# Capitalization rate - Reading 51

How did they get the 2% on page 592? If they used depreciation in real terms, they woud use -1.5% If they used appreciation in nominal terms, they would use 3.5% The difference (inflation) is 5% Where do they get 2%? Thanks, Olivier

Hmm I haven’t gotten to this reading yet but I’m looking it over and I’m confused as well in what they are representing with the 2%.

i think they’re just trying to net the 2- so appreciation of the 3.5% minus the depreciation of 1.5% = 2%. they’re saying that the capitalization rate can be very different depending on what you use for depreciation or appreciation. if there’s lots of appreciation, the r - g will be a small # for capitalization, which takes the mkt value of a property up since it’s NOI/ r - g and the r - g number would be very small. makes sense, property appreciates, it’s worth more. similarly, the higher the depreciation is, the bigger the R0 is going to be, meaning property valued lower. seems like that 3rd example just combines the 2- giving a R0 somewhere b/t the 1st 2 examples since you’re showing both the appreciation and depreciation. unless i’m missing something, i don’t think the appreciation plus the depreciation would equal inflation… where did inflation come into play here? i’d think with lots of inflation, then the appreciation would appear big, the mkt value of the property would be higher, but the \$\$ increase in value would be due to the inflation, not necessarily a real price increase. it does say here nominal appreciation, not real… i’d think if you knew inflation was 5% for example, then the real appreciation rate there would actually be negative. 3.5 minus 5%, so neg 1.5%… which r - g would get a big number, and mkt value would in real terms go down. am i nuts here? i think it was just appreciation minus depreciation here and in their example they didn’t state any sorts of inflation rates.

A depreciation is decrease in value. Hence, that would be a negative number. 3.5 - (-1.5) = 5 (and not 2) Also, the difference between a “real” and a “nominal” number is inflation.

say you had a building worth \$100 million. Say you depreciate it 5% a year over 20 years straight line. so every year you depreciation the building \$5 mil. Say your building this year appreciates in value \$10 mil. when you’re trying to figure out how much your building is worth at the end of the year, you aren’t going to say that it’s worth 100 + 10 + 5. You’ll say 100 + 10 - 5. Just as you said, depreciation is a decrease in value. That’s all the example was doing- looking at a case where you included estimates of both appreciation of the property’s value and depreciation of the same property.

I’m in asset valuation (real estate). In that reading (#52), depreciation means negative appreciation. As can be see on the example 11 - (-3.5) = 14.5 It ain’t FSA no more

yes, if you only are looking at depreciation there, then agree 100%, it’d be the 11 - (-3.5) = 14.5. Look bigger picture at what this little section is trying to tell you. That cap rate of 14.5 is big, so the market value of whatever property you’re looking at is going to be lower because it’s NOI/ r - g. Agree. The book then goes first and shows appreciation. Appreciation is going to take that r-g number and make it smaller. so the mkt value of the property would be higher. the last example- i really think all it’s trying to do is say hey, now what if you looked at both effects at once. a price appreciation and depreciation. those together would be the appreciation MINUS the depreciation. so 3.5 - 1.5= 2. that 2% they then plug afterwards into the r - g as g. big picture- bigger the depreciation, bigger the cap rate, less your property’s worth bigget the appreciation, smaller the cap rate, more your property’s worth I think if you get that bigger concept, you’re fine. maybe they ask a plug and chug given a NOI or flip it around and show you comparables and you find the cap rate, but this section should be one on the test that we’re all saying, whew, that reading was not that bad. i think you’re overthinking it.