Developing Capitalization Rates: It's More than Math

Course overview

This seven hour seminar provides educational elective renewal credit for Michigan appraisers and assessors. The target audience is certified general appraisers and MAAO and MMAO assessors. A background in the income approach and familiarity with the operation of a financial calculator (HP12C or equivalent) is recommended. USPAP citations in Standards 1-4, 2-2 and 6-5 are reviewed. Michigan court cases where capitalization rates were an issue are identified. This seminar explores the development of capitalization rates via direct and indirect methods including the advantages and disadvantages of each method. Interviews with local market experts and national published data on capitalization rates including sources, survey methods and applicability to Michigan markets are identified and discussed. Typical purchasers of investment properties, characteristics of income streams and understanding the financial factors that affect capitalization rates are identified. A review of yield capitalization exploring the relationship of going in to terminal rates, implied capitalization rates and understanding the relationship of present value cash flows to reversion are discussed. Capitalization rates from recent transactions across property sectors are presented. A case study on capitalization rate development and several problems are included for group participation.