Question: A downtown surface parking lot generates annual net cash flow of $180,000, and this is expected to grow indefinitely at 3% per year. Based on the current use and current capital market conditions you feel that investors require a 12% return, which implies an initial income yield or cap rate of 9%
a. What is the indicated current use value of the property? [Remember that value equals net rent divided by cap rate.]
b. A developer recently paid $4.5 million for the site. What is the implied cap rate associated with this deal? Explain why the sale price differs significantly from the current use value you calculated in (a).