Chapter 5: Estimate In-Place Value

Estimate In-Place Value

Select a cap-rate range that matches the in-place NOI basis, pressure-test the conclusion, and use unit and square-foot metrics only as supporting checks.

Decision output: In Place Value Conclusion. Case requirement: downside teaser only, full downside later.

Inputs

Inputs

  • Normalized in-place NOI from the prior chapter.
  • Market sales evidence and submarket context for cap-rate selection.
  • Secondary market checks such as price per unit and price per SF.

Analysis

How to analyze it

value = NOI / cap rate

value = NOI / cap rate
Capitalization only works when the cap rate and NOI basis describe the same in-place operating reality.

Select a central cap rate, then show a narrow range around it so the price discussion acknowledges uncertainty instead of masking it.

  • Use sales comps to anchor the range.
  • Adjust for asset quality, submarket tone, and business-plan risk.
  • Keep price-per-unit and price-per-SF as reasonableness checks only.

Example card

Small cap-rate moves create large value swings

At $1.41M of normalized NOI, moving from a 5.25% cap to a 5.75% cap drops value by more than $2.3M. That is why the cap assumption needs explanation, not just a single selected point.

  • Selected cap rate: 5.50%
  • Sensitivity floor: 5.25%
  • Sensitivity ceiling: 5.75%

Example card

Price per unit as a secondary market check

If the selected in-place value implies $129K per unit while recent trades land closer to $124K to $132K per unit, the market comp screen supports the NOI-based conclusion instead of replacing it.

Example card

Price per SF to catch unit-mix distortion

A deal can look reasonable on price per unit and still be expensive on price per SF if the comp set has larger average unit sizes. Use both only as a reasonableness screen.

Output

What output you should produce

Output artifact: In Place Value Conclusion

  • A selected in-place cap-rate conclusion and a sensitivity band around it.
  • One defendable value range with a central reference point.
  • A short note on what would widen the downside later in the process.

Common mistakes

Common mistakes

  • Selecting a cap rate without saying why it fits the asset.
  • Mixing stabilized assumptions into the in-place conclusion.
  • Treating price-per-unit as if it were a primary valuation method.

Price meaning

What this means for price

This chapter establishes the first defendable value ceiling. It is still not the bid, but it becomes one of the three core constraints that the bid cannot outrun.

Teaching calculator

Cap Rate Sensitivity

Interactive teaching aid. Use it to pressure-test the chapter example, not to replace source-backed underwriting.

Teaching notes

  • Use a range that you can defend from sales comps and asset quality.
  • The cap assumption must match the NOI basis being capitalized.

Inputs

Teaching-only framing: use this to see value movement, not to prove a single cap rate is correct.

Output

  • 5.25% cap rate: $26.9M
  • 5.5% cap rate: $25.6M
  • 5.75% cap rate: $24.5M

Value moves from $24.5M to $26.9M across the selected cap-rate range.