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Income Capitalization Approach

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Income Capitalization Approach

Here is a helpful review of the process of how the majority of property assessments are determined and why a savvy tax consultant is needed to help navigate through this process.

Income Capitalization Approach
This is the most common valuation approach utilized by appraisal districts in a mass appraisal of multi-family properties. The basic elements of this approach include: estimating the potential gross income on a stabilized basis; estimating a proper allowance for vacancy and collection loss; estimating anticipated fixed and variable operating expenses (including a reserve for replacement of depreciable components); and capitalizing the income stream into an indication of value by using market-derived capitalization rates.
The data necessary to complete the preceding steps is delineated on the appraisal districts commercial worksheet as follows:
  • Potential Gross Income (PGI)
  • Vacancy Allowance (%)
  • Operating Expense Ratio (%)
  • Net Operating Income (NOI)
  • Capitalization Rate (OAR)
The impact of these assumptions on the resulting value indication plays a crucial role in understanding the appraisal district’s value position. For this reason, Cantrell McCulloch obtains a digital version of the appraisal district’s commercial worksheets and exports the data to a proprietary software application for comparison to the subject’s actual operating history.
The unique insight gained from this data provides a benchmark from which all negotiations begin. It not only identifies inaccuracies relative to the subject’s actual operating performance, but also allows us to seek common ground on any appraisal district assumptions deemed favorable to our client’s tax position.

CONTACT US if you have any questions about the Income Capitalization Approach or any other multi-family property tax concerns.