CRE Ch 12: Advanced Micro-Level Valuation

Question 1

Define market value (MV) and investment value (IV)

Answer 1

Market Value = MV = What you can sell the asset for today

Investment Value = IV = What the asset is worth to you if you don’t sell it for a
long time

Question 1

State NPV in terms of IV and MV from the perspective of a buyer.

Answer 1

NPV = IV - MV

Question 2

State NPV in terms of IV and MV from the perspective of a seller.

Answer 2

NPV = MV - IV

Question 3

Compare marginal and intramarginal investors

Answer 3

Investor NPV
Marginal 0
Intramarginal ¡ 0 possible

Key takeaway: Marginal investor has NPV of 0 because of the equilibrium market
price produces NPV 0 and MV IV

For intramarginal investors, NPV can be positive. This can happen when:
Seller IV MV Buyer IV

Question 4

State what REIT stands for and provide a definition.

Answer 4

REIT = Real Estate Investment Trust

Simple definition: A company owning income-producing real estate

Question 5

State five differences between REIT’s and Property Market

Answer 5

1. Liquidity - usually higher with REIT’s
2. Short-term volatility - usually higher with REIT’s
3. Informational efficiency - REIT’s tend to respond more quickly to new information
4. Valuation
5. Different investor populations, and therefore tax considerations as well

Question 6

What are two key explanations for valuation differences in real estate NPV analysis?

Answer 6

1. Expected future cash flow differences
2. Opportunity cost of capital differences

Question 7

Define inherent value.

Answer 7

Inherent Value - value of an object (e.g. commercial property) to a given owner or
user of the object, in the absence of any consideration of the market value or exchange
value of the object

Question 8

Define transaction price.

Answer 8

Transaction price - price at which deals are actually done (i.e. price at which
properties change hands)

Question 9

Define equilibrium price.

Answer 9

Equilibrium price - price at which the market would clear with an equal number of
buyers and sellers

Question 10

Describe reservation price.

Answer 10

Reservation price - price at which parties will stop searching any further for a willing
partner and will agree to trade

Question 11

Compare the distribution of reservation price vs inherent value.

Answer 11

Reservation price distributions are tighter around the equilibrium value than
inherent value distributions

Question 12

Describe price discovery.

Answer 12

Price discovery - process of determining the asset value through the information
revealed by transaction prices observable in the market

Question 13

State the fundamental principle of the valuation of thinly traded objects.

Answer 13

“Observed transaction prices are dispersed around the contemporaneous market
value.”