Commercial real estate finance and the lending cap rate

PurposeThe aim of this study is to report on a simple derivation that results in what the authors refer to as the lending cap rate. The lending cap rate is a unique cap rate resulting in a property valuation that perfectly aligns the maximum loan amount for the financing of commercial real estate.Design/methodology/approachThe derivation is the result of simple algebra relating the two most common underwriting ratios: debt service coverage and loan-to-value with the formula for the present value of an annuity. Numerical examples are presented to demonstrate the calculation of the lending cap rate, property valuation and maximum loan amount. The authors also present comparative statics results.FindingsThe main finding of this research is that once a lender knows the debt service coverage ratio, loan-to-value ratio and lending terms for a specific property financing request, a simple calculation reveals the lending cap rate and the property valuation that aligns the maximum loan amount implied by the two underwriting ratios.Practical implicationsOne practical implication of the research is that a simple calculation reveals the lending cap rate which facilitates timely property evaluations for lending purposes. The methods demonstrated also offer real estate finance educators a practical means of connecting the loan underwriting process with property appraisal thereby facilitating conceptual understanding.Originality/valueThe key finding is original, and the importance of the finding is that the determination of the lending cap rate is simple and has the ability to make commercial real estate lending faster and cheaper, especially in lending situations where an evaluation rather than an appraisal is appropriate.

Real Options for Risk Analysis in Estimating the Capitalization Rate

A suitable cap-rate is generally determined through an analogical process in order to estimate the value of any real estate through the capitalization of the incomes. The analogy relates to the risk and duration of similar investments. There are numerous methods to rationalize the valuation of the cap-rate. Appraisals have a certain degree of uncertainty in all these methods. This paper proposes a methodology which removes any uncertainty when evaluating the cap-rate. This is achieved through the combination of the formal logic of the Ellwood’s model and the Real Options Analysis.

Sale and leaseback to market cap rate ratio in emerging markets – an empirical study in Vietnam

PurposeThis study hypothesises that sale and leaseback (SLB) cap rate is lower than the market cap rate in emerging economies, and the difference is due to institutional cost and vacancy risk. This study aims to provide a novel SLB-Cap-Rate Model to assess the performance of SLB transaction (SLBT).Design/methodology/approachSLBT data are generally not publicly available in developing countries. This study collected data from 31 SLBTs by conducting semi-structured interviews with stakeholders in Vietnam in 2019. The market cap rates were collected from consultants' reports. The hypotheses are tested by three regression models.FindingsThe results show that the SLBT cap rate is significantly less than the market cap rate in Vietnam, and most of the cap rate discount can be explained by institutional and risk factors. This suggests that SLBT helps to reduce search costs for tenants and vacancy risks. It explains why SLBTs are becoming more common in emerging countries.Practical implicationsThe study has a strong practical implication for assessing the performance of SLBT for both buyers and sellers. It introduces a novel model for analysing the cap rates and potential risks of SLBT to facilitate property investment decisions.Originality/valueThis paper is one of the studies that contains new knowledge on SLBs in a developing country specifically Vietnam.

The determinants of capitalization rates: evidence from the US real estate markets

PurposeEstablishing the strength of a novel variable–mortgage debt as a fraction of US gross domestic product (GDP)–on forecasting capitalization rates in both the US office and multifamily sectors.Design/methodology/approachThe authors specifies a vector error correction model (VECM) to the data. VECM are used to address the nonstationarity issues of financial variables while maintaining the information embedded in the levels of the data, as opposed to their differences. The cap rate series used are from Green Street Advisors and represent transaction cap rates which avoids the problem of artificial smoothness found in appraisal-based cap rates.FindingsUsing a VECM specified with the novel variable, unemployment and past cap rates contains enough information to produce more robust forecasts than the traditional variables (return expectations and risk premiums). The method is robust both in and out of sample.Practical implicationsThis has direct implications for governmental policy, offering a path to real estate price stability and growth through mortgage access–functions largely influenced by the Fed and the quasi-federal agencies Fannie Mae and Freddie Mac. It also offers a timely alternative to interest rate-based forecasting models, which are likely to be less useful as interest rates are to be held low for the foreseeable future.Originality/valueThis study offers a new and highly explanatory variable to the literature while being among the only to model either (1) transactional cap rates (versus appraisal) (2) out-of-sample data (versus in-sample) (3) without the use of the traditional variables thought to be integral to cap rate modelling (return expectations and risk premiums).

