Yield capitalization is capable of measuring virtually any income and value pattern. It reflects market participants’ thinking regarding return on investment, the expected holding period for the investment, and anticipated income and value changes during that period. It works in any economic climate and is not dependent on comparable sales. It is useful in ad valorem tax appraisal because it does not require a predetermination of taxes. Direct capitalization, by contrast, requires the availability of comparable sales transactions reflecting risk, income, and value characteristics similar to the appraised properties. Yield capitalization can be developed using a variety of data sources. Although direct capitalization requires no presumption of a forecast period, income pattern, or change in property value, it nonetheless speculates that capitalization rates extracted from comparable sales inherently include the same characteristics as the subject. Should these data prove to be inconsistent, significant error can occur. Finally, yield capitalization offers ease of explanation via the IRV formula. Although this method provides the precision of discounted cash flow analysis, it does not require presentation of the detailed computations of income and value patterns to be understood – only the IRV components. It is easily adapted to mass appraisal and is readily updatable. Yield capitalization is an ideal tool for ad valorem tax appraisal.
Capitalization, Income approach to value
This material was first presented at the International Association of Assessing Officers’ (IAAO) 76th Annual International Conference on Assessment Administration in Orlando, Florida, on August 31, 2010.
Todora, J. (2011). Using yield capitalization in property tax appraisal. Journal of Property Tax Assessment & Administration, 8(2), 5-24. Retrieved from https://researchexchange.iaao.org/jptaa/vol8/iss2/1