Lesson 18 Exercises – Property Reversion – Annuity plus Reversion Method (The Income Approach to Value)

Appraisal Training: Self-Paced Online Learning Session

1. Assume the following data concerning the subject property:

• Net Income Before deducting for recapture and Taxes:\$62,520
• Shape of the Income Stream (Income Stream Premise):Level Terminal
• Yield Rate:7½%
• Land Value:\$120,000
• Terms of Lease:33 years
• Tax Allowance:1%
• Remaining Economic Life:33 years
• Net Land Value at Termination of Lease | End Building's Economic Life:\$120,000

Compute the total property value using the property reversion technique.

Solution:

Present Value of the Rental Income:

\$62,520 NIBT / 7½% Y + 0.007594 SFF{7½,Ann,33yrs} + 1% ETR
= \$675,206

Present Value of the Land Reversion:

Land Value in 33 Years
\$120,000
PW1 @ 8.5% [7.5% Yo + 1% ETR]
× 0.067736
Present Value of Reversion
\$8,128

Present Value of Total Property

Present Value of the Rental Income
\$672,206
Present Value of the Reversion
+ \$8,128
Present Value of the Total Property
\$683,334
Say
\$683,000

One might ask, how accurately can you estimate the value of the land in 33 years. Not very accurately, but look what a small component it is in the final value estimate – after discounting, only slightly over one percent of the value. Predicting values in the future may be difficult, but the further into the future you go, the less impact they have on the final value estimate.