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CABARRUS COUNTY 2012 APPRAISAL MANUAL <br />market place. <br />The allowance for ILLIQUIDITY refers to the marketability or ease with which the investment can <br />be converted to cash. This allowance can be considerable in large or valuable parcels because <br />substantial negotiations may be required and the number of potential local investors may be <br />significantly reduced. <br />The MANAGEMENT allowance refers to the time and effort required to manage THE <br />INVESTMENT, not the property itself. The cost of managing THE PROPERTY is an operating <br />expense which is reflected in the net income statement. <br />Generally, for assessment purposes, real estate taxes are removed from expenses and the applicable county <br />millages are added to the discount rate to arrive at the discount rate applicable to the subject property. <br />BUILT -UP METHOD OF FINDING DISCOUNT RATE <br />For example: <br />Safe Rate 4.5 <br />Risk 2.0% <br />Illiquidity 1.5% <br />Management 0.5% <br />Ad Valorem Taxes 1.5% <br />Total Discount Rate 10.0% <br />The idea of the built -up method is to load the safe rate with rates which reflect the quality of the income stream. <br />The higher the quality, the lower the rate necessary to attract investors. Conversely, the poorer the quality, the <br />higher the rate would be. In essence, the proper interest rate is that rate necessary to attract capital to the <br />investment. <br />IDENTIFY METHOD OF DEPRECIATION <br />The wearing out and /or obsolescence of the improvements is reflected in the projected holding period or in the <br />remaining life of which enables the investor to recoup or recapture his initial capital investment while also <br />receiving a return on his capital. <br />Every method of providing for capital recovery can be expressed in the form of a sinking fund. A specific sum is to <br />be recovered over a specific period of time. Periodic annual payments are made as part of NOI to cumulate to the <br />full amount of capital to be recovered by the end of the capital recovered period. <br />There are basically two methods of providing for capital recovery each with specific assumptions as to the risk, <br />timing, and stability of the net income stream. <br />Cabarrus County — 2012 Revaluation INCOME PROPERTY VALUATION 8- 7 <br />05/24/01 <br />Attachment number 9 <br />G -6 Page 278 <br />