Separate property income from financing

Learning goals

• Calculate property value from NOI and capitalization rate.
• Explain why 6 million applies to this case.
• Identify the case-specific assumption or failure mode before taking action.

Draft · approximately 30 minutes, excluding further revision.

Shared case and decision context

A property generates sustainable annual NOI 600,000. A direct capitalization rate is 6%. Debt is 4 million. NOI excludes financing costs and tax. An appraisal has not updated a major lease expiry risk.

Economic or professional mechanism

Direct capitalization converts a stabilized one-period income into property value; a discounted cash-flow model can explicitly represent lease changes, vacancy, capital works and sale proceeds. Cap rates reflect growth and risk under the selected market convention, so they are not simply mortgage interest rates. NOI is an operating property measure, not distributable equity cash flow.

Apply, challenge and communicate

Property value is 10 million and simple equity value 6 million before other claims. Stress the lease rollover, vacancy and refurbishment budget; valuation smoothing does not prove low economic volatility. Distinguish direct ownership, private funds and listed real-estate vehicles because liquidity, governance and leverage differ.

Commercial property types transmit economic risk differently

Office demand depends on employment, location, fit-out and lease expiry; retail depends on tenant sales, footfall and competition; industrial property depends on logistics, transport and tenant concentration; multifamily depends on households, affordability and turnover. Hotels reprice frequently but can lose occupancy immediately in a travel shock. A long lease may stabilize nominal cash while adding tenant-credit and re-leasing concentration.

Due diligence must match the type: inspect rent roll, break clauses, incentives, maintenance backlog, environmental issues and local supply. For two properties with identical current NOI, the one facing a major tenant exit can warrant a different forecast and capitalization rate. Do not attribute all value differences to financing when operating risks differ.

Formula and assumptions

Property value=stabilized NOI/capitalization rate

Case analysis with explicit assumptions

1. A property generates sustainable annual NOI 600,000. A direct capitalization rate is 6%. Debt is 4 million. NOI excludes financing costs and tax. An appraisal has not updated a major lease expiry risk.
2. Method: Property value=stabilized NOI/capitalization rate
3. Case result: 10 million. Property value is 10 million and simple equity value 6 million before other claims. Stress the lease rollover, vacancy and refurbishment budget; valuation smoothing does not prove low economic volatility. Distinguish direct ownership, private funds and listed real-estate vehicles because liquidity, governance and leverage differ.

Errors to catch

• Do not replace the stated assumptions with an unstated shortcut. Reconcile units, timing and the claim being valued or duty being assessed.
• All rental income is not a defensible conclusion for these case facts.

Original knowledge check

Answer every question before checking. Review explanations after submitting; retry starts a new attempt.

Sources and coverage status

These original lessons are drafts. Public outlines are used to check scope; the official learning-outcome text and proprietary question banks are not reproduced here. Follow the source for exam-year requirements and updates.

• Reference · www.cfainstitute.org
• Reference · www.investor.gov