Market value and investment value same when?

• A. The investor's required return matches the market's cap rate and the property's cash flows meet the investor's expectations.
• B. Replacement cost equals market value.
• C. Market value always exceeds investment value.
• D. Location alone determines value.

Answer: (A)

Market value is what a property would bring in an open market based on typical buyers’ expectations, while investment value is what it’s worth to a specific investor given that investor’s required return and cash flow expectations. They become the same when the investor’s required return equals the market’s cap rate and the cash flows the investor expects are the same as the property's actual cash flows.

Put simply, investment value is the present value of expected cash flows discounted at the investor’s rate. Market value is NOI divided by the prevailing cap rate. If the cap rate equals the investor’s required rate and the expected cash flows match what the property actually generates, both values converge to the same number. If either the rate or the cash flow expectations differ, the two values diverge.

Replacement cost and location influence value but do not determine it in the same way as the market cap rate and cash flow expectations.