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CABARRUS COUNTY 2012 APPRAISAL MANUAL REMAINING ECONOMIC LIFE In order to apply any of the residual income techniques, it is necessary to estimate the remaining life of the improvements. By definition the economic life of improvements is the time period over which the improvements will be able to produce an income at a competitive rate of return on the portion of the investment represented by the improvements. Another term frequently used is capital recovery period. At the end of this time period, the improvements will be used up or depreciated to the point that they will no longer make any contribution to total property value over and above the contribution made by the site. Remaining economic life is directly related to the effective age of a given property. This is the difference between the total economic life less the remaining economic life. Remaining economic life and its complements, effective age, are dependent on tastes, standards- customs, and the effect of competition plus, perhaps most important to the property appraiser, the observed condition of the improvements. Elsewhere, in the discussion on depreciation, we have shown some typical building lives for various commercial improvement types. Reference to this table will give some indication as to the expected economic life new; however, the appraiser should look for buildings within the area that no longer produce income. The age of these buildings should give you some idea of the economic life of a building. INVESTMENT HOLDING PERIOD The Investment Holding Period is pertinent in the Ellwood or equity method; because of income tax considerations, it has been shown for instance, that most income producing properties are held by the average investor approximately twelve years. This, of course, can vary depending on specific properties and investor's requirements. A change in tax laws directly affects the holding period of all properties. DETERMINE DISCOUNT RATE: SELECT METHOD OF RATE ESTIMATION The Discount Rate, the basic building block in five of the income approaches, is also called a RATE OF RETURN ON INVESTMENT. It is determined by the forces of supply and demand for investment funds. A rate of return on an investment or "discount rate" is paid or offered in order to attract investment capital. The Discount Rate is generally estimated from one of two methods: Band of Investment or Build -up and the rate must compensate the investor for: 1) Overcoming time preference 3) Assuming investment management burdens 2) Giving up liquidity 4) Assuming the risks of investment and ownership BAND OF INVESTMENT The Band of Investment method recognizes the Discount Rate as the weighted average of mortgage interest rate(s) based on typical financing; and the equity yield rate, derived from market data. It is based on the premise that investments in income - producing properties are usually financed with a mortgage at the best available terms. The weighting factor is the percentage of the total investment represented by each component contributing thereto. The procedure involved in the Band of Investment method is illustrated as follows: Assume a property is financed with an 80% mortgage at 5 1/2% interest. Equity investors are seeking a 15% return on this type of investment. The indicated Discount Rate would be developed as follows: BAND OF INVESTMENT METHOD FOR DISCOUNT RATE Cabarrus County — 2012 Revaluation INCOME PROPERTY VALUATION 8- 5 05/24/01 Attachment number 11 G -3 Page 408