Income Approach
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Income approach Sales approach Value is determined by estimating the income for the property Value is determined by comparing the subject property to comparable sales and determining value Cost approach Value is determined by estimating the cost for reconstructing the property This is the approach where we compare the subject property value to the income produced by similar properties in the neighborhood. If we are looking at a value for ourselves then this would be the approach that looked at the value of the income for us; we still need other sales but it is a slightly different way to look at the problem Anticipation – Expectation of benefits -PV of future benefits to be derived from owning the property Supply and Demand You need to think about S&D when forecasting future benefits and rates of return What are prices, yields, and costs going to do? Substitution Types of rent, prices, returns and other factors tend to be set by the conditions in the neighborhood Relatively easy substitutions between properties Balance When there is so sort of equilibrium between the number of farms for rent and people willing to rent them Buyers? auctions Cash rent Crop share rent Owner-operator; Owner operator is the hardest but it is probably the one that you will be the most familiar with using What’s customary in the area? Needed for comparables Percent of Iowa Farmland, Excluding Acres in Government Programs or Custom Farmed, by Operator and Year 60% 50% 40% 30% 20% 10% 0% 1982 1992 Owner-operated 2002 Cash rented 2007 Crop share Percent of Leased Farmland by Lease Arrangement 80% 70% 60% 50% 40% 30% 20% 10% 0% 1982 1992 Cash rent 2002 Crop share 2007 Other Percent of Iowa Farmland Rented 60% 50% 40% 30% 20% 10% 0% 1900 1910 1920 1925 1930 1935 1940 1945 1950 1992 1997 2002 2007 Percent of County Land Rented, 2007 Osceola Lyon Dickinson Winnebago Emmet Worth Mitchell Howard Winneshiek Allamakee Kossuth Palo Alto Clay O'Brien Hancock Cerro Gordo Floyd Chickasaw Sioux Fayette Buena Vista Cherokee Plymouth Humboldt Pocahontas Wright Franklin Butler Hardin Grundy Black Hawk Sac Ida Woodbury Webster Calhoun Hamilton Clayton Bremer Buchanan Dubuque Delaware Jackson Tama Monona Carroll Crawford Greene Boone Story Benton Jones Linn Marshall Clinton Cedar Harrison Shelby Audubon Guthrie Dallas Poweshiek Jasper Polk Iowa Johnson Scott Muscatine Pottawattamie Mahaska Marion Warren Madison Adair Cass Keokuk Washington Louisa Mills Montgomery Adams Union Clarke Lucas Monroe Wapello Jefferson Henry Des Moines Fremont Page Taylor Ringgold Decatur Wayne Appanoose Davis Van Buren Lee 0% to 40% 40% to 50% 50% to 60% 60% to 75% Percent of Land by Type of Operator by Region, 2007 60% 50% 40% 30% 20% 10% 0% NW SW N Owner NC Cash S NE Crop sh. E Distribution of Cash and Crop Share Acres by Characteristics 80% 70% 60% 50% 40% 30% 20% 10% 0% Percent of rented acres Written lease Leased to relative Cash Rent Crop Share Fixed term lease This uses the direct capitalization procedure Converting a single year income into a value Step 1: Determine how the property is being operated considering what’s typical for the area If you are going to change; ie, from it being cash to owner/operated then that has to be determined Step 2; Verify all the information; be sure that what you know is so Step 3; Get all the expense data necessary for the type of operation or expected operation Step 4; Obtain and verify comparable