1. 1 Welcome to the International Right of Way Association’s Course 402 Introduction to the Income Capitalization Approach 402PPT.R3.2014.01.21.0.0

2. 2 Introductions Who we are… What we do… Where we do it… How long we’ve been doing it… Our goals for the day...

3. 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

4. 4 Objectives (2) At the conclusion of the day, you will be able to... Apply the income capitalization approach (direct capitalization) to specific valuation situations

5. 5 Housekeeping

6. 6 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

7. 7 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

8. 8 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?

9. 9 Three Approaches to Value Cost Approach Sales Comparison Income Capitalization Approach

10. 10 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

11. 11 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 into a final value opinion

12. 12 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.

13. 13 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

14. 14 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).

15. 15 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

16. 16 Example Value = Net operating income  Capitalization rate V = I  R V = $75,000 .105 V = $714,286

17. 17 Exercise No. 1 Value = 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

18. 18 Direct/Yield (1)

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22. 22 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 arrive at the net operating income Develop a capitalization rate Convert the net operating income into value

23. 23 Case Study (1) PGI = $43,375

24. 24 Case Study (2) PGI = $43,375 V&C = - 4,338 EGI = $39,037

25. 25 Expenses Fixed Variable Replacement allowances

26. 26 Case Study (3) PGI = $43,375 V&C = - 4,338 EGI = $39,037 Expenses = - 16,025 NOI = $ 23,012

27. 27 Band of Investment Ro = (M x R M ) + (E x R E )

28. 28 Market Ro = I  V

29. 29 Case Study (4) Ro = (M x R M ) + (M x R M ) + (E x R E ) Ro = (.70 x.1096) + (.15 x.1699) + (.15 x.16) Ro =.1262 or 12.62%

30. 30 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%

31. 31 Case Study (6) PGI = $43,375 V&C = - 4,338 EGI = $39,037 Expenses = - 16,025 NOI = $ 23,012 $ 23,012 .1262 = $182,345

32. 32 Case Study (7) PGI = $41,875 V&C = - 6,281 EGI = $35,594 Expenses = - 15,540 NOI = $ 20,054 $ 20,054 .1262 = $158,906

33. 33 Case Study (8) Before value = $182,345 After value = $158,906 Compensation = $ 23,439

34. 34 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. 35 Objectives (2) Now, you are able to... Apply the income capitalization approach (direct capitalization) to specific valuation situations

36. 36 Thank you! 402PPT.R3.2014.01.21.0.0