Agenda - Council - 04/09/2019 - Laserfiche WebLink

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Income Approach -- continued Capitalization Rate Estimate A capitalization rate is used to convert current estimated net income into an indication of market value of the subject. To derive the overall capitalization rate, consideration is given to the age and condition of the property, the stability of commercial occupancy in the market, capitalization rates for similar properties recently sold in the market, current loan rates and the economy in general. Two Capitalization methods have been considered. Yield Capitalization: The subject is a single -occupant commercial building that would likely be owner occupied. A yield capitalization analysis is not considered applicable and will therefore not be applied. Direct Capitalization includes two methods noted below and it uses market rates. Band of Investment — Mortgage and Equity Components Rate Extraction from comparable sales. Band of Investment — Mortgage and Equity Components In this method, an overall capitalization rate is developed which will satisfy the market return requirements of both the debt and equity positions. We will perform this calculation to show what a potential buyer might be willing to pay for the property as an investment. Mortgage Component: Mortgage Amount 75% of value Amortization Period 20 years, 5-year balloon Interest Rate 4.5% Annual Constant (calculated) 0.076 Annual Mortgage Constant, is calculated by multiplying the monthly payment by 12 (months) and dividing it by the loan amount. Equity Dividend Rates: The rate used to capitalize the equity income is called the equity capitalization rate. It's the ratio of annual equity dividend to the amount of equity investment. For appraisal purposes, a property's equity capitalization rate is the anticipated cash flow to the equity investor for the first year of the projection period divided by the initial equity investment. Based on discussions with investors and market participants, along with various published sources (including Realtyrates.com Investor Survey), and market data, equity capitalization rates range from 6% to 15%+. Historically, equity dividend rates are 100 to 500 (1 % to 5%) basis points higher than the mortgage interest rate. Rates can vary widely based on property type, investor preference, market conditions, etc. A rate at the mid -range will be utilized, say 10.0%. An overall rate using the mortgage/equity band of investment method may now be developed as follows: Source of Capital % of Value Constant Payment Weighted Rate Mortgage .75 .076 .057 Equity .25 .100 .025 Total .082 Nagel) Appraisal Incorporated 1952.544.8966