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October 17, 2011 (Regular Meeting) BUILDING RESIDUAL TECHNIQUE Page 752 When the land value can be accurately estimated using the market and the improvements are older buildings or other than the highest and best use, a Building Residual Technique can be employed. Building Residual - Straight Line Given: Land Value (from Market or Sales Comparison) $30,000 Net Operating Income $15,000 Discount Rate 10% Remaining Economic Life 50 years Straight Line Capital Recovery 1/50 = 2% (Straight Line Capital Recovery assumes a declining income stream and may be appropriate when short term leases or economic rent figures are utilized.) Net Operating Income $15,000 Less annual income allocated to site capitalized at the DISCOUNT RATE ($30,000 X .10) Plus CAPITAL RECOVERY RATE ((.02) = .12) $12,000/12) _ $100,000 Plus current Land Value $30,000 Straight Line Building Residual Technique $130,000 BUILDING RESIDUAL TECHNIQUE - LEVEL ANNUITY Again, when contract rent is applicable (long term lease with prime tenants) the level annuity technique should be used as follows: Net Operating Income $15,000 Less annual income allocated to land - $3,000 Equals income allocated to improvements $12,000 Present worth of Improvements equals Annual Income allocated to building capitalized at the capitalization rate: (i.e. $12,000/.100857) _ $118,980 Plus current land value $30,000 Level Annuity Building Residual Technique $148,980 PROPERTY RESIDUAL LEVEL ANNUITY When total property income is difficult to allocate to either land or building, as in the case where building improvements are old, and where there is doubt about the land value because of location and specialized character, the property appraiser may want to use the property residual technique. Net Annual Income is capitalized over the remaining economic life of the property. To this must be added the projected value of the land at the end of the property's expected economic life discounted at the appropriate rate. PASCO allows the appraiser to compensate for expected growth trends in land values by entering an annual land growth rate. However, for properties with relatively long remaining economic lives, the difference is minimal. Given: NOI, $15,000 Discount Rate, 9% REL, 25 years Estimated Reversionary Value of Land, $2,000 Net Operating Income $15,000 Present Worth of Income Stream: NOI / (Discount Rate & Capital Recovery Rate) NOI / (.09 + .0118) $15,000 / .10181 = $147,333 Plus Present Worth of Reversion $20,000 x .115968 $2,319 Present Worth of Property $149,652