The "Cap Rate," 1966-1984: Comment

• Published in: Land economics Vol. 64; no. 4; pp. 381 - 383
• Main Authors: Lentz, George H., Stern, Jerrold J.
• Format: Journal Article
• Language: English
• Published: Chicago University of Wisconsin Press 01-11-1988
• Subjects: Changes; Comment and Reply; Effects; Equilibrium; Financial investments; Income; Income taxes; Investment tax credits; Peas; Property; Property taxes; Real estate; Real estate economics; Real estate taxes; Studies; Tax incentives; Tax law; Tax rates; Tax reform; Tax regulations
• ISSN: 0023-7639; 1543-8325
• DOI: 10.2307/3146312

Recently, Nourse (1987) examined the impact of the 1976 and 1981 tax acts on income property cap rates. His article was critical of a paper that used partial equilibrium analysis (PEA) to study the effect of those tax law changes on real estate. However, PEA continues to be used by respected researchers to analyze the impact of tax rules on investor behavior. A benefit of PEA is that it avoids data limitation problems inherent in investigations of real estate transactions. Inadequacies of any particular study that utilized PEA do not imply that PEA is not a valid technique of tax analysis. In addition, because of selection bias in Nourse's data set, his results cannot be generalized to the population of income properties that are relevant to the paper he criticized. Nourse replies that he does not consider all simulation techniques to be partial equilibrium methods. Instead, partial equilibrium connotes logically showing the impact of one change, the income tax law, on the cap rate holding all other variables constant, including indirect interest changes.