Question

Johnson is appraising two parcels of property. One is leased to the government for use as a post office; the other is leased to a private owner for use as a hardware store. Both parcels have recently started long-term leases. The capitalization rate of the post office property as compared to the capitalization rate of the hardware store property will be:

Answer 1

Answer:

Lower.

Explanation:

The capitalization rate is mainly used in real estate and is a measure of the rate of return on a property, based on the net operating income it is expected to generate.

Johnson in appraising two parcels of property, leased one to the government for use as a post office while the other parcel of property, is leased to a private owner for use as a hardware store. Having the knowledge that the parcels have recently started long-term leases. The capitalization rate of the post office property used by the government as compared to the capitalization rate of the hardware store property used by the private owner will be lower.

The capitalization rate of the post office property would be lower because, real-estate investors will not expect much returns on the investment as it's a less risky investment. The post office is less likely than a hardware store to run out of business or go bankrupt by virtue of being a governmental agency or public company.

Hence, the hardware store will need a higher capitalization rate in comparison with post office property.