Which model describes yield capitalization of property benefits?
Correct Answer
B) Discount the forecast periodic net benefits and terminal proceeds to present value.
Yield capitalization discounts forecast benefits, including any terminal proceeds, at a supported yield rate consistent with cash-flow timing and risk. Single-period direct capitalization and gross multipliers are different techniques. A terminal benefit must not be omitted or counted twice.
Why This Is the Correct Answer
Option B is correct because yield capitalization forecasts the periodic net benefits over a projection period plus the terminal or reversionary proceeds and discounts each to present value at an appropriate yield rate. Summing those present values produces the value indication. The yield rate accounts for both annual income and the proceeds at the end of the investment.
Why the Other Options Are Wrong
Option A: Divide a single stabilized income by an overall rate with no explicit holding-period forecast.
Option A, dividing a single stabilized income by an overall rate with no holding-period forecast, is wrong because that describes direct capitalization, not yield capitalization.
Option C: Multiply gross rent by a comparable gross-income multiplier with no discounting.
Option C, multiplying gross rent by a comparable gross-income multiplier with no discounting, is wrong because that is the gross multiplier technique, which does not forecast or discount future benefits.
Option D: Add the undiscounted receipts together without considering when each one occurs.
Option D, adding undiscounted receipts without considering when each occurs, is wrong because yield capitalization specifically discounts each benefit for its timing; simply summing receipts ignores the time value of money.
Yield means discount the future
Direct capitalization looks at one year; yield capitalization looks at every year plus the sale, each brought back to today.
How to use: Use this to tell yield capitalization apart from direct capitalization and gross multipliers in definition questions.
Exam Tip
Look for the words forecast, discount and reversion or terminal value; together they signal yield capitalization.
Common Mistakes to Avoid
- -Calling direct capitalization with an overall rate a form of yield capitalization
- -Omitting the reversion from a discounted cash flow
- -Counting the terminal value twice by also building it into the annual income
Concept Deep Dive
Analysis
This question tests the difference between yield capitalization and other income techniques. Yield capitalization forecasts each period's benefits, including the reversion, and discounts them to present value at a yield rate. Methods that use a single year's income or ignore timing are different techniques.
Background Knowledge
Income capitalization has two main branches: direct capitalization, which converts one year's income with an overall rate or multiplier, and yield capitalization, which discounts a forecast series of benefits. Discounted cash flow analysis is the most common form of yield capitalization. The reversion at the end of the projection period must be included once and discounted like the other benefits.
Real-World Application
An appraiser values a multi-tenant office building whose leases roll over unevenly in the next several years. A discounted cash flow model forecasts each year's net income and a resale at the end of the holding period. Each amount is discounted at a market-supported yield rate and summed to indicate value.
More Income Approach Questions
An appraiser is valuing a duplex. A market survey of recent duplex sales reports prices at 10.8 times potential gross income, with stabilized vacancy and credit loss of 10% of PGI and no other income. The subject's rent schedule is unavailable, but the property manager's records show collected income of $54,000 a year, in line with market rent and the 10% market loss. What value is indicated?
The subject property is a fourplex with annual EGI of $72,000 and operating expenses of $28,800. Of those expenses, $18,000 is fixed and $10,800 varies in direct proportion to EGI. The owner's annual mortgage payments are $21,000. An appraiser projects that EGI will fall 10% because of higher vacancy. What is the projected NOI?
Annual NOI available for debt service is $168,000 and total annual mortgage principal and interest debt service is $120,000. What is NOI ÷ debt service?
Annual PGI is $250,000 and combined vacancy and collection loss is explicitly 12% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $360,000 and combined vacancy and collection loss is explicitly 8% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $640,000. Combined vacancy and collection loss is 6.25% of PGI. There is no other income. What EGI remains?
An appraiser is updating a prior appraisal of a triplex with potential gross income of $60,000 and no other income. The prior appraisal used vacancy and credit loss of 5% of PGI, and a new survey of competing rentals indicates 8%. The operating expenses of $24,000 are property taxes, insurance and contract services that do not vary with occupancy, and the market overall rate remains 7.5%. By what percentages do effective gross income and indicated value decrease?
Annual potential rental income is $600,000 and vacancy loss alone is $36,000. What percentage of potential rent does that loss represent?
In the subject's market, lenders on fourplexes have lowered their typical loan-to-value ratio from 70% to 60%. The annual mortgage constant remains 5% and the equity dividend rate remains 10%. The subject's NOI has not changed. How does this affect the overall rate indicated by the band of investment and the indicated value?
A lender will fund 70% of value at an annual mortgage constant of 8%. The remaining equity requires an annual equity dividend rate of 12%. Annual NOI is $92,000. Using the band of investment to develop the overall rate, what value is indicated, rounded to the nearest dollar?
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Previous Question
A property has annual potential base rental income of $180,000, with vacancy and collection loss of 5% of base rent. Other real property operating income, already net of its own collection loss, is $25,000. Annual property operating expenses are $56,000, including property taxes and any replacement reserve but excluding debt service. Market data indicate an overall capitalization rate of 10%. What value is indicated, to the nearest dollar?
Next Question
An appraiser values a property by direct capitalization at a 6% overall rate. If annual NOI decreases by $12,000 and the rate does not change, by how much does the indicated value decrease?