9. A property is being appraised assuming NOI will be $250,000 per year over the
ID: 2758034 • Letter: 9
Question
9. A property is being appraised assuming NOI will be $250,000 per year over the 25-year remaining economic life of the building. Using the sales comparison approach, land is found to be worth $500,000 today. The land value is expected to remain constant over the next 25 years. The appraiser believes a 10% discount rate is appropriate. a. What is the land capitalization rate? b. What is the building capitalization rate? c. Using the land residual technique, what is the building value? d. What is the total property value? e. What is the implied overall capitalization rate?
Explanation / Answer
a.The land capitalization rate is 50%.
= NOI/Price of Property*100
=$250,000/$500,000 *100
=50%
b. The building capitalization rate is 10%.
c. Using the land residual technique, the building value is $2,000,000.
= Present value of Building less Present value of Land
= ($250,000/0.10) - $500,000
= $2,500,000 - $500,000
= $2,000,000
d. Total property value is $2,500,000 ( $2,000,000+$500,000)
e. Implied overall capitalization rate is
= $250,000 /$2,500,000 *100
= 10%
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