band of investment

Band of Investment

An appraisal method for investment property that determines the amount one would pay for a piece of real estate such that it equals its operating income. One calculates the band of investment by multiplying the operating income by a capitalization rate. The appraiser must estimate the capitalization rate because it is not known for sure until the property is purchased. The band of investment can be used to analyze whether or not to buy an investment property.

band of investment

An appraisal method used to arrive at a capitalization rate for the valuation of income-producing property.Appraisers determine the net operating income from a property,and then divide that figure by a number, called the cap rate or capitalization rate, in order to arrive at a property value.Conceptually,that value represents what an investor would pay to receive an income equal to that of the property.(The net operating income is fairly easy to calculate,but what cap rate do you use? There are no tables or standards.The appraiser must choose a figure that is justifiable.)

The band of investment method considers the interest rates currently available in the marketplace to finance the particular property. In commercial markets, interest rates may vary significantly depending on which lenders are trying to add what particular property types to their loan portfolios in order to achieve an optimum mix.After deciding on the property loan interest rate,the appraiser then calculates the amount of equity the purchaser would have to pay at closing,and what reasonable investors would expect for a percentage return on their equity each year.These two percentages are then blended according to the percentage of debt and percentage of equity typically seen when financing such properties.The blended number is the cap rate the appraiser will use to help determine value.

References in periodicals archive ?
Both experts used the band of investment technique, which includes both a mortgage and equity component, to calculate an overall capitalization rate.
Traditional Asian venture capitalists -- the well-connected and wealthy -- are being outpaced in the chase for high technology start-ups by a growing band of investment banks and professionally managed funds.
In a similar way, in the band of investment method with mortgage and equity components, all that is explicit is the one-year's income of the subject.
The same issues exist in arriving at a capitalization rate using a band of investment application.
Akerson's classic article on the Ellwood model, a logical progression from the band of investment.
His model began with Kazdin's basic band of investment using the mortgage constant and loan-to-value ratio, but also included several innovative elements: the concept of an investment holding period instead of the property's economic life, incorporation of an increase or decrease in the value of the property, and the principle of equity buildup.
The simple band of investment rate--or weighted average--of the mortgage interest rate and equity yield rate is the true basic mortgage-equity capitalization rate for an investment which can be financed with an "interest only" loan.
The loan-to-value ratio and mortgage constant are used in both the band of investment and the Ellwood formula for developing overall rates, and debt coverage ratios are easily surveyed or acquired from mortgage research sources such as the American Council of Life Insurance Companies' Investment Bulletin.
Appraisers who use the Ellwood or band of investment method to develop an overall rate ([R.
If the debt coverage ratio (DCR) calculated using this formula is inconsistent with current bank lending criteria applicable to the subject property, then the overall rate derived through the Ellwood or band of investment method may be flawed.
The band of investment version of the method consists of estimating the expected net operating income (NOI) to be derived from the hypothetically improved property, calculating the portion of the NOI attributable to the improvements, and then subtracting the improvement NOI from the property NOI to estimate the land NOI.
In the band of investment version, an appraiser must know not only the value of the improvements but also the appropriate capitalization rate to apply to derive the improvement NOI.