An Argument for the Debt Coverage Method in Developing Capitalization Rates

The quality of a methodology used to ascertain a capitalization rate depends on the market-derived information it uses. Therefore, an appraiser is likely to produce the most accurate and reliable estimate of value when using capitalization rate methods that require few verifiable variables. The meri...

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Bibliographic Details
Published in:The Appraisal journal 1990-10, Vol.58 (4), p.558
Main Authors: Boykin, James H, Hoesli, Martin E
Format: Article
Language:English
Subjects:
Capitalization
Comparative analysis
Debt service
Market value
Operating revenue
Rates
Real estate appraisal
State court decisions
Statistical data
Techniques
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Summary:The quality of a methodology used to ascertain a capitalization rate depends on the market-derived information it uses. Therefore, an appraiser is likely to produce the most accurate and reliable estimate of value when using capitalization rate methods that require few verifiable variables. The merits of using the debt coverage ratio method to prepare an overall capitalization rate are shown. This method, popularized by Gettel (1978), states that the overall capitalization rate can be derived by multiplying the loan-to-value ratio by the debt coverage ratio and by the annual mortgage constant. This method is far less complete than the projected income-value method, but it is more easily derived from actual market evidence. Since criticisms of this method have some merit, further research using actual sales and net operating income figures would be useful.
ISSN:0003-7087