• Mortgage Equity Analysis – This analysis derives from the idea that real property investments are a combina- tion of two components: debt and equity. It differs from the Band of Investment because it accounts for total yield: equity dividend and appreciation over time. It is a use- ful tool because it also solves for a levered eq- uity yield (that includes both cash flow or equity dividend and appre- ciation over time). Self- storage as an asset class has demonstrated su- perior returns for many years. For example, comparing total return of self-storage REITs over the last 25 years, self- storage has provided an 16.9 percent return on average and is supe- rior to other core sectors such as office, industrial, retail, or apartments (based on NAREIT data). As a result, institutional investors have been storing cap- ital in the sector. The Mortgage Equity Analysis solves for equity yield, a common metric of the comparison of returns among investments for the institutional market. The equity yield rate estimated is lower for a single as- set (in this case estimated at 13.5 percent) than publicly traded REIT data because REITs offer greater liquidity. The mortgage equity example, with the same mort- gage requirements as the Band of Investment example for consistency, is presented in Tables 14.5 on page 130 and 14.6.
Less Credit for Equity Build-up Loan Ratio x % Paid off in Projected Period x Sinking Fund Factor
Source: Compliled by NKF
Cap Rate Summary Table 14.7 summarizes the four techniques utilized to derive a cap rate and understand a self-storage investment returns.
In general, market derived data is best. However, the
data represents historical views. Survey research represents what investors view now going forward and is the best es- timate of current market sentiment. These analyses are further supported by two mathematical techniques to test the reasonableness of the cap rate market data presented. There are other good tools and analyses, such as a Debt Ser- vice Coverage Ratio, debt yield, and residual techniques that can provide tests of reasonableness to a cap rate conclusion (not presented here). One is the EGIM multiplier that tests the effective gross income (all income after vacancy and col- lection loss) compared to expense ratios. Using the formula of 1 – expense ratio \ the EGIM = cap rate. This multiplier is market derived, and the analysis tests overall assumptions of the net operating income forecast such as income, va- cancy, and expenses, to the concluded cap rate. Altogether, these analytical tools can be effective resources in conclud- ing a reasonable and credible cap rate for a self-storage property.
Loan Ratio x Annual Constant Equity Ratio x Equity Yield Rate
=
= +
65.00% x 5.90% = 3.84% 35.00% x 13.50% = 4.73%
= - 65.00% x 20.56% x 5.30% = 0.71%
Less Appreciation / Plus Depreciation Appreciation / Depreciation x Sinking Fund Factor = +/-
37.69% x 5.30% = 2.00%
Comparable Sales
NKF Self-Storage Investor Survey: 3Q 2020 Band of Investment
Mortgage Equity Analysis - Akerson Format Source: Compliled by NKF
5.00% – 6.24% 4.50% – 8.50% 5.59% 5.86%
2021 Self-Storage Almanac 131
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