Laserfiche WebLink
CABARRUS COUNTY 2012 APPRAISAL MANUAL <br />DETERMINE DISCOUNT RATE: SELECT METHOD OF RATE ESTIMATION <br />The Discount Rate, the basic building block in five of the income approaches, is also called a RATE OF RETURN ON <br />INVESTMENT. It is determined by the forces of supply and demand for investment funds. A rate of return on an <br />investment or "discount rate" is paid or offered in order to attract investment capital. The Discount Rate is <br />generally estimated from one of two methods: Band of Investment or Build -up and the rate must compensate the <br />investor for: <br />1) Overcoming time preference 3) Assuming investment management burdens <br />2) Giving up liquidity 4) Assuming the risks of investment and ownership <br />BAND OF INVESTMENT <br />The Band of Investment method recognizes the Discount Rate as the weighted average of mortgage interest <br />rate(s) based on typical financing; and the equity yield rate, derived from market data. It is based on the premise <br />that investments in income - producing properties are usually financed with a mortgage at the best available terms. <br />The weighting factor is the percentage of the total investment represented by each component contributing <br />thereto. The procedure involved in the Band of Investment method is illustrated as follows: <br />Assume a property is financed with an 80% mortgage at 5 112% interest. Equity investors are <br />seeking a 15% return on this type of investment. The indicated Discount Rate would be <br />developed as follows: <br />BAND OF INVESTMENT <br />METHOD FOR DISCOUNT RATE <br />First Mortgage: <br />Equity Investment: <br />RATE WEIGHT <br />.0550 x .80 <br />.1500 x .20 <br />WEIGHTED <br />RATE <br />_ .0440 <br />_ .0300 <br />Indicated Discount Rate <br />BUILT -UP METHOD <br />0740 <br />The Built -Up Method involves the "building" of a discount. The discount rate is "built" by taking the current "safe <br />rate" or non -risk of ownership, the illiquidity of the investment, and the burden of management. <br />The SAFE RATE is that rate of return which can be earned annually on a risk free, highly liquid <br />investment requiring virtually no rate which can be earned on a savings account or negotiable 1 <br />year certificate of deposit to the prime lending rate corresponding to the size of the investment. <br />RISK arises from the possibility that the net income forecast will not be realized and refers to the <br />investments continued ability to earn income caused by uncertainties and instabilities in the <br />Cabarrus County — 2012 Revaluation <br />INCOME PROPERTY VALUATION 8- 6 <br />05/24/01 <br />Attachment number 9 <br />G -6 Page 277 <br />