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Developing Capitalization Rates <br /> In developing capitalization rates, we attempt to analyze the <br /> relationship between properties' net operating incomes and <br /> their sales prices. While we can often verify actual sales <br /> prices of properties or closely approximate their sales <br /> prices from revenue stamps, realtors, MLS, and other real <br /> estate professionals, deriving net operating income is <br /> inherently more difficult. Although we always encourage <br /> voluntary contribution of income and expense data from <br /> commercial property owners, past voluntary contribution has <br /> been extremely limited and often difficult to qualify. For <br /> this reason, we also rely on other sources for income and <br /> expense data including but not limited to private appraisers, <br /> real estate brokers and property managers, trade publications <br /> and published reports. From a collaborative gathering of <br /> data, we attempt to derive capitalization rates for various <br /> property types based on what we perceive as typical income <br /> and expense rates and ratios for various properties <br /> considering such variables as differences in location, <br /> quality, and physical, functional, and economic <br /> characteristics. <br /> A capitalization rate established for use in appraising for <br /> Ad Valorem Taxes will generally consist of the following <br /> factors: <br /> 1. Recapture. . .or the annual rate of return of the <br /> depreciable items of a real estate investment. <br /> 2. Discount Rate. . .or the annual percentage rate <br /> reflecting the competetive rate of return on <br /> an investment. <br /> 3. Effective Tax Rate. . .the rate expressing the ratio <br /> between the property value and the current tax bill; <br /> the official tax rate of the taxing jurisdiction <br /> multiplied by the Assessment Ratio <br /> RECAPTURE RATE. The straight Line method of recapture is <br /> the simplest method and the one which seems to most reflect <br /> the action of the investors in general. It calls for the <br /> return of capital in equal increments or percentage <br /> allowances spread over the estimated remaining economic life <br /> of the building. <br /> • <br />