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
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