Cap rate calculation in the presence of Rent holiday
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[{"id": "hpc4z4i", "text": "Do a 7-year Discounted Cash Flow.\n\nThe effect on value of the rent holiday will be felt in the reversion being discounted more heavily due to being pushed out 3 years. (do a second dcf that ends with reversion after the 4 years of rent to compare)", "replies": [], "depth": 1}, {"id": "hpcdvve", "text": "Cap rates are based on market NOI with market level rents. A deduction for below market rents (which is what the holiday would qualify as) would be done after the cap rate is calculated as a one time adjustment.", "replies": [], "depth": 1}, {"id": "hpcffxu", "text": "Why on earth would you be calculating a cap rate?\n\n&amp;#x200B;\n\nYou should calculate effective rent that will determine NOI.\n\n[https://carr.us/real-estate-resources/glossary/what-does-effective-rent-mean/](https://carr.us/real-estate-resources/glossary/what-does-effective-rent-mean/)", "replies": [], "depth": 1}, {"id": "hpcjf1v", "text": "I'd divide the actual rent paid for that 7 year period, into the entire 7 years.\n\nThat's the real rent.\n\nYou have to do an NPV / FPV on the cash.", "replies": [{"id": "hpd95jm", "text": "How does that get you a cap rate calculation?", "replies": [{"id": "hpdbvp5", "text": "*(He's baaaaaaaack).*\n\nGo away Honobob, your Mom is calling.  Dinner is ready.", "replies": [{"id": "hpdcev9", "text": "I was sure you would not be able to answer a simple real estate question but it is fun to see you try to squirm your way out of answering.", "replies": [{"id": "hperzg7", "text": "Dude, you need some serious help. Mods, check this guys history on this subject. He's several pallets shy of a full load.", "replies": [{"id": "hpg0pkm", "text": "Why can't you answer a simple commercial real estate question? It is your constant evasive whining and crying that is the real problem.  It is better to light one candle than to curse the darkness. AGAIN, answer the question or quityerbitchin.", "replies": [{"id": "hpg6jqd", "text": "&gt;Do you add the net present value of the free rent periods onto the purchase price, do you add up the years of rent left and then divide by the total number of years left on the lease (including the years of free rent), or use some other method?\n\nHis question was clearly not how to do the math for a cap rate, rather, needing assistance on the inputs.\n\nIt's no surprise that escaped you.\n\nGet a life dude.", "replies": [{"id": "hpgrm9e", "text": "His question was, \"What is the preferred way of **calculating the cap rate**...\"   The answer is r=i/v   How simple is that?  Geez, even a novice like you should know IRV.  Do you even read any post other than your own?  \n\nI believe he really wanted to know how to calculate NOI.  I supplied the answer of calculating effective rents.  Your answer was nonsensical and did not result in the answer of calculating a cap rate.  Maybe you can answer MY question.\n\nBut my question of WHY is still valid.  Maybe  u/MindfulAttorney can clarify why he wants to try to calculate a cap rate so I can help him more.  Your post are not helping at all.", "replies": [{"id": "hphnnop", "text": "Discernment isn't your forte Honobob.  Come back when you're tall enough for this ride.", "replies": [{"id": "hpiaj4m", "text": "Ride?  Explains everything.  You must be on the tea cups in Fantasyland.", "replies": [], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hpckzgu", "text": "I expect you are looking at CVS deals. I specialize directly (as a broker) in CVS properties nationwide. In my shoes, I have to value the lease based on what most buyers will value the deal from. When calculating the final credit to be taken off the purchase price, npv is utilized to deduct the final 3 years from the agreed upon purchase price. Buyers will typically look at final value from a cap rate perspective when considering the total cash received (4 years of rent averaged over the 7 year period) and the true final purchase price (agreed upon sale price less npv credit). The cap rate you get from this must at least match the market rates for other 7 year CVS deals in similar markets. Often times, the risk of holding a deal for 3 years with no rent increases so buyers will need 25 to 50 basis points of extra incentive in cap rate to justify the purchase. Feel free to DM me for any further clarifications!", "replies": [], "depth": 1}]