An appraiser finds a sale of a retail building at 12.0 times annual NOI, with a 15-year lease to a national tenant. The subject property is a similar retail building with the same NOI, leased on short terms to local tenants with higher turnover. Compared with the sale, how should the subject's NOI multiplier and overall rate differ?
Correct Answer
D) Lower multiplier, higher overall rate
Less certain income is capitalized at a higher rate. A multiplier is the reciprocal of a rate, so a higher rate means a lower multiplier, and the subject's should fall below 12.0. Equal NOI does not mean equal value when the certainty of that income differs. A multiplier and rate cannot both rise, and a lower rate would treat the subject's short leases as the safer income.
Why This Is the Correct Answer
Option D is correct because short leases to local tenants make the subject's income less certain than income from a 15-year lease to a national tenant, which calls for a higher rate. A multiplier is the reciprocal of a rate, so the higher rate goes with a multiplier below 12.0.
Why the Other Options Are Wrong
Option A: Higher multiplier, higher overall rate
Option A has a higher multiplier together with a higher overall rate, which cannot both hold. A multiplier of 12.0 equals a rate of about 8.33% and a multiplier of 10.0 equals 10%, so a higher rate goes with a lower multiplier.
Option B: Same multiplier, same overall rate
Option B keeps the same multiplier and same overall rate because NOI is equal. Two equal income figures can differ in how likely they are to be collected, and the market pays less for less certain income.
Option C: Higher multiplier, lower overall rate
Option C has a higher multiplier and lower overall rate, which treats the subject as the lower-risk property. Short leases to local tenants with higher turnover make its income less certain than the sale's, so the movement runs the other way.
Rate up, multiplier down
Rate and multiplier are reciprocals, so they move in opposite directions. More risk pushes the rate up and the multiplier down.
How to use: Use this when comparing a sale and a subject whose income differs in risk.
Exam Tip
Translate a multiplier into a rate if the direction feels confusing. For example, 12.0 is about 8.33% and 10.0 is 10%.
Common Mistakes to Avoid
- -Assuming equal NOI means equal value
- -Thinking a higher rate means a higher multiplier
- -Treating short leases to local tenants as no riskier than a long lease to a national tenant
Concept Deep Dive
Analysis
A multiplier carries the risk of the sale it came from. Equal NOI invites a direct transfer, but the leases make the subject's income less certain. Reason from risk to rate, and then from rate to multiplier by way of the reciprocal.
Background Knowledge
A capitalization rate is the reciprocal of a multiplier, so each statement about one implies the opposite move in the other. Risk raises the required rate. Lease term and tenant strength are common indicators of how certain income is.
Real-World Application
An appraiser finds one strong sale of a national-tenant building, but the subject has short-term local tenants with similar NOI. Rather than transferring the multiplier directly, the appraiser explains why a lower multiplier is warranted and looks for sales with similar leases.
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Previous Question
The subject property has monthly gross rent of $2,280. A rented comparable sold for a cash-equivalent price of $564,000 with monthly gross rent of $2,400. Sales in the market area indicate the same price-to-rent ratio applies to the subject, and no other adjustments are needed. What is the subject's indicated value, to the nearest dollar?
Next Question
Annual NOI is known, and operating expenses are 35% of EGI, with no other deductions. Which expression recovers EGI from NOI?