sales Construct an operating statement for each one Estimate the capitalization rate for each one Capitalization rate = net operating income/sales price Step 5; Estimate the appropriate capitalization rate and determine the subject property value using the income approach Ag Decision Maker Extension Farmers in the area Dealers Lenders NASS and other state and Federal govt. Owner Remember to base these estimates on the potential and not the current operator Costs per bushel varied by over $1.50 and $4 in 2008 for farms in the Iowa Farm Business Association Owner/operator Crops Application rates and practices Yields Prices Taxes Insurance Maintenance Management Utilities Crop Cash rent; Amount Conditions for example; when is it paid, how many payments, fixed or variable 32% of cash rent acres have a single payment with 49% before planting and 41% after harvest 58% are two payment with 74% having first payment due before planting and 69% having second payment due after harvest Crop share; Crops Participation Yields, prices, costs,…. for the area Who pays what? How are the costs and returns divided? Remember the rent on buildings or the farmstead. Are they worth anything or are they a detraction? Income estimate will vary depending on the method used. In general the cash rent should provide the lowest net operating income, followed by the crop share, followed by owner/operator. Why? Income approach says: Value = Net operating income/Capitalization Rate The capitalization rate is Capitalization rate = Net operating income/Sales price NOI = Sales* Capitalization Rate Comparable sales provide estimates of the current capitalization rate Average Capitalization Rate by Crop Reporting District from Farm Credit Services, 2008 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% NW NC NE WC C EC SW SC SE Average and Range in Capitialization Rates, Iowa, 2007-2009 4.00% 3.73% 3.58% 3.53% 3.50% 3.00% 2.42% 2.39% 2.50% 2.32% 2.00% 1.50% 1.00% 0.50% 0.00% 2007 2008 Average 2009 Range Average Sales Price, 2007, Farm Credit Services Osceola Lyon Dickinson Winnebago Emmet Worth Mitchell Howard Winneshiek Allamakee Kossuth Clay O'Brien Palo Alto Hancock Cerro Gordo Floyd Chickasaw Sioux Fayette Cherokee Buena Vista Pocahontas Plymouth Sac Ida Woodbury Humboldt Butler Hamilton Hardin Grundy Clayton Black Hawk Buchanan Webster Calhoun Wright Franklin Bremer Delaware Dubuque Jackson Monona Greene Carroll Crawford Boone Benton Tama Marshall Story Jones Linn Clinton Cedar Harrison Shelby Audubon Guthrie Dallas Iowa Poweshiek Jasper Polk Johnson Scott Muscatine Pottawattamie Adair Cass Madison Warren Marion Mahaska Keokuk Washington Louisa Mills Montgomery Adams Union Clarke Lucas Monroe Wapello Jefferson Henry Des Moines Fremont Page Taylor Ringgold Decatur Wayne Appanoose Davis Van Buren Lee 0 to $3,350 $3,350 to $3,950 $3,950 to $4,500 $4,500 to $6,500 Capitalization Rate, 2007, Farm Credit Services Osceola Lyon Dickinson Winnebago Emmet Worth Mitchell Howard Winneshiek Allamakee Kossuth Palo Alto Clay O'Brien Hancock Cerro Gordo Floyd Chickasaw Sioux Fayette Cherokee Plymouth Buena Vista Pocahontas Sac Ida Woodbury Humboldt Wright Butler Hardin Grundy Black Hawk Webster Calhoun Franklin Hamilton Clayton Bremer Buchanan Delaware Dubuque Jackson Monona Greene Carroll Crawford Boone Benton Tama Marshall Story Jones Linn Clinton Cedar Harrison Shelby Audubon Guthrie Dallas Iowa Poweshiek Jasper Polk Johnson Scott Muscatine Pottawattamie Adair Cass Madison