Direct Capitalization Approach

A

The direct capitalization approach =

Market Value = Annual NOI / Market Capitalization Rate

The direct capitalization approach is a commonly used method in real estate valuation. It is based on the concept of capitalization, which involves converting the expected income generated by a property into an estimate of its market value. The formula for the direct capitalization approach is as follows:

Market Value = Annual Net Operating Income (NOI) / Capitalization Rate

In this formula, the annual NOI represents the net income generated by the property after deducting all operating expenses but before deducting mortgage payments or income taxes. It is a measure of the property's ability to generate cash flow.

The capitalization rate is the rate of return that an investor would expect to receive on an investment property. It reflects the relationship between the property's income and its value. The capitalization rate is often derived from market data and comparable property sales. It represents the market's perception of the risk and return associated with investing in a particular type of property.

Now, let's analyze the answer choices:

A. Market Capitalization Rate: This option is the correct answer. The market capitalization rate is used in the direct capitalization approach to calculate the market value of a property.

B. Market Discount Rate: This option is incorrect. The market discount rate is not used in the direct capitalization approach.

C. None of these answers: This option is incorrect. One of the provided answers is correct.

D. Subject Property Capitalization Rate: This option is incorrect. The subject property capitalization rate refers to the specific capitalization rate of the property being valued, which is used in the direct capitalization approach.

E. Subject Property Discount Rate: This option is incorrect. The subject property discount rate is not used in the direct capitalization approach.

In summary, the direct capitalization approach calculates the market value of a property by dividing the annual net operating income (NOI) by the market capitalization rate.