Cash flow from operations

[Anonymous]

Hi all,

This might be a silly question (since i’m not heavily involved in modeling), but I was curious when you would Direct CAP the cash flow from operations vs. NOI.

Thanks for everything,

Ben

[Spencer Burton]

Not a silly question at all! Generally speaking, in the United States at least, direct cap valuations are derived by capping NOI. There are exceptions to this, but the standard is to cap NOI.

With that said, what matters most is that you’re following market and property type convention. This is because the cap rate you eventual use in your analysis should be based on and/or supported by cap rates at comparable sales. If the comparable cap rates you’re using to support your valuation are based on Net Operating Income, then you should likewise use NOI in your analysis.

Equally as important, is to ensure your NOI contains similar line items as your comparable set. So for instance, if your comp set (i.e. market convention for your property type) includes a capital reserve in the NOI calculation (i.e. capital reserve modeled above the line), then likewise you should follow suit.

Thanks for the great question!

[Anonymous]

Thanks Spencer!

Just as a quick follow up to the above, is it typical that you have enough information to determine whether sales comps were based on NOI or CFO? I have access to REISS and CoStar and I’m not sure I have seen anything that might give me this information.

[Spencer Burton]

REIS and CoStar in the United States use NOI when calculating cap rate. However, as I mentioned above, there may be line items in specific markets included in NOI that aren’t included in other markets.

If you use a data provider, it’s good form to get to know the data provider’s market analyst for your markets. In CoStar for example, on each property page the market analyst’s name and contact information are listed so you can reach out and ask questions about the data. I’ll occasionally call the analysts, especially in markets I’m unfamiliar with, to ask questions about specific properties or submarkets, or how data was collected and is being presented. You’re paying a lot of money for those subscriptions, might was get the most out of it!

[Author]

Posts