391 Upper Airway Resistance Syndrome is associated with high Cyclic Alternating Pattern

Introduction Upper Airway Resistance Syndrome (UARS) is suspected in individuals with excessive daytime sleepiness, fatigue, and sleep fragmentation associated with increased respiratory effort. UARS can negatively impact daytime function. Conventional polysomnography parameters do not demonstrate significant abnormalities in UARS patients but increase in RERAs and arousal index. Cyclic alternating pattern (CAP) is a periodic electroencephalogram activity of non-REM sleep that expresses a condition of sleep instability. The objective of the study was to compare CAP components between UARS patients and health individuals. Methods Fifteen subjects with UARS and 15 age- and sex- matched controls had their sleep study blinded analyzed. UARS criteria were the presence of sleepiness (Epworth Sleepiness Scale – ESS - ≥ 10) and/or fatigue (Modified Fatigue Impact Scale ≥ 38) associated with an apnea/hypopnea index (AHI) ≤ 5 and a respiratory disturbance index (RDI) > 5 events/hour of sleep, and/or flow limitation in more than 30% of total sleep time. Control group criteria were AHI < 5 events/hour, RDI ≤ 5 events/hour and < 30% of TST with flow limitation and ESS < 10, without sleep, clinical, neurological, or psychiatric disorder. CAP electroencephalogram of both groups was analyzed. Results We found higher CAP rate (p = 0.05) and CAP index in N1 stage (p < 0.001) and in N3 stage (p < 0.001) in UARS patients compared to control group. Considering only CAP phase A1 analysis, UARS patients presented higher CAP rate (p = 0.05) and CAP index in N1 stage (p < 0.001) as well as CAP index in N3 stage (p < 0.001) compared to control group. Considering only CAP phase A2 analysis, UARS patients also presented higher number of CAP in N1 stage (p = 0.05). There was no significant difference for CAP phase A3 between groups. Conclusion Although UARS is associated with high arousal index, we found increase in CAP phase A1 and A2, which do not include necessarily AASM arousals, suggesting not only sleep fragmentation but also sleep instability. Support (if any) Associação Fundo de Incentivo à Pesquisa (AFIP) and Fundação de Amparo à Pesquisa do Estado de São Paulo (FAPESP).

Microsleep disturbances are associated with noradrenergic dysfunction in Parkinson’s disease

Study Objectives Parkinson’s disease (PD) commonly involves degeneration of sleep-wake regulating brainstem nuclei; likewise, sleep-wake disturbances are highly prevalent in PD patients. As polysomnography macroparameters typically show only minor changes in PD, we investigated sleep microstructure, particularly cyclic alternating pattern (CAP), and its relation to alterations of the noradrenergic system in these patients. Methods We analysed 27 PD patients and 13 healthy control (HC) subjects who underwent over-night polysomnography and 11C-MeNER positron emission tomography for evaluation of noradrenaline transporter density. Sleep macroparameters as well as CAP metrics were evaluated according to the consensus statement from 2001. Statistical analysis comprised group comparisons and correlation analysis of CAP metrics with clinical characteristics of PD patients as well as noradrenaline transporter density. Results PD patients and HC subjects were comparable in demographic characteristics (age, sex, body mass index) and polysomnography macroparameters. CAP rate as well as A index differed significantly between groups, with PD patients having a lower CAP rate (46.7 ± 6.6% versus 38.0 ± 11.6%, p = 0.015) and lower A index (49.0 ± 8.7/hour versus 40.1 ± 15.4/hour, p = 0.042). In PD patients, both CAP metrics correlated significantly with diminished noradrenaline transporter density in arousal prompting brainstem nuclei (locus coeruleus, raphe nuclei) as well as arousal propagating brain structures like thalamus and bitemporal cortex. Conclusions Sleep microstructure is more severely altered than sleep macrostructure in PD patients and is associated with widespread dysfunction of the noradrenergic arousal system.

0393 The Effect of Trazadone Use on Non-REM Sleep Instability in Community-Dwelling Older Men

Introduction With steadily growing numbers of patients with a depressive disorder, the effect of antidepressants on sleep architecture is of increasing concern. One major oral antidepressant medication is trazadone, which has also been prescribed in low doses for sleep insomnia treatment. Here, we investigate the effect of trazadone on NREM sleep instability also known as cyclic alternating pattern (CAP) in community-dwelling older men. Methods CAP was scored in overnight EEG recordings from 41 older men on trazadone (TRZ) and 50 age-matched men who did not use trazadone (NTRZ), participating in the Osteoporotic Fractures in Men Sleep Study. A high performance automated detection system determined the ratio between CAP time and NREM sleep time (CAP rate), the number of A1-phases per hour of NREM sleep (A1 index), and the number of A2+A3-phases per hour of NREM sleep (A2+A3 index). The effect of TRZ on CAP parameters was determined using the Mann-Whitney U test. Results CAP rate was significantly decreased in men using trazadone (NTRZ: 58.2±19.7%, TRZ: 47.9±15.9%) as compared to non-trazadone user (p < 0.01). Subtype indices did not show any significant difference between both groups but to some extent less frequent A2-A3 phases for TRZ user (A1-phases: NTRZ 13.0±18.7 no./h vs. TRZ 10.8±20.4 no./h, p = 0.35; A2+A3-phases: NTRZ 51.5±33.7 no./h vs. TRZ 44.7±23.3 no./h, p = 0.068). Conclusion CAP rate was significantly decreased in older men on trazadone as compared to older men who did not use trazadone, suggesting that trazadone usage has a stabilising effect on sleep micro-structure. Support The National Heart, Lung, and Blood Institute (NHLBI) provides funding for the MrOS Sleep ancillary study “Outcomes of Sleep Disorders in Older Men” under the following grant numbers: R01 HL071194, R01 HL070848, R01 HL070847, R01 HL070842, R01 HL070841, R01 HL070837, R01 HL070838, and R01 HL070839.

