The Functional Relationships and Use of Going-In and Going-Out Capitalization Rates
In performing a Discounted Cash Flow Analysis for an income-producing property, a traditional rule-of-thumb indicates that the going-out capitalization rate should be one-half to one percent higher than the going-in capitalization rate. So far, there has been no theoretical model or empirical evidence to support or to dispute this assertion. This paper develops a model to examine the determinants of the going-out capitalization rate, as well as the relationship between going-in and going-out capitalization rates in a complete market setting. The proposed model indicates that the rule-of-thumb can be challenged, and the selection of an appropriate going-out capitalization rate requires a careful examination of the changes in the assumed income-growth rates, changes in the assumed required rates of return, and changes in the assumed property-appreciation rates during and after the projected holding period. The functional relationship between the property-appreciation rate assumption required for Ellwood methods and the going-out capitalization rate assumption required for DCF analysis also is derived.
Volume (Year): 5 (1990)
Issue (Month): 2 ()
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- Karl L. Guntermann & Richard L. Smith, 1987. "Derivation of Cost of Capital and Equity Rates from Market Data," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 15(2), pages 98-109.
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