402-pt – revision 2 – 01.10..07.int
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Welcome to the International Right of Way Association’s Course 402 Introduction to the Income Capitalization Approach. 402-PT – Revision 2 – 01.10..07.INT. Introductions Who we are… What we do… Where we do it… How long we’ve been doing it… Our goals for the day. - PowerPoint PPT PresentationTRANSCRIPT
1
Welcome to the International Right of Way
Association’s
Course 402Introduction to the Income
Capitalization Approach
402PPT.R3.2014.01.21.0.0
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Introductions
Who we are…What we do…
Where we do it…
How long we’ve been doing it…
Our goals for the day...
3
Objectives (1)
At the conclusion of the day,you will be able to...
• Express an understanding of the valuation process and the income capitalization approach
• Appreciate the differences between direct and yield capitalization
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Objectives (2)
At the conclusion of the day,you will be able to...
• Apply the income capitalization approach (direct capitalization)to specific valuation situations
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Housekeeping
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Schedule
8:00 - 8:30 Introductions, Etc.
8:30 - 9:00 Valuation Process
9:00 - 9:30 Income Capitalization Approach
9:30 - 10:00 Direct and Yield Capitalization
10:15 - 3:00 Components of Direct Capitalization
3:00 - 3:45 “After Value” and Compensation
3:45 - 4:00 Summary and Review
4:00 - 5:00 Exam
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Valuation Process
Appraisal Problem Definition
Scope of Work
Data Collection/Selection/Analysis
Land Value Opinion
Three Approaches to Value
Reconciliation and Final Value Opinion
Defined Value Opinion Report
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Highest and Best Use
The reasonably probable and legal use that is physically possible, appropriately supported,
and financially feasible, and that results in the highest value.
• Physically possible?
• Legally permissible?
• Financially feasible?
• Maximally productive?
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Three Approaches to Value
Cost Approach
Sales Comparison
Income Capitalization Approach
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Cost Approach
• Develop a value opinion for the land
• Estimate the cost new of the improvement
• Deduct depreciation
• Add land value opinion to the depreciated improvement value
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Sales Comparison Approach
• Research the market for comparable data
• Develop relevant units of comparison
• Compare the sales to the subject and adjust for dissimilarities
• Reconcile the value indications intoa final value opinion
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Income Capitalization Approach
In developing a property value opinion by the income capitalization approach, the appraiser converts income into value through the application of a rate or a ratio.
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Valuation Process
Appraisal Problem Definition
Scope of Work
Data Collection/Selection/Analysis
Land Value Opinion
Three Approaches to Value
Reconciliation and Final Value Opinion
Defined Value Opinion Report
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Income Capitalization Approach
In developing a property (market) value opinion by the income capitalization approach, the appraiser converts (net operating) income into (market) value through the application of a (overall capitalization or yield) rate or ratio (multiplier).
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Formulas
Value = Net operating income Capitalization rate
V = I R
Net operating income = Capitalization rate x Value
I = R x V
Capitalization rate = Net operating income Value
R = I V
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Example
Value = Net operating income Capitalization rate
V = I R
V = $75,000 .105
V = $714,286
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Exercise No. 1Value = Net operating income Capitalization rate
V = I R
V = $48,000 .12
V = $400,000
Capitalization rate = Net operating income Value
R = I V
R = $33,000 $300,000
R = .11
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Direct/Yield (1)
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Income Capitalization Approach
• Estimate the subject’s potential gross income
• Determine a vacancy and collection loss
• Subtract the vacancy and collection loss from the potential gross income
• Estimate annual operating expenses and subtract the expenses from the effective gross income to arriveat the net operating income
• Develop a capitalization rate
• Convert the net operating income into value
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Case Study(1)
PGI = $43,375
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Case Study(2)
PGI = $43,375
V&C = - 4,338
EGI = $39,037
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Expenses
Fixed
Variable
Replacement allowances
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Case Study(3)
PGI = $43,375
V&C = - 4,338EGI = $39,037 Expenses = -
16,025NOI = $
23,012
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Band of Investment
Ro = (M x RM) + (E x RE)
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Market
Ro = I V
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Case Study(4)
Ro = (M x RM) + (M x RM) + (E x RE)
Ro = (.70 x .1096) + (.15 x .1699) + (.15 x .16)
Ro = .1262 or 12.62%
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Case Study(5)
Sale No. 1: Ro = I V or Ro = $25,870 $205,000 or 12.62%
Sale No. 2: Ro = I V or Ro = $22,085 $175,000 or 12.62%
Sale No. 3: Ro = I V or Ro = $22,527 $178,500 or 12.62%
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Case Study(6)
PGI = $43,375V&C = - 4,338EGI = $39,037 Expenses = -
16,025NOI = $
23,012
$ 23,012 .1262 = $182,345
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Case Study(7)
PGI = $41,875V&C = - 6,281EGI = $35,594 Expenses = - 15,540NOI = $
20,054
$ 20,054 .1262 = $158,906
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Case Study(8)
Before value = $182,345
After value = $158,906
Compensation = $ 23,439
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Objectives (1)
Now, you are able to...
• Express an understanding of the valuation process and the income capitalization approach
• Appreciate the differences between direct and yield capitalization
35
Objectives (2)
Now, you are able to...
• Apply the income capitalization approach (direct capitalization) to specific valuation situations
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Thank you!
402PPT.R3.2014.01.21.0.0