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Band-of-Investment Cap Rates |
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The Band-of-Investment Capitalization Rates Based on Debt-Funding Sources Band-of-Investment “BOI” Capitalization Rates are static yield calculations computed by totaling the weighted-average yield components built upon the 10-Year Treasury as the risk-free base. The minimum spread over treasury (Debt Spread), longest allowable amortization (Constant Premium), and the lowest acceptable investor equity return (Equity Yield) are added to generate a capitalization rate. Rather than focusing on property-type, the Institute’s BOI cap rates are constructed using three main funding sources: the Agencies (Freddie Mac, FNMA and FHA), Banks and Life Companies. By default, property types are readily identified as agencies focus on multifamily assets, while banks and life companies primarily fund commercial income properties — namely industrial, office and retail. The net result is a built-up yield driven by the lowest cost of debt and maximum leverage. This type of calculation is very practical as a starting point for valuations during capital-constrained markets, when scare debt sources and limited leverage severely transaction volume. |
