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CABARRUS COUNTY 2012 APPRAISAL MANUAL <br />recovery rate. It must be remembered that the central objective is the valuation of a finite income stream with the "infinite" <br />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 represents the present <br />worth of the right to receive the income. The basic relationship between the income and 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 producing <br />property. Each has the same basic theory - that a right to receive a future value may be determined by discounted cash flow <br />analysis which properly corresponds to the characteristics of the inflows and outflows of 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 residual <br />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 technique should <br />be used as follows: <br />Given: Building Value (based on replacement cost new) $100,000 <br />Net Operating Income $15,000 <br />Discount Rate 10% <br />Remaining Economic Life 50 years <br />Straight Line Capital Recovery Rate 1150 = 2% <br />Net Operating Income $15,000 <br />Less Annual Income allocated to building -$12,000 <br />($100,000 x .12) <br />Equals Income allocated to Land $3,000 <br />Present value of the Land equals annual income allocated to land capitalized at the discount rate. <br />($3,000 divided by .10) <br />Plus current building value <br />Estimated value via Income <br />Capitalization Straight Line Land <br />Residual Technique <br />$30,000 <br />$100,000 <br />$130,000 <br />Cabarrus County — 2012 Revaluation <br />INCOME PROPERTY VALUATION 8- 8 <br />05/24/01 <br />Attachment number 11 <br />G -3 Page 411 <br />