Questions:
Suppose you're appraising a commercial property, and you've been informed that the appropriate cap rate falls somewhere between 6.5% and 7.25%. Which cap rate would result in a more conservative valuation, and why?

Assume you are analyzing a commercial property with a reported Net Cash Flow (NCF) of $573,250 for the past year.

You believe this NCF includes one-time revenue streams that will not be relevant going forward, so you decide to apply a 7% haircut. Additionally, you've observed that similar properties in the area have been appraised using cap rates ranging from 6.5% to 7.25%. Using the adjusted NCF, apply the most conservative cap rate from this range to estimate the property's value.

Reference answers:
In commercial real estate, the cap rate (capitalization rate) is used to derive a property value based on the Net Cash Flow (NCF). The property value is calculated using the formula:

Property Value = NCF / Cap Rate

A higher cap rate results in a lower property value. Therefore, the 7.25% cap rate would result in a more conservative (lower) valuation compared to the 6.5% cap rate.

First, calculate the adjusted NCF:
$573,250 * (1-0.07) = $533,122.5

Based on the cap rate range of 6.5% to 7.25% provided above, 7.25% would result in the most conservative valuation. 

Property value = Adjusted NCF / Cap Rate:

Property value = $533,122.5 / 7.25%

Property value = $7,353,413.79