Midwest Lenders Conference

October 13, 2015

Daniel J. Schneider, MAI

Lean Appraisal News– Cap Rate Derivation – Lean Email Blast 8/28/15– Development of Cap Rates– Drivers of Cap Rate Compression– UPL/IGT and T12 – Lean Email Blast 6/24/15– Decision Circuit

Valuation and Information Group | October 13, 2015

APPRAISAL INCOME CAPITALIZATION RATE DERIVATION

When deriving capitalization rates from comparable sales, the sale’s analyzed income must be consistent with the appraised property’s income being capitalized.  Handbook 4232.1, Section II, Chapter 5.3.R.4.m:

 

Under the direct capitalization method, the appraiser extracts the overall capitalization rate from sales comparables. The methodology for estimating the comparables NOI should match the methodology used in developing the subject NOI.

 

If the comparable sales’ capitalized income is not consistent with appraised property’s income, the appraiser must analyze the impact of the sale’s income on the capitalization rate.  The capitalization rate support must describe and analyze how the sale’s risk and potential for income fluctuations impacts the capitalization rate.   The utilization of a trailing capitalization rate will not be considered acceptable unless the appraiser provides adequate support that the stated capitalization rate is consistent with the property appraised’s income.  Special care and consideration should be given to those sales where the buyer anticipates major changes in income.

Valuation and Information Group | October 13, 2015

Development of Capitalization Rates

• Consistency – The development of the NOI for the subject should be consistent with the improved sales’ NOI

• Value premise – market value is based upon the conversion of anticipated (future) benefits into value

• Adjustments to price and NOI maybe necessary to derive a meaningful capitalization rate which may include the following:– Anticipated repairs and renovations by the buyer– Expected changes to revenue such as expected changes in payor mix, occupancy, state or

federal reimbursement changes– Expected changes to expenses often include efficiencies, better purchasing power,

employee benefits and adjustments for reserves and management fees– Any other influences on purchase price

Valuation and Information Group | October 13, 2015

Valuation and Information Group | October 13, 2015

Example of Capitalization Development

Valuation and Information Group | October 13, 2015

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

50

100

150

200

250

300

350

Publicly Announced Seniors Housing & Care Acquisitions 2000 - 2014

Source: The Senior Care Acquisition Report, Twentieth Edition, 2015

Num

ber

Valuation and Information Group | October 13, 2015

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

Average Price per Bed for Skilled Nursing Facilities 2000 - 2014

Source: The Senior Care Acquisition Report, , Twentieth Edition, 2015

Pri

ce P

er B

ed

Valuation and Information Group | October 13, 2015

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014$0

$50,000

$100,000

$150,000

$200,000

$250,000

Average Price per Unit for AL and ILiving Facilities 2000 - 2014

Source: The Senior Care Acquisition Report, Twentieth Edition, 2015

Pri

ce P

er U

nit

Valuation and Information Group | October 13, 2015

The Senior Care Acquisition Report, Twentieth Edition, 2015

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

SNF Capitalization Rate Trends

Average Median

Valuation and Information Group | October 13, 2015

The Senior Care Acquisition Report, Twentieth Edition, 2015

Drivers of Cap Rate Compression

• Higher Prices (bidding wars)• Increase demand for senior housing• Economy and Housing Values• Risk Premium is still high• Reimbursement• High barriers of entry• Low interest rates/ low cost of equity

Valuation and Information Group | October 13, 2015

UPL and IGT Clarification• What are Intergovernmental Transfers (IGT) and Upper Payment Limits

(UPL)

• June 24, 2015 Lean Blast• Recognizes the financial benefits

• The risk of the additional revenue is mitigated by:– Not including the revenue for the calculation of minimum DSCR– ORCF has applied a very high capitalization rate to the UPL

revenue for valuation purposes– Additional scrutiny is applied as the percentage of NOI derived from

UPL increases

Valuation and Information Group | October 13, 2015

Analyzing Trailing 12 (T-12) Data• For 223(f) - Both annual and T12 data must be reviewed and used

as a basis for underwriting

• Lender is required to use project specific expenses for R&R, taxes and management fees

• For (a) 7 transactions – the lender must review the T12 financial performance and use it as the basis for underwriting revenue and expenses

• ORCF is not willing to rely on annualized data

Valuation and Information Group | October 13, 2015

Decision Circuit• A tool to help determine the risk level of a particular project and

flags items that may need additional review

• Four Flags

Valuation and Information Group | October 13, 2015