It’s probably not surprising that the most common question we’re asked is:
What is my facility worth?
While we have talked about this question in other newsletters, it’s time for a refresher.
Real estate appraisers use three approaches in determining value: income, comparable sales, and replacement cost. For most buyers and lenders, the income approach is most important because they also need to know the amount of income available to support debt service and to gauge whether the property is financially feasible.
A variable in the income approach is the capitalization rate (or cap rate), which is the yield that a property produces at a given price before considering the effects of leverage or debt. Buyers and sellers normally have differing opinions about the right cap rate for a property. Buyers will seek a higher cap rate (resulting in lower value), and sellers aim for a lower cap rate (resulting in higher value). Cap rates for senior care real estate vary depending on the type and quality of the property.
The income approach calculates value by capitalizing the income generated by the property. In other words, net operating income (NOI) is divided by a cap rate to determine the value of the property.
Price = Net Operating Income ÷ Capitalization Rate
The formula is simple, but determining the correct NOI and the correct cap rate can be subject to some debate.
While the formula may be simple, the process can be complex. At Senior Care Realty, our Advisory Services Team works with clients to determine the market value of their property. Some clients are preparing for a sale and may engage our Brokerage Team to find a buyer, while others are simply testing the market or updating their financial planning. For more information about valuation of senior care real estate, please contact Mike Collins at firstname.lastname@example.org or at 877-834-4175.