Direct Capitalization:

1
Chapter 22

• Direct Capitalization
• Value From 1 Yr. Income
• Not Concerned With Return on Vs. Return of
  Investment
  
• Income Rates in Direct Cap
• Overall Cap Rate
• Mortgage Cap Rate or Mortgage Constant
• Equity Cap or Equity Dividend Rate

2

• Land Cap Rate
• Building Cap Rate
• Leased Fee Position Cap Rate
• Leasehold Position Cap Rate
• Income Factors in Direct Cap
• Potential Gross Income Multiplier (PGIM)
• Gross Rent Multiplier (GRM)
• Effective Gross Income Multiplier (EGIM)
• Net Income Multiplier

3

• Deriving Overall Cap Rate
• Value NOI / Overall Cap Rate
• Deriving From Comparable Sales
• Preferred Method When Data Is Available
• Market Conditions Must Be Similar
• Divide Comparables NOI by Sales Price
• Consistency Is Vital Use Same Basis
• Deriving From EGIM
• Use if Comparable Data is Not Complete
• Divide Comparables NOI Ratio by EGIM

4

• Deriving From Band of Investments (A)
• Market Requirements of Both Debt and Equity,
  Weighted for Size of Each
  
• Best for Testing, Not Deriving
• Mortgage Constant Is Ratio of Annual Debt
  Service to Loan Principal
  
• Equity Cap Rate is Ratio of Pre-Tax Cash Flow
  to Equity Invested
  
• Formula
• (Loan to Value Ratio Mortgage Constant)
  (Equity Ratio Equity Cap Rate)

5

• Deriving From Band of Investments (B)
• Land and Improvements, Weighted for Each
• Formula
• (Land Value Ratio Land Cap Rate)
• (Building Value Ratio Building Cap Rate)
• In-House Cap Rate
• Debt Coverage Ratio is Ratio of NOI to Annual
  Debt Service
  
• Formula
• Debt Coverage Ratio Mortgage Constant
  Loan to Value Ratio

6

• Residual Techniques
• Physical Land or Building
• Financial Mortgage or Equity
• Building Residual Technique
• Apply Land Cap Rate to Known Land Value to
  Derive NOI of Land
  
• Subtract NOI of Land From NOI to Derive
  Building NOI
  
• Apply Building Cap Rate to Building NOI to
  Derive Building Value
  
• Add Land Value to Building Value

7

• Land Residual Technique
• Apply Building Cap Rate to Known Building
  Value to Derive NOI of Building
  
• Subtract NOI of Building From NOI to Derive
  Land NOI
  
• Apply Land Cap Rate to Land NOI to Derive Land
  Value
  
• Add Building Value to Land Value

8

• Equity Residual Technique
• Subtract Annual Debt Service From NOI to
  Derive Residual Income for Equity
  
• Apply Equity Cap Rate to Residual Income for
  Equity to Derive Equity Value
  
• Add Equity Value to Loan Principal

9

• Mortgage Residual Technique
• Apply Equity Cap Rate to Equity Invested to
  Derive Equity Income
  
• Subtract Equity Income from NOI to Derive
  Residual Income to Mortgage
  
• Apply Mortgage Constant to Residual Income to
  Mortgage to Derive Loan Principal
  
• Add Loan Principal to Equity Invested

10

• Gross Income Multipliers
• Ratio of Sales Price to Annual or Monthly
  Gross Income
  
• PGIM, EGIM, NIM or GRM Depending on Available
  Data