Midwest Lenders Conference
October 13, 2015
Daniel J. Schneider, MAI
Lean Appraisal News
– Cap Rate Derivation – Lean Email Blast 8/28/15
– Development of Cap Rates
– Drivers of Cap Rate Compression
– UPL/IGT and T12 – Lean Email Blast 6/24/15
– Decision Circuit
Valuation and Information Group | October 13, 2015
APPRAISAL INCOME CAPITALIZATION RATE DERIVATION
When deriving capitalization rates from comparable sales, the sale’s analyzed income must be
consistent with the appraised property’s income being capitalized. Handbook 4232.1, Section II,
Chapter 5.3.R.4.m:
Under the direct capitalization method, the appraiser extracts the overall capitalization rate from sales
comparables. The methodology for estimating the comparables NOI should match the methodology
used in developing the subject NOI.
If the comparable sales’ capitalized income is not consistent with appraised property’s income, the
appraiser must analyze the impact of the sale’s income on the capitalization rate. The capitalization
rate support must describe and analyze how the sale’s risk and potential for income fluctuations
impacts the capitalization rate. The utilization of a trailing capitalization rate will not be considered
acceptable unless the appraiser provides adequate support that the stated capitalization rate is
consistent with the property appraised’s income. Special care and consideration should be given to
those sales where the buyer anticipates major changes in income.
Valuation and Information Group | October 13, 2015
Development of Capitalization Rates
•
Consistency – The development of the NOI for the subject should be consistent with the improved
sales’ NOI
•
Value premise – market value is based upon the conversion of anticipated (future) benefits into
value
•
Adjustments to price and NOI maybe necessary to derive a meaningful capitalization rate which
may include the following:
– Anticipated repairs and renovations by the buyer
– Expected changes to revenue such as expected changes in payor mix, occupancy, state or
federal reimbursement changes
– Expected changes to expenses often include efficiencies, better purchasing power,
employee benefits and adjustments for reserves and management fees
– Any other influences on purchase price
Valuation and Information Group | October 13, 2015
Example of Capitalization Development
Valuation and Information Group | October 13, 2015
Publicly Announced Seniors Housing & Care Acquisitions 2000 - 2014
350
300
Number
250
200
150
100
50
0
2000
2001
2002
2003
2004
Source: The Senior Care Acquisition Report, Twentieth Edition, 2015
Valuation and Information Group | October 13, 2015
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Average Price per Bed for Skilled Nursing Facilities 2000 - 2014
$90,000
$80,000
Price Per Bed
$70,000
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$0
2000
2001
2002
2003
2004
Source: The Senior Care Acquisition Report, , Twentieth Edition, 2015
Valuation and Information Group | October 13, 2015
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Average Price per Unit for AL and ILiving Facilities 2000 - 2014
$250,000
Price Per Unit
$200,000
$150,000
$100,000
$50,000
$0
2002
2003
2004
2005
Source: The Senior Care Acquisition Report, Twentieth Edition, 2015
Valuation and Information Group | October 13, 2015
2006
2007
2008
2009
2010
2011
2012
2013
2014
SNF Capitalization Rate Trends
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Average
Median
The Senior Care Acquisition Report, Twentieth Edition, 2015
Valuation and Information Group | October 13, 2015
The Senior Care Acquisition Report, Twentieth Edition, 2015
Valuation and Information Group | October 13, 2015
Drivers of Cap Rate Compression
•
•
•
•
•
•
•
Higher Prices (bidding wars)
Increase demand for senior housing
Economy and Housing Values
Risk Premium is still high
Reimbursement
High barriers of entry
Low interest rates/ low cost of equity
Valuation and Information Group | October 13, 2015
UPL and IGT Clarification
•
What are Intergovernmental Transfers (IGT) and Upper Payment Limits
(UPL)
•
June 24, 2015 Lean Blast
• Recognizes the financial benefits
•
The risk of the additional revenue is mitigated by:
– Not including the revenue for the calculation of minimum DSCR
– ORCF has applied a very high capitalization rate to the UPL
revenue for valuation purposes
– Additional scrutiny is applied as the percentage of NOI derived from
UPL increases
Valuation and Information Group | October 13, 2015
Analyzing Trailing 12 (T-12) Data
• For 223(f) - Both annual and T12 data must be reviewed and used
as a basis for underwriting
• Lender is required to use project specific expenses for R&R, taxes
and management fees
• For (a) 7 transactions – the lender must review the T12 financial
performance and use it as the basis for underwriting revenue and
expenses
• ORCF is not willing to rely on annualized data
Valuation and Information Group | October 13, 2015
Decision Circuit
• A tool to help determine the risk level of a particular project and flags
items that may need additional review
• Four Flags
Valuation and Information Group | October 13, 2015