This rate is similar to the equity yield rate
. According to the Appraisal of Real Estate, the IRR is defined as "the rate of discount that produces a profitability index of one and a net present value of zero.
But like other methods, it breaks down if key inputs are absent.(6) Of particular importance is the equity yield rate
([Y.sub.E]) which is always relevant when income properties are leveraged.
This can be demonstrated by discounting the after-debt cash flows at the equity yield rate
and adding back the mortgage amount.
Testing the capitalization rate by considering such items as the implied debt coverage ratio, equity dividend rate, and equity yield rate
should be part of the direct capitalization analysis.
In the income capitalization approach, the increased equity return requirement, over the market return for an uncontaminated but otherwise similar property, can be measured as a risk premium adjustment to the equity yield rate
. Through the mortgage-equity framework, this can be translated into changes to the overall yield rate and the overall capitalization rate.
Equity yield rate
([Y.sub.E]): The equity yield rate
([Y.sub.E]) is the rate of return on equity capital as distinguished from the rate of return on debt capital (the interest rate = [Y.sub.M] = [R.sub.M] = mortgage constant).
The first part of Akerson's format closely resembles the simple band of investment method with one important difference: The equity rate used here is the equity yield rate
([Y.sub.E]), not the equity capitalization rate (equity dividend rate or [R.sub.E]) found in the band of investment.
For example, a market equity yield rate
([Y.sub.e]) of 17% without contamination could translate into a risk-adjusted equity yield rate
An equity yield rate
of 14% with first-year net operating income of $50,000 is expected to increase annually by 3%.
In analyzing the two income approaches, most emphasis was placed on the $3,250,000.00 figure as indicated as a result of the extraction of the equity yield rate
. It is felt most people are looking for a good suitable return on cash invested at this time and therefore this approach affords most weight.
Alternatively, the impact on the level of risk associated with an asset, and consequently its marketability, can be estimated by determining the change in the equity yield rate
over the holding period.
Valuing the mortgagee's participation required the appraiser to select an appropriate equity yield rate
, a return that an investor would require to take a position subordinate to other, superior claims against the income stream.