An appraiser is developing a band of investment rates for a mixed-use property in a transitioning neighborhood. She selects four reliable sources: (1) local commercial mortgage lenders’ current stated loan rates on stabilized properties; (2) recent equity investor return expectations cited in a CBRE market report; (3) historical IRRs from NCREIF Property Index for similar assets; and (4) the 10-year U.S. Treasury yield. Which of these four sources is LEAST appropriate for inclusion in the band of investment analysis?
Correct Answer
D) The 10-year U.S. Treasury yield
The band of investment method synthesizes current, market-derived debt and equity return expectations — not risk-free benchmarks. While the Treasury yield informs the risk-free rate component in some theoretical models (e.g., build-up), USPAP Advisory Opinion 21 and the Appraisal Institute’s *The Appraisal of Real Estate* (15th ed.) clarify that the band of investment relies on actual or observed market financing terms and investor requirements, not government securities yields alone. Including the Treasury yield without adjustment for risk, liquidity, and illiquidity premiums would misrepresent market expectations. Options A–C reflect actual or reported market participant behavior; D does not, making it the least appropriate. This tests conceptual application of the band of investment methodology.
Why This Is the Correct Answer
The band of investment method synthesizes current, market-derived debt and equity return expectations — not risk-free benchmarks. While the Treasury yield informs the risk-free rate component in some theoretical models (e.g., build-up), USPAP Advisory Opinion 21 and the Appraisal Institute’s *The Appraisal of Real Estate* (15th ed.) clarify that the band of investment relies on actual or observed market financing terms and investor requirements, not government securities yields alone. Including the Treasury yield without adjustment for risk, liquidity, and illiquidity premiums would misrepresent market expectations. Options A–C reflect actual or reported market participant behavior; D does not, making it the least appropriate. This tests conceptual application of the band of investment methodology.
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A commercial office building is leased to a single tenant under a 20-year absolute net lease with rent escalating annually at 2.5% compounded. The tenant has invested $1.8 million in tenant improvements that will have no residual value at lease expiration. The appraiser is asked to value the leasehold interest. Which factor is MOST directly relevant to determining whether that interest has positive value?
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