Scribd Logo
Upload

Welcome to Scribd!

  • 129 views

    Capitalization Rate

    Uploaded by

    Andi Eka Iftitah
    1. The document discusses different methods for calculating capitalization rates used to determine property values from net operating income. It describes the direct capitalization method and defines key terms like capitalization rate, potential gross income, and net operating income. 2. Two techniques for capitalizing net operating income into property value are described: the building residual technique and land residual technique. The building residual technique values the land separately first before applying the residual income to value the building. The land residual technique reverses this by valuing the building first. 3. Examples are provided to demonstrate how to use each technique to calculate the capitalization rate and determine total property value given figures for net operating income, building value, land value,

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd

    Capitalization Rate

    Uploaded by

    Andi Eka Iftitah
    129 views10 pages
    1. The document discusses different methods for calculating capitalization rates used to determine property values from net operating income. It describes the direct capitalization method and defines key terms like capitalization rate, potential gross income, and net operating income. 2. Two techniques for capitalizing net operating income into property value are described: the building residual technique and land residual technique. The building residual technique values the land separately first before applying the residual income to value the building. The land residual technique reverses this by valuing the building first. 3. Examples are provided to demonstrate how to use each technique to calculate the capitalization rate and determine total property value given figures for net operating income, building value, land value,

    Copyright

    © Attribution Non-Commercial (BY-NC)

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    1. The document discusses different methods for calculating capitalization rates used to determine property values from net operating income. It describes the direct capitalization method and defines key terms like capitalization rate, potential gross income, and net operating income. 2. Two techniques for capitalizing net operating income into property value are described: the building residual technique and land residual technique. The building residual technique values the land separately first before applying the residual income to value the building. The land residual technique reverses this by valuing the building first. 3. Examples are provided to demonstrate how to use each technique to calculate the capitalization rate and determine total property value given figures for net operating income, building value, land value,

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    129 views10 pages

    Capitalization Rate

    Uploaded by

    Andi Eka Iftitah
    1. The document discusses different methods for calculating capitalization rates used to determine property values from net operating income. It describes the direct capitalization method and defines key terms like capitalization rate, potential gross income, and net operating income. 2. Two techniques for capitalizing net operating income into property value are described: the building residual technique and land residual technique. The building residual technique values the land separately first before applying the residual income to value the building. The land residual technique reverses this by valuing the building first. 3. Examples are provided to demonstrate how to use each technique to calculate the capitalization rate and determine total property value given figures for net operating income, building value, land value,

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 10

    03/05/2012

    CAPITALIZATION RATE (TINGKAT KAPITALISASI)

    Murtaji, S.ST., M.Ec.Dev.

    Direct Capitalization
    Net Operating Income : Capitalization = Value Categories data needed: 1. Potential gross income 2. Effective gross income 3. Net operating income 4. Capitalization rate

    03/05/2012

    Example:

    An investor paid $500,000 for a building that earns a net income of $50,000 per year. What is the capitalization rate of the investment?

    How to determine Capitalization Rate


    Study comparable properties that have recently sold and

    assume that the capitalization rate of a comparable property would be approximately the same as that of the subject. Analyze the component parts of a capitalization rate and structure one for the subject property.

    03/05/2012

    Building a capitalization rate


    Every good investment provides for a return on

    the invested capital, called the interest or discount, and a return of the invested capital, called capital recapture.

    Selecting recapture rate: straight line method of recapture


    A building has useful life of 20 years. What is recapture rate?

    03/05/2012

    Selecting interest rate by the Market Extraction Method


    Property X sold $200,000. The site is valued at $50,000 Remaining Economic/useful life of 40 years Total NOI $30,000

    Recapture rate = 100%/ 40 = 2,5% NOI for building recapture = 2,5% * (200,000-50,000) =

    $3,750 NOI for property = $30,000 3,750 $26 ,250 Interest rate = 26,250/200,000 = 0.13125 = 13,125% Capitalization rate = 15,625%

    03/05/2012

    Cap rate vs Risk Rate


    Bagaimana hubungan antara risk rate, cap rate, value?

    Capitalization Technique Using Residual Income


    Two techniques by which net operating income (NOI) can be capitalized into value using residual income are: a. Building residual technique b. Land residual technique

    03/05/2012

    1. Building Residual Technique


    To use the building residual technique, the appraiser must

    know the value of the land, which is usually found by analyzing comparable sales. Example: A commercial property is being appraised. The land value has been estimated at $80,000 and the typical rate of return is 12%, so the land itself must earn $9,600. The property should yield a total NOI of $37,000 yearly. The residual income to the building is $27,400 ($37,000 $9,600). Remaining economic/useful life of building is 20 years. What is the value of property?

    Solution:
    Estimated land value $80,000 NOI $37,000 Interest on land value $9,600 Residual income to building $27,400 Capitalization rate for building 5% + 12% = 17% Building value $27,400/17% = $161,200 Total property value $241,200

    03/05/2012

    Exercise:
    The property under appraisal is 25-year-old apartment building producing an NOI of $50,000 a year. Compute the value of the property, assuming remaining economic life of 40 years for the building, a 10.5% interest rate, and land value estimated at $100,000.

    Land value $100,000 NOI $50,000 Interest on land value 10.5% x $100,000 = 10,500 Residual income for building = $39,500 Capitalization rate for building 10.5% + 2,5% = 13% Building value 89,500/13% = ? Property value?

    03/05/2012

    Conclusion
    The building residual technique is most useful when land

    values are stable and can be determined easily by recent sales of similar sites. This technique also used when the construction cost of the building and the amount of accrued depreciation are difficult to measure accurately because of the buildings age or unusual design.

    2. Land Residual Technique


    The land residual technique follows the same procedure as the building residual technique, but with the building and land calculations reversed. Example: Assume that the NOI for a commercial property is $45,000 annually and the value of the building has been estimated at $225,000. The appropriate interest rate for the building is 11 7/8 percent and the estimated recapture rate is 4 percent. What is the values of the property to the nearest $100?

    03/05/2012

    Solution:
    Building value $225,000 NOI $45,000 Interest rate 11.875% Recapture rate 4% Capitalization rate for building: 15.875% NOI available for building ($225,000/15.875% = $35,700 Residual income to land $45,000 - $35,700 = 9,300 Land value $9,300/11.875% = 78,300 Total property value = $303,300

    Exercise
    A new office building valued at $300,000 produces an annual NOI of $53,000. A first 60% of capital mortgage can be obtained from a bank provided by a partner at 10 percent. Equity for this type of property requires a 12 percent return an the buildings remaining economic life is estimated at 50 years. Estimate the total property value by the land residual technique!

    03/05/2012

    Building value $300,000 NOI $53,000 Interest rate: 60% x 10.24% = 6.15% 40% x 12% = 4.8% (10.95%) Recapture rate 100%/50 = 2% NOI available for building = $300,000 x 12.95% = $38,850 Residual income to land = $14,150 Land value $14,100/10.95% = $129,200 Property value = $429,200

    Conclusion
    The land residual technique is used: (1) when the land value cannot be estimated from comparable sales; or (2) when the building is new or in its early life and represents the highest and best use of the land. When a building is new, value usually is assumed to be equal to reproduction cost.

    10

    You might also like