Partial Subdivision - Expenses to Include

[Curtis West]

If you are deducting the costs of the mortgage, then that which remains is the equity return not the NOI. If you are using equity as your measure of income it stands to reason you would use and equity dividend rate (ie equity capitalization rate) to convert the "income" to value.

Not something I think any of us are recommending by the way.

The reason for my question was that an equity dividend rate is synonymous with an equity capitalization rate (it is not synonymous with an equity yield rate, or an equity discount rate). Furthermore, profit is synonymous with yield. While it is true that there are numerous ways to convert income to value, using an equity dividend rate (equity cap rate) to discount income to equity is not one that I have ever heard or read about.

After deducting the cost of the mortgage (aka, mortgage payments, income to the mortgage, NOI for the mortgage, return on and return of income for the mortgage, etc.), that which remains is actually income for the equity (aka, NOI for the equity, or return on and return of income for the equity). I could easily agree with your statement (above) if it said it stands reason you would use and equity yield rate (rather than an equity dividend rate) to convert the "income" to value.

 

[Ken B]

Kenneth,

We had the Appraisal Institute over-night us Don Emerson's new publication Subdivision Valuation:
http://www.appraisalinstitute.org/store/p-115-subdivision-valuation.aspx
which is completely in line with your method. I sure hope you're working toward your general certification! This publication makes it clear that if financing costs and equity return are considered, then we are going into mortgage analysis; therefore, these should not be deducted.

The book also goes into entrepreneurial incentive vs. profit, which is clearly the way to go. Scott Lanz nailed it there.

It's an interesting read which goes into much better analysis than a Lovell's Subdivision Analysis from 1993, especially with respect to bulk lot sales.

I must say this is the first time I've used this site for discussions and I've been very impressed with the wealth of knowledge among the users. I'll definitely spend more time looking through this site in the future.

Much appreciated!
Irene

Irene,

Thank you. And the older AI Subdivision Analysis text is part of my professional library. I can guarantee you that I believe in learning from the best.

And I have been recently approved to sit the CG exam. I will be taking it in a couple of weeks. Wish me luck! I hear the new exam is a bear.

With regards to the site, wear a flak jacket when you venture outside of the realm of the Commercial/Industrial Appraisal sub-forum. The discussion can get a little crazy, heated, and sometimes just plain ludicrous. If you don't take anything personal, it can be quite entertaining.

Best of luck to you.

Ken

 

[PropertyEconomics]

Irene,

Thank you. And the older AI Subdivision Analysis text is part of my professional library. I can guarantee you that I believe in learning from the best.

And I have been recently approved to sit the CG exam. I will be taking it in a couple of weeks. Wish me luck! I hear the new exam is a bear.

With regards to the site, wear a flak jacket when you venture outside of the realm of the Commercial/Industrial Appraisal sub-forum. The discussion can get a little crazy, heated, and sometimes just plain ludicrous. If you don't take anything personal, it can be quite entertaining.

Best of luck to you.

Ken

Kenneth .. good luck on your CG exam. Please come back and tell us how it went. Id love to know how the new test is.

 

[PropertyEconomics]

The reason for my question was that an equity dividend rate is synonymous with an equity capitalization rate (it is not synonymous with an equity yield rate, or an equity discount rate). Furthermore, profit is synonymous with yield. While it is true that there are numerous ways to convert income to value, using an equity dividend rate (equity cap rate) to discount income to equity is not one that I have ever heard or read about.

After deducting the cost of the mortgage (aka, mortgage payments, income to the mortgage, NOI for the mortgage, return on and return of income for the mortgage, etc.), that which remains is actually income for the equity (aka, NOI for the equity, or return on and return of income for the equity). I could easily agree with your statement (above) if it said it stands reason you would use and equity yield rate (rather than an equity dividend rate) to convert the "income" to value.

Curtis .. you are absolutely correct.

The Rate of Return on the Equity portion of an investment, taking into account periodic Cash Flow and the proceeds from resale. Considers the timing and amounts of cash flow after Annual Debt Service, but not income taxes.
The yield rate would be used to convert the "income" to value. I was going off of a previous posting and not really thinking about what I was writing. My apologies.

In either event ... this is not a method I would suggest as I previously noted.