An Atlanta-based real estate partnership acquired the property for $155 per square foot, which equated to approximately a 7.5 percent going-in capitalization rate
. Sonnenblick Goldman secured more than 96 percent leverage for the borrower in the transaction.
Year 11 income of $1,628,895 (Year 10 income of $1,551,328 increased by 5%, corresponding to the annual rate of inflation) was capitalized in perpetuity at 10% (consistent with the going-in capitalization rate of 10%).
The going-out terminal capitalization rate on disposition of the property is also the next investor-purchaser's going-in capitalization rate.
For illustration purposes, inputs were taken from investor surveys of three categories of income-producing properties (Suburban Office, Community Shopping Center, Multi-Tenant Industrial) and prepared at two different times by the same company: The reported going-in capitalization rate, the reversionary or terminal capitalization rate, the compound annual income inflator, the discount rate, and the holding period of the investment (10 years) form the basis of the inputs of the investor survey simulation for each category.
Surveys that monitor investor expectations of discount rates ([Y.sub.0]s), going-in capitalization rates ([R.sub.0]S), reversionary or terminal capitalization rates ([R.sub.N]s), investment holding periods, and assumed or implied annual income growth rates (i.e., combined rent and expense inflators (18)) are commonly relied upon by appraisers and analysts for use in DCF valuation modeling.
A recent article by David Bradley, "The Capitalization Rate, the Discount Rate, and Inflation,"(3) delineates how the internal rate of return (IRR) equals the capitalization rate plus an income growth rate (i.e., Y = R + g, where Y is the IRR, R is the capitalization rate, and g is the income growth factor).(4) In 1990 two other articles appeared in The Appraisal Journal that apply Bradley's insights to appraisal problems.(5) Both articles primarily discuss the results of applying a higher reversion capitalization rate than the going-in capitalization rate in a discounted cash flow (DCF) analysis.
The going-in capitalization rate equals the going-out capitalization rate and there are no selling costs at reversion.
Conversely, the going-in capitalization rate would have to be increased to 10.77% to maintain a 13% IRR (this assumes that the reversion capitalization rate remains at 10%).