Warren Marion Mahaska Keokuk Washington Louisa Mills Montgomery Adams Union Clarke Lucas Monroe Wapello Jefferson Henry Des Moines Fremont Page Taylor Ringgold Decatur Wayne Appanoose Davis Van Buren Lee 2.4% - 3.1% 3.1% - 3.4% 3.4% - 3.8% 3.8% - 5.1% Implied Net Operating Income, 2007 Osceola Lyon Dickinson Winnebago Emmet Worth Mitchell Howard Winneshiek Allamakee Kossuth Palo Alto Clay O'Brien Hancock Cerro Gordo Floyd Chickasaw Sioux Fayette Buena Vista Cherokee Plymouth Pocahontas Sac Ida Woodbury Humboldt Wright Franklin Butler Hamilton Hardin Grundy Black Hawk Webster Calhoun Clayton Bremer Buchanan Delaware Dubuque Jackson Monona Greene Carroll Crawford Boone Story Benton Tama Marshall Jones Linn Clinton Cedar Harrison Shelby Audubon Guthrie Dallas Iowa Poweshiek Jasper Polk Johnson Scott Muscatine Pottawattamie Adair Cass Madison Marion Warren Mahaska Keokuk Washington Louisa Mills Montgomery Adams Union Clarke Lucas Monroe Wapello Jefferson Henry Des Moines Fremont Page Taylor Ringgold Decatur Wayne Appanoose Davis Van Buren Lee $63 to $116 $116 to $140 $140 to $158 $158 to $196 Average Sales Price, 2008, Farm Credit Services Osceola Lyon Dickinson Winnebago Emmet Worth Mitchell Howard Winneshiek Allamakee Kossuth Palo Alto O'Brien Clay Cherokee Buena Vista Hancock Cerro Gordo Floyd Chickasaw Sioux Fayette Plymouth Woodbury Pocahontas Sac Ida Humboldt Wright Franklin Butler Hamilton Hardin Grundy Black Hawk Webster Calhoun Clayton Bremer Buchanan Delaware Dubuque Jackson Monona Greene Carroll Crawford Boone Story Benton Tama Marshall Jones Linn Clinton Cedar Harrison Shelby Audubon Guthrie Dallas Iowa Poweshiek Jasper Polk Johnson Scott Muscatine Pottawattamie Adair Cass Madison Marion Warren Mahaska Keokuk Washington Louisa Mills Montgomery Adams Union Clarke Lucas Monroe Wapello Jefferson Henry Des Moines Fremont Page Taylor Ringgold Decatur Wayne Appanoose Davis Van Buren Lee $0 to $3,800 $3,800 to $4,600 $4,600 to $5,150 $5,150 to $7,400 Capitalization Rates, 2008, Farm Credit Services Osceola Lyon Emmet Dickinson Winnebago Worth Mitchell Howard Winneshiek Allamakee Kossuth Palo Alto Clay O'Brien Hancock Cerro Gordo Floyd Chickasaw Sioux Fayette Humboldt Cherokee Buena Vista Pocahontas Plymouth Sac Ida Woodbury Wright Butler Black Hawk Buchanan Webster Calhoun Franklin Clayton Bremer Hamilton Delaware Dubuque Grundy Hardin Jackson Monona Greene Carroll Crawford Boone Benton Tama Marshall Story Jones Linn Clinton Cedar Harrison Shelby Audubon Guthrie Dallas Iowa Poweshiek Jasper Polk Johnson Scott Muscatine Pottawattamie Adair Cass Madison Warren Marion Mahaska Keokuk Washington Louisa Mills Montgomery Adams Union Clarke Lucas Monroe Wapello Jefferson Henry Des Moines Fremont Page Taylor Ringgold Decatur Wayne Appanoose Davis Van Buren Lee 2.4% - 3.1% 3.1% - 3.4% 3.4% - 3.8% 3.8% - 4.4% Implied Net Operating Income, 2008 Osceola Lyon Dickinson Winnebago Emmet Worth Mitchell Howard Winneshiek Allamakee Kossuth Palo Alto Clay O'Brien Hancock Cerro Gordo Floyd Chickasaw Sioux Fayette Buena Vista Cherokee Plymouth Pocahontas Sac Ida Woodbury Humboldt Wright Franklin Butler Hamilton Hardin Grundy Black Hawk Webster Calhoun Clayton Bremer Buchanan Delaware Dubuque Jackson Monona Greene Carroll Crawford Boone Story Benton Tama Marshall Jones Linn Clinton Cedar Harrison Shelby Audubon Guthrie Dallas Iowa Poweshiek Jasper Polk Johnson Scott Muscatine Pottawattamie Adair Cass Madison Marion Warren Mahaska Keokuk Washington Louisa Mills