Is there a cap rate limit?

During the past couple of weeks, a question posted by Keith Borglum (Medical Practice Appraisal Valuation Services) LinkedIn’s BV Professionals Group elicited responses from a handful of valuation practitioners.  Borglum asked: “is there a cap rate limit?”

It is not surprising that some appraisers responded “it depends.” Joshua V. Azran (Origins Group) said “it depends on is which component that informs the cap rate you are speaking about, the growth rate, or the discount rate.”  Mirtha Guerra Aguirre (MGA Accountants & Consultants) said “the biggest variable is the target company risk factor. Technically there is no limit to that risk factor. It depends on the individual circumstances of the company.”

Keith Pinkerton (Hooper Cornell Valuation) responded: “I do not believe it is correct to make a blanket statement about any particular rate being too high or too low unless viewed in a specific context.”  Pinkerton also added: “in my opinion, discount and cap rates are where appraisers really earn their money. I believe that every assignment is largely about the evaluation of alternative investments–the overall rates of return have to correspond to other risk/reward combinations available do they not? We are simply trying to “fit” a particular investment somewhere on the risk and return spectrum between say, treasury bills and a venture capital.”

Is there a cap rate limit? - BVWire - January 25, 2011