Why NOI / Cap Rate DOESN'T = Value: Challenging the Standard Value Formula

What I mean by the title is most people use a T12 NOI and divide it by the cap rate. How lenders value assets is by the T3 annualized NOI divided by the NOI. The difference between the two can be a significant difference.

T3 annualized takes the last 3 months of the properties income and multiplies it by 4. The expense numbers used are still the last 12 months. This is because income items are more consistent and expense items are often paid in chunks throughout the year. If those payment chunks are included or omitted in the last 3 months, multiplying the last 3 months by 4 would skew the numbers.

The reason that lender's themselves use the T3 annualized as standard practice is because it gives you a current picture of what rents are like at the time of sale. Rents 12 months ago mean less than what the rents being achieved today are; they could be less or more.

So how should you calculate NOI and value?

(Trailing 3 months effective gross income x 4) - (Trailing 12 months operating expenses) = NOI / Market Cap Rate = Value