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ATTACHMENT 3
<br />Income Capitalization Approach
<br />The income capitalization approach converts anticipated economic benefits of owning real property into
<br />a value estimate through capitalization. The steps taken to apply the income capitalization approach are:
<br />• Analyze the revenue potential of the property.
<br />• Consider appropriate allowances for vacancy, collection loss, and operating expenses.
<br />• Calculate net operating income by deducting vacancy, collection loss, and operating expenses
<br />from potential income.
<br />• Apply the most appropriate capitalization method, either direct capitalization or discounted cash
<br />flow analysis, or both, to convert anticipated net income to an indication of value.
<br />The two most common capitalization methods are direct capitalization and discounted cash flow analysis.
<br />In direct capitalization, a single year's expected income is divided by an appropriate capitalization rate to
<br />arrive at a value indication. In discounted cash flow analysis, anticipated future net income streams and a
<br />future resale value are discounted to a present value at an appropriate yield rate.
<br />In this analysis, we use only direct capitalization because investors in this property type typically rely
<br />more on this method.
<br />Direct Capitalization Analysis
<br />Annual
<br />$/Unit
<br />INCOME
<br />Rental Income
<br />$1,333,500
<br />$20,836
<br />Expense Reimbursements
<br />$60,000
<br />$938
<br />Other Income
<br />$10,800
<br />$169
<br />Potential Gross Income
<br />$1,404,300
<br />$21,942
<br />Vacancy & Collection Loss
<br />5.00%-$70,215
<br />-$1,097
<br />Effective Rental Income
<br />$1,334,085
<br />$20,845
<br />Effective Gross Income
<br />$1,334,085
<br />$20,845
<br />EXPENSES
<br />Real Estate Taxes
<br />$208,019
<br />$3,250
<br />Insurance
<br />$9,600
<br />$150
<br />Utilities
<br />$64,000
<br />$1,000
<br />Repairs/Maintenance
<br />$48,000
<br />$750
<br />Painting & Decorating
<br />$9,600
<br />$150
<br />Payroll/Benefits
<br />$96,000
<br />$1,500
<br />Advertising & Marketing
<br />$6,400
<br />$100
<br />General/Administrative
<br />$13,341
<br />$208
<br />Management
<br />3.00% $40,023
<br />$625
<br />Replacement Reserves
<br />$32,000
<br />$500
<br />Total Expenses
<br />$526,982
<br />$8,234
<br />NET OPERATING INCOME
<br />$807,103
<br />$12,611
<br />Capitalization Rate
<br />4.50%
<br />Indicated Value
<br />$17,935,613
<br />$280,244
<br />Rounded
<br />$17,935,000
<br />$280,234
<br />Page 5
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