A cap rate or capitalization rate is found by dividing NOI, net operating income, by the cost of a property or its fair market value.
Obviously, we can reverse the process–find property values if we know both NOI and the applicable market-dictated cap rate for that type of property.
Let’s try this with some Bloomberg Businessweek-provided data (Dawn of the laternfly, Andrew Zaleski, Bloomberg Businessweek, Oct 8, 2018) for Pennsylvania farmland–a vineyard no less…
Here’s what we know from that article: Vineyard grape production (before an Asian invasive species–the lanterfly–descended on the area) was 3 tons per acre per annum and the wholesale price was $2,000 per ton of grapes.
That’s all the article tells us, but we can surmise the price of land from just this info.
Here’s how–the total yield is $6,000 per acre per year; if we assume a farm operating margin of 10%, this means the farmer makes about $600 per acre per year and, if the applicable cap rate is 6%, the value of this land is $10,000 per acre ($600/.06). That’s USD.
I did a reality check (crosscheck) by looking up value of farmland in my area:
In 2017, farmland in Eastern Ontario was valued at $9,624 CAD so the above number for Pennsylvanian land looks reasonable.
But cap rates for farmland have been known to be in a range as low as 3%. This makes a BIG difference.
At 3%, the vineyard land is worth $20,000 per acre.
Now according to MSN, land values in Pennsylvania are the 10th highest of any state in the US (https://www.msn.com/en-us/money/generalmoney/what-us-land-is-really-worth-state-by-state/ar-BBkTfZS#image=BBkGo1K|39), an average of $31,923 per acre, but since this includes all land–urban as well as rural, it’s biased upwards, at least from a farmland point of view.
So my guesstimates appear to be reasonable, the main point being to demonstrate another use for cap rates…
Bruce M Firestone, B Eng (civil), M Eng-Sci, PhD
Real Estate Investment and Business coach
ROYAL LePAGE Performance Realty broker
Ottawa Senators founder
MAKING IMPOSSIBLE POSSIBLE
FREEDOM VIA REAL ESTATE INVESTMENT AND PB4L, PERSONAL BUSINESS FOR LIFE
FEHAJ, FOR EVERY HOME A JOB
ps here’s some info on farm operating margins/profits from, https://www.ers.usda.gov/amber-waves/2015/januaryfebruary/profit-margin-increases-with-farm-size/