Turner stresses this approach is not independent from the other two approaches as procedures and techniques from the Income Approach are used to analyze comparable sales in the Sales Comparison Approach, and to measure certain forms of depreciation—or obsolescence—in the Cost Approach.

Turner outlined the most basic form of Income Approach analysis is the Direct Capitalization Method as follows:

Develop the subject's Potential Gross Income (PGI) through analysis of the subject's actual historic income and an analysis of competitive current market income rates.

Estimate and deduct vacancy and collection losses to develop the Effective Gross Income (EGI).

Develop and subtract operating expenses to derive the Net Operating Income (NOI).

Develop the appropriate capitalization rate (Ro).

Divide the net operating income by the capitalization rate for an estimate of value through the income approach.

ATLANTA—When it comes to commercial real estate appraisals, one size does not fit all. Indeed, various approaches fit various needs.

We've been discussing these approaches with Paulk Turner, director of J.H. Berry & Gilbert's appraisal and valuation services division. In part one of this exclusive educational series, we discussed the benefits of the cost approach valuation. In part two, we explored the right model for income-producing properties. In this segment, we will dive into the Income Approach.

“The Income Approach is based on the present worth of the future rights to income, and considers the property from an investor's point of view, with the basic premise that the amount and quality of the income stream are the basis for the value of the property,” Turner tells GlobeSt.com. “This approach is most applicable to multi-tenant properties with multiple existing or prospective leases in place, but is also applicable to single-tenant properties that are leased or have the potential to be leased.”

According to The Appraisal of Real Estate – 14th Edition, “income-producing real estate is typically purchased as an investment, and from an investor's point of view earning power is the critical element affecting property value. One basic investment premise holds that the higher the earnings, the higher the value, provided the amount of risk remains constant. An investor who purchases income-producing real estate is essentially trading present dollars for the expectation of receiving future dollars.”

Turner stresses this approach is not independent from the other two approaches as procedures and techniques from the Income