Initial Determination of Value
If you know the sales price of a project (its fair market value) and the project's NOI, you can find what yield the buyer was willing to pay, the Cap Rate, by inverting the formula as follows:
As a cursory initial determination of value, this formula can be used to determine the market cap rate from comparable projects and then that market cap rate can be applied to a specific project's NOI to find that particular project's value.
The formula should only be used as a starting point in the analysis, an initial indication of value, since the formula does not take into account, among other things, variations in NOI over time. In Chapter 3 we discuss in more detail how to determine value by spreading the project's income and expenses over a 10-year period through a discounted cash flow analysis and thereby gaining a more accurate indication of value.
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