INCOME CAPITALIZATION APPROACH TO VALUEPowerPoint PresentationSlide 3Slide 4CAPITALIZATION RATEINCOMECROP SHARE RENTAL AGREEMENTSSlide 8INCOME CAPITALIZATIONAPPROACH TO VALUEA BASIC INVESTMENT PREMISE IS: THE HIGHER THE EARNINGS, THE HIGHER THE VALUE.THE PRINCIPLE OF ANTICIPATION IS FUNDAMENTAL TO THE INCOME CAPITALIZATION APPROACH.VALUE MAY BE DEFINED AS THE PRESENT WORTH OF FUTURE BENEFITS.AN INCOME RATE EXPRESSES THE RELATIONSHIP BETWEEN ONE YEARS INCOME AND THE CORRESPONDING CAPITAL VALUE OF THE PROPERTY.AN OVERALL CAPITALIZATION RATE IS AN INCOME RATE FOR A TOTAL PROPERTY THAT REFLECTS THE RELATIONSHIP BETWEEN A SINGLE YEARS NET OPERATING INCOME EXPECTANCY AND THE TOTAL PROPERTIES VALUE.DIRECT CAPITALIZATION IS A METHOD USED TO CONVERT AN ESTIMATE OF A SINGLE YEARS INCOME EXPECTANCY INTO AN INDICATION OF VALUE IN ONE DIRECT STEP.EITHER BY DIVIDING THE ESTIMATE BY AN APPROPRIATE INCOME RATE OR BY MULTIPLYING THE INCOME ESTIMATE BY AN APPROPRIATE FACTOR.THE RATE OR FACTOR SELECTED REPRESENTS THE RELATIONSHIP BETWEEN INCOME AND VALUE OBSERVED IN THE MARKET AND IS DERIVED THROUGH COMPARABLE SALES ANALYSIS.THE FORMULA USED IN THE INCOME CAPITALIZATION APPROACH IS:VALUE = INCOME / RATEWHERE: VALUE IS THE ESTIMATEDVALUE OF THE PROPERTY INCOME IS THE ANNUAL NET RETURN TO LANDRATE IS THE CAPITALIZATION RATE DERIVED FROM THE MARKETCAPITALIZATION RATETHE CAPITALIZATION RATE IS DERIVED USING COMPARABLE SALES. THE FORMULA IS RESTATED AS: RATE = INCOME / VALUEINCOMEIN ESTIMATING INCOME OWNER - OPERATOR INCOME OR LANDLORD - TENANT INCOME MAY BE USED. THE LANDLORD-TENANT RENTAL OR LEASE INCOME IS AN ESTIMATE OF THE RETURNS TO LAND AND IS TYPICALLY USED IN RURAL APPRAISALS.CROP SHARE RENTALAGREEMENTSTHE LANDLORD RECEIVES A PERCENTAGE OF THE OUTPUT, GOVERNMENT PAYMENTS, AND OTHER INCOME.THE LANDLORD PAYS A PERCENTAGE OF CERTAIN VARIABLE PRODUCTION EXPENSES, EX. FERTILIZER, INSECTICDE, AND GINNING.THE LANDLORD MAY PAY ALL OR A PORTION OF REPAIRS TO IRRIGATION SYSTEMS.ADDITIONAL LANDLORD EXPENSES TO BE CONSIDERED IN THE ESTIMATION OF NET RETURNS ARE:PROPERTY