I’m soliving problem #4 in Reading 45 (Alternative Inv) of the CFAI texts which basically compares a propery with higher property taxes to other similar properties… If they were valued using the Gross Income Multiplier approach and the Direct capitlization method, woulndt they be roughly the same, since DCI method deducts only operating expenses and not taxes in calculting NOI and hence the property value. The text says that the value from GIM method should be higher… Any reasons why it may be this way?
NOI is calculated after deducting property taxes. It is the income taxes that are not deducted in calculating NOI. In this example, NOI is lower for this particular property, resulting in a lower valuation under the direct capitalization method than under the GIM method, which uses the pre-tax rental income.
Or alternatively you can work backwards from the bottom: NOI = Net Income + Income Taxes + Interest Expenses + Depreciation. The trick here is NOI is very much like EBITDA, except it’s for properties rather than companies.