James Real Estate RE Inv Criteria Dnvr 2000 3rd Qtr Page 7
JAMES REAL ESTATE SERVICES, INC.
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Discount Rates
Alternative Yield Rates. The investment yield environment that presents alternatives to real
estate investors is best represented by the available yields on United States and corporate bonds of
reasonably equivalent duration. The risks associated with investment in U.S. bonds are significantly
lower than most real estate investments. Corporate bonds generally have moderately lower risk than
real estate. Varying upward adjustment, then, is necessary to most bond rates to drive an indication of
appropriate discount rates for use in analysis of most investment real properties.
Bond Rates (%)
1997
1998
1999
2000
1Q 2Q 3Q 4Q
US 5-yr Bonds
6.1
5.2
6.6
6.3
US 10-yr Bonds
6.5
5.2
5.9
6.7
6.0
US 30-yr Bonds
6.7
5.6
6.6
5.9
Aaa Corp Bonds
6.5
6.5
6.9
7.8
7.6
A
Corp
Bonds
6.8 7.1 8.1
Baa Corp Bonds
7.1
7.1
7.7
8.3
8.4
Data Source:
RERC
Real Estate Research Corp
Moody's
Bond
Survey
Appraisal
Institute
Discount Rates Improved Properties. The discount rate is the internal rate of return (IRR), or
yield, to a cash investor used in discounted cash flow analysis of a real property. Although variations are
common, an appropriate discount rate may be approximated by surcharging the cash investor's cash flow
rate, i.e. capitalization rate, with the expected growth rate in net income. Generally, the investment criteria
surveys indicate discount rates ranging in the past several years from 11 to 13%.
