If such a ground lease is near the end of its term, and there is an expectation of a change in the highest and best use or a significant increase in land rent when the ground lease expires, then the value will likely be based on yield capitalization
. Likewise, when the leased fee interest involves a nonstandardized ground lease on higher-valued land with major improvements constructed and leased to multiple users, and more complex and nontraditional financial benefits accruing to the landowner, then yield capitalization
is used more often because it can explicitly capture these benefits.
Under this approach, there are two different techniques for converting net operating income into a value indication: 1) direct capitalization, which employs an overall capitalization rate on the net operating income from a stabilized 12-month period and 2) yield capitalization
, which employs an internal rate of return on a stream of annual cash flows and a residual capitalization rate on the reversionary property value at the end of the projected investor holding period.
There are two principal methods in the income approach: direct capitalization or yield capitalization
. Direct capitalization is used when the intangible is expected to generate a normalized income, changing at a constant rate over time; the rate can be positive, negative, or zero.
Two income methods are often used to value these properties: direct capitalization and yield capitalization
. Using the direct capitalization approach, a company's normalized net income is divided into a capitalization rate derived from an analysis of the cost of capital of comparable companies.
Two methods are commonly used: the direct capitalization method and the yield capitalization
Of the two basic income capitalization models, direct capitalization and yield capitalization
, direct capitalization is usually the preferred method, as it is perceived to be simple.
It illustrates how value equivalency can be achieved between direct capitalization and yield capitalization
(i.e., discounted cash flow) when the anticipated percentage change in annual net operating income (NOI) is made to correspond to the spread between a uniquely paired [R.sub.0] and [Y.sub.0].
These include income multipliers, direct capitalization, and yield capitalization
. Income multipliers are quite easy to find and simple to use.
While the development of market-extracted overall capitalization rates are obviously critical components of direct capitalization, they are also an important element to the correct application of yield capitalization
using discounted cash flows.
This suggests that yield capitalization
, which specifically considers future changes in income and value, would be an appropriate valuation framework.
Typically, within yield capitalization
, appraisers present income analysis using annual projections of cash flows and compound interest.
An excellent reference on how to calculate equivalent level income can be found in Course 510, Session 6: "Stabilizing Income and Yield Capitalization
(DCF) Using an Equity Yield Rate."