0818 Cyclic Alternating Pattern as Indicator for Subjective Sleep Quality in Community-Dwelling Older Men

Introduction The micro-architecture of NREM sleep displays a cyclic alternating pattern (CAP) comprising activation phases of slow high-amplitude waves (A1), fast low-amplitude brain activity rhythms (A3) or a mixture of both (A2). In this study, we investigated the relationship between CAP and subjective sleep quality parameters reported by community-dwelling older men from the Osteoporotic Fractures in Men Sleep Study. Methods CAP was scored in 2,811 overnight EEG recordings using a high performance automated CAP detection system. We quantified the ratio between CAP time and NREM sleep time (CAP rate), the number of A1-phases per hour of NREM sleep (A1 index), and the number of A2+A3-phases per hour of NREM sleep (A2+A3 index). Also, participants were asked to score the quality of their sleep on a Likert scale with five items from light to deep, from short to long, and from restless to restful. The relationship between CAP parameters and the subjective sleep quality measures was determined using ANCOVA with traditional sleep disturbance indices such as obstructive apnea-hypopnea index and arousal index as covariate. Results CAP rate decreased significantly with increasing quality of sleep for all three subjective measures (light vs. deep: 58.8±22.3% vs. 54.6±20.5%, p < 0.001; short vs. long: 58.4±21.4% vs. 55.1±20.5%, p < 0.001, restless vs. restful: 59.4±20.8% vs. 55.6±21.0%, p = 0.002). The A1 index did not show any significant variations across all three sleep quality parameters. The A2+A3 index behaved similarly to the CAP rate with decreasing values for each subjective measure (all: p < 0.001). Conclusion CAP rate, especially A2+A3-phases, are reduced in older men who report good sleep quality, while A1 index did not show any significant relationship with subjective sleep quality measures. Hence, CAP is an indicator of sleep quality. Support The National Heart, Lung, and Blood Institute (NHLBI) provides funding for the MrOS Sleep ancillary study “Outcomes of Sleep Disorders in Older Men” under the following grant numbers: R01 HL071194, R01 HL070848, R01 HL070847, R01 HL070842, R01 HL070841, R01 HL070837, R01 HL070838, and R01 HL070839.

0392 The Effect of Benzodiazepine Use on Non-REM Sleep Instability in Community-Dwelling Older Men

Introduction Previous studies on the implications of benzodiazepine (BZD), a widely prescribed pharmacotherapeutic treatment method for sleep insomnia, on sleep architecture demonstrated significantly reduced EEG activity in low-frequency bands. In this study, we explore the effect of BZD on NREM sleep instability also known as cyclic alternating pattern (CAP) in community-dwelling older men. Methods CAP was scored in overnight EEG recordings from 30 older men on long-acting BZD (LBZD), 35 older men on short-acting BZD (SBZD), and 50 age-matched men who did not use BZD (NBZD), participating in the Osteoporotic Fractures in Men Sleep Study (MrOS sleep). A high performance automated detection system determined the ratio between CAP time and NREM sleep time (CAP rate), the number of A1-phases per hour of NREM sleep (A1 index), and the number of A2+A3-phases per hour of NREM sleep (A2+A3 index). The relationship between CAP parameters and BZD use was determined using the Kruskal-Wallis test by ranks with Bonferroni correction for post-hoc analysis. Results CAP rate was significantly decreased in older men using long-acting BZD (NBZD: 59.6±18.0%, LBZD: 46.9±13.1%, SBZD: 53.0±20.1%) as compared to non-BZD user (p < 0.01). All BZD users demonstrated significantly lower frequencies of A1-phases (NBZD: 19.9±23.0 no./h, LBZD: 6.9±13.3 no./h, SBZD: 4.5±9.9 no./h) as compared to non-BZD users (LBZD: p < 0.01, SBZD: p < 0.001). The A2+A3 index did not show any variations between the three groups. Conclusion Older men using long-acting BZD demonstrate a significantly reduced CAP rate during sleep, particularly less frequent A1-phases, compared to the control group. Moreover, short-acting BZD user show significantly less frequent A1-phases but no difference in CAP rate and A2+A3-phases than older men using no BZD. Hence, BZD usage has a major adverse effect on the occurrence of EEG slow waves. Support The National Heart, Lung, and Blood Institute (NHLBI) provides funding for the MrOS Sleep ancillary study “Outcomes of Sleep Disorders in Older Men” under the following grant numbers: R01 HL071194, R01 HL070848, R01 HL070847, R01 HL070842, R01 HL070841, R01 HL070837, R01 HL070838, and R01 HL070839.