Results of the overall capitalization rate
modeling procedure using the three periods are presented in Exhibit 9.
The biggest increases in overall capitalization rates
are forecast to occur in the national regional mall market, as well as the Houston and Northern Virginia office markets, according to estimates.
The Appraisal of Real Estate cites five methods for developing an overall capitalization rate
in direct capitalization.
The necessary assumptions built into the theory of "discount rate equals overall capitalization rate
plus income growth" are as follows:
Rearranging the relationship, value equals income divided by rate, allows the appraiser to calculate feasibility rent, or the net operating income necessary to support this assertion (net operating income equals cost new plus site value times the overall capitalization rate
Also, the overall capitalization rate
([R.sub.o]) should not be applied to an income stream that includes only income from real property, when the overall capitalization rate
([R.sub.o]) includes risks from personal property and business intangibles.
For RL [right arrow] [infinity] the ground value term approaches zero, while the annuity factor becomes the reciprocal of the overall capitalization rate
respective to perpetuity.
This is identical to the traditional, direct capitalization process in appraisal practice, where value is equal to net operating income (NOI) divided by the overall capitalization rate
(V = NOI/[R.sub.o]).
In both cases, the overall capitalization rate
is 15.55%, which is the same overall capitalization rate
applied in the commercial valuation for the TAB.
In direct capitalization, real estate value ([V.sub.o]) is estimated by capitalizing net operating income ([I.sub.o]), usually the new owner's first-year income, with an overall capitalization rate
([R.sub.o]) using the following formula:
* An appropriate indication of the overall capitalization rate
for hotel investments
Residual Cap Rate: Overall capitalization rate
used in calculation of