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.
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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.

The Complete Real Estate Encyclopedia by Denise L. Evans, JD & O. William Evans, JD. Copyright © 2007 by The McGraw-Hill Companies, Inc.
References in periodicals archive ?
Notestine's appraiser derived a capitalization rate by using the direct comparison, band of investment, and debt coverage formula techniques, and applied that rate to a net operating income figure.
"The Welsh Government plans to make some changes to the way that the next band of investment (Band B) will operate.
A recent 2015 appraisal we reviewed discussed the Band of Investment concept: "Because most properties are purchased with debt and equity capital, the overall capitalization rate must satisfy the market return requirements of both investment positions.
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.
Both experts used the band of investment technique, which includes both a mortgage and equity component, to calculate an overall capitalization rate.
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. The final article in this category, by Peter E Korpacz and Mark I.
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.(4)
An alternative method to deriving an appropriate capitalization rate is the "band of investment." It was assumed for the purposes of this analysis that a 60% mortgage could be obtained on the subject property at an 8.5% interest rate with a 30-year amortization (.092270 mortgage constant).
For example, using the band of investment as a starting point for capitalization rate derivation, an appraiser's terminal capitalization rate would only be different from a current rate if the analyst believed that in the future loan-to-value ratios, equity dividend rates, or mortgage lending requirements would be different than they are now.
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.