Montgomery Adams Union Clarke Lucas Monroe Wapello Jefferson Henry Des Moines Fremont Page Taylor Ringgold Decatur Wayne Appanoose Davis Van Buren Lee $70 to $130 $130 to $165 $165 to $185 $185 to $228 Cap Rate, 2009 3.18 3.01 3.75 3.31 4.33 4.34 4.64 4.46 Lyon Osceola Dickinson Emmet Winnebago Worth Mitchell Howard 4.26 3.18 Kossuth 3.67 3.74 3.95 O'Brien Clay Palo Alto 4.54 4.33 4.22 Hancock 4.59 Cerro Gordo Floyd Chickasaw 3.81 3.00 Winneshiek Allamakee Sioux 3.49 3.27 3.72 Plymouth Cherokee Buena Vista 4.07 3.68 Pocahontas 4.04 4.14 4.21 Wright Franklin Butler 3.67 4.10 3.58 Hamilton Hardin Grundy Humboldt 4.08 3.57 3.30 3.40 3.86 Woodbury Ida Sac Calhoun Webster 4.00 4.17 2.45 Fayette Clayton Bremer 4.03 4.03 3.42 2.92 Black Hawk Buchanan Delaware Dubuque 3.03 4.13 3.32 3.06 3.55 3.44 3.92 3.64 Monona Crawford Carroll Greene Boone Story Marshall 3.56 3.56 3.42 Tama Benton Linn Jackson 3.80 Jones 3.45 Clinton 3.94 3.96 3.35 3.51 3.50 3.42 3.54 3.25 3.41 3.64 Harrison Shelby Audubon Guthrie Dallas Polk Jasper Poweshiek Iowa 3.46 Cedar 3.93 Johnson Scott 3.56 Muscatine 3.49 3.34 3.71 3.08 3.77 3.66 3.71 3.47 3.20 Pottawattamie Cass Adair Madison Warren Marion Mahaska Keokuk Washington 3.66 Louisa 4.54 4.29 4.32 3.46 3.72 3.78 3.40 3.00 3.85 Mills Montgomery Adams Union Clarke Lucas Monroe Wapello Jefferson 3.78 Henry 3.27 Des Moines 4.68 4.57 4.01 4.24 3.84 4.29 4.87 3.75 3.42 Fremont Page Taylor Ringgold Decatur Wayne Appanoose Davis Van Buren 3.51 Lee 2.00 to 3.40 3.40 to 3.60 3.60 to 4.00 4.00 to 5.50 Implied Net Operating Income, 2009 197.92 145.44 167.44 143.06 174.63 177.29 194.09 181.43 Lyon Osceola Dickinson Emmet Winnebago Worth Mitchell Howard 184.80 206.80 218.95 181.65 178.50 O'Brien Clay Palo Alto Kossuth 211.70 204.94 211.21 Hancock 193.19 Cerro Gordo Floyd Chickasaw 134.34 91.38 Winneshiek Allamakee Sioux 206.19 186.40 136.88 188.27 172.78 Plymouth Cherokee Buena Vista Pocahontas Humboldt 194.21 148.44 186.19 173.54 183.47 Woodbury Ida Sac Calhoun Webster 210.00 201.84 181.21 195.39 Wright Franklin Butler 197.85 193.56 225.18 Hamilton Hardin Grundy 163.92 93.10 Fayette Clayton Bremer 202.51 189.49 161.01 116.22 Black Hawk Buchanan Delaware Dubuque 116.14 151.82 169.35 185.80 160.14 165.15 218.81 166.78 Monona Crawford Carroll Greene Boone Story Marshall 174.72 155.71 183.04 Tama Benton Linn Jackson 174.91 Jones 141.17 Clinton 186.56 137.13 150.98 136.40 134.68 183.07 Harrison Shelby Audubon Guthrie Dallas 190.91 151.94 145.13 132.31 Polk Jasper Poweshiek Iowa 189.92 Cedar 226.92 Johnson Scott 142.47 Muscatine 157.08 111.72 103.88 104.44 123.47 148.23 127.55 122.14 177.31 Pottawattamie Cass Adair Madison Warren Marion Mahaska Keokuk Washington 154.89 Louisa 158.85 150.19 112.06 84.11 66.96 92.65 49.44 100.20 137.21 Mills Montgomery Adams Union Clarke Lucas Monroe Wapello Jefferson 152.98 Henry 143.36 Des Moines 173.49 129.33 78.96 83.53 68.43 84.51 110.21 81.98 94.08 Fremont Page Taylor Ringgold Decatur Wayne Appanoose Davis Van Buren 106.42 Lee 0.00 to 120.00 120.00 to 160.00 160.00 to 190.00 190.00 to 240.00 Why would capitalization rates vary? Would you expect them to be the same? Income approach is one approach to estimating value in appraising land. With this approach we assume that income from different properties in the neighborhood will be similar. Estimating income as cash rent, crop share, or owner/operator Comparisons must generate income in the same way Capitalization rate estimate is a key to this approach
