NVI Technical College Information

I NCOME C APITALIZATION A PPROACH 58

I NCOME C APITALIZATION A PPROACH

G ENERAL P ROCESS In the Income Capitalization Approach, the appraiser concludes to a value indication for the subject by converting a projected net operating income into a single present value by using either the direct capitalization or yield capitalization method. In direct capitalization, the estimated net operating income is divided by a market-driven capitalization rate to provide an indication of value. In yield capitalization, a series of income streams are discounted over a holding period to estimate a present value. The yield capitalization approach is referred to as a discounted cash flow analysis and is most useful for properties that are not stabilized or expect to have large fluctuations in the income stream over a holding period.

The Income Capitalization Approach to value requires the following sequential steps:

Estimate Economic Gross Income

Estimate the economic gross income for the subject’s space based on existing leases and market data. Estimate a proper vacancy and credit loss for the subject’s market, then deduct this rent loss from the estimated economic gross income to arrive at an effective gross income. Calculate the net operating income by deducting the estimated operating expenses (fixed and variable) and a provision for replacement of short-lived building components from the estimated effective gross income. Convert the net operating income into a value indication by using a market-derived capitalization rate in the case of direct capitalization and/or a market-derived discount rate in the yield capitalization analysis (discounted cash flow analysis). The yield capitalization approach also forecasts the anticipated future income streams and estimates a reversion price at the end of a presumed holding period. These future income streams are then discounted to a present value using a market extracted discount rate based on investor expectations based on the risks associated with a property.

Estimate Effective Gross Income

Estimate the Net Operating Income

Value Indication

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