In appraisals for property tax purposes, appraisers will often use the income approach to value special use property such as refineries, pipelines, railroads, and the like. To estimate a discount rate for use in the income approach, appraisers will often obtain data from the traded securities of refinery, pipeline, or railroad companies. Often that discount rate derived from security data is used without adjustment to discount the estimated future cash flows from the operating property. This study will establish that the use of a discount derived from securities must be adjusted to reflect the illiquidity of real property compared to the liquidity of securities and that the minimum adjustment to the discount rate is a size premium. Size premiums are the historical average difference in return between the stock returns of small companies compared to large companies with similar risk.
Valuation of real property
Heaton, H. B. (2014). Adjusting securities data to value real property : the size premium as a minimum illiquidity adjustment. Journal of Property Tax Assessment & Administration, 11(1), 35-45. Retrieved from https://researchexchange.iaao.org/jptaa/vol11/iss1/2