The band of investment technique is used to:
Correct Answer
C) Derive an overall rate from mortgage and equity
The mortgage-equity band weights the annual mortgage constant and equity dividend rate by their capital shares to derive an overall capitalization rate. The mortgage constant includes annual debt service relative to principal; a note coupon alone is not interchangeable. A total equity yield is also different from a current dividend rate.
Why This Is the Correct Answer
Option C is correct because the band of investment weights and combines the capitalization rates of the investment's components to derive a weighted-average rate for the whole investment. In the mortgage-equity form, the annual mortgage constant and equity dividend rate are weighted by their shares of value to produce an overall rate.
Why the Other Options Are Wrong
Option A: Calculate the depreciation in the cost approach
Option A, calculating depreciation in the cost approach, describes a cost-approach step that uses methods such as age-life or market extraction. The band of investment is an income-approach rate derivation technique.
Option B: Calculate the effective gross income multiplier
Option B, calculating an effective gross income multiplier, describes dividing sale prices by EGI. The band of investment produces a capitalization rate, not an income multiplier.
Option D: Determine the highest and best use of a property
Option D, determining highest and best use, involves testing uses for legal permissibility, physical possibility, financial feasibility and maximum productivity. The band of investment does not perform that analysis; it derives a capitalization rate.
Bands of debt and equity
Picture value split into a debt band and an equity band, each with its own rate; blend the bands to get one overall rate.
How to use: Use this picture to recall that the band of investment outputs an overall capitalization rate.
Exam Tip
Match each technique to the approach and output it belongs to; the band of investment belongs to the income approach and produces a rate.
Common Mistakes to Avoid
- -Using a loan's interest rate instead of the mortgage constant
- -Treating the equity dividend rate as a total equity yield
- -Associating the band of investment with the cost approach
Concept Deep Dive
Analysis
This question tests recognition of what the band of investment technique produces. It weights the rates attributable to the components of an investment, here debt and equity, to derive a weighted-average overall capitalization rate.
Background Knowledge
The band of investment is a technique in which the capitalization rates attributable to components of a capital investment are weighted and combined into a weighted-average rate. Its financial version uses the mortgage constant, which reflects total annual debt service relative to principal, and the equity dividend rate, which is a current cash return rather than a total equity yield.
Real-World Application
When few comparable sales with reliable income data are available, an appraiser supports her overall rate with a band of investment built from current lender terms and investor equity return expectations.
More Income Approach Questions
Which stated cause of supported value loss is external?
Improvement cost new is $450,000. Separately supported improvement depreciation deductions of $45,000, $25,000, $15,000 are expressly nonoverlapping and not already excluded from cost new. Add supported site value of $125,000, already reflecting any site losses. What total indicated value results?
Which two depreciation categories may each be classified as curable or incurable by comparing the cost to remedy a deficiency with the value gained?
Improvement cost new is $800,000. Separately supported improvement depreciation deductions of $120,000, $80,000, $40,000 are expressly nonoverlapping and not already excluded from cost new. No site is included. What depreciated improvement amount results?
The principle of anticipation in real estate valuation states that:
Which highest-and-best-use criterion addresses whether a proposed use is allowed by zoning and applicable legal restrictions?
Three comparables produce adjusted indications of $312,000, $309,000 and $315,000, requiring gross adjustments of 9%, 14% and 22% respectively. Verification also establishes that the first sale is the closest competitive substitute and its adjustments are better supported than the other two. Which indication deserves the most weight on those facts?
When reconciling value indications from the three approaches to value, an appraiser should:
A property sold at a cash-equivalent price of $1,062,500. Its stabilized annual NOI is $85,000. What is the indicated overall rate?
In reconciliation, an appraiser should:
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