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CABARRUS COUNTY 2012 APPRAISAL MANUAL <br />The preceding discussion has detailed how the net operating income is derived and also the various components <br />of the Capitalization Rate. A Capitalization Rate can be derived arithmetically by adding together the discount <br />rate and the capital recovery rate. It must be remembered that the central objective is the valuation of a finite <br />income stream with the "infinite" value of the site. <br />IDENTIFY METHOD OF CAPITALIZATION TO USE <br />Capitalization is a process whereby an income stream of future payments is discounted to a figure which <br />represents the present worth of the right to receive the income. The basic relationship between the income and <br />value is expressed as follows: <br />Value = Net Operating Income /Capitalization Rate <br />There are seven methods in PASCO which employ the capitalization technique to derive a value for an income <br />producing property. Each has the same basic theory - that a right to receive a future value may be determined by <br />discounted cash flow analysis which properly corresponds to the characteristics of the inflows and outflows of <br />income. <br />Each of these methods is detailed in the following pages with specific examples. <br />METHODS OF CAPITALIZATION <br />LAND RESIDUAL <br />When the building is fairly new, free of obsolescence, and the replacement cost accurately determined, a land <br />residual technique may be used to estimate the value. <br />Land Residual Straight Line <br />If economic rent is applicable (short term lease or rental or less than first class tenants), straight line <br />technique should be used as follows: <br />Given: Building Value (based on replacement cost new)$100,000 <br />Net Operating Income <br />Discount Rate <br />Remaining Economic Life <br />Straight Line Capital Recovery Rate <br />$15,000 <br />10% <br />50 years <br />1/50 = 2% <br />Net Operating Income <br />Less Annual Income allocated to building <br />($100,000 x .12) <br />Equals Income allocated to Land <br />Cabarrus County — 2012 Revaluation <br />$15,000 <br />-$12,000 <br />$3,000 <br />INCOME PROPERTY VALUATION 8- 9 <br />05/24/01 <br />Attachment number 9 <br />M <br />Page 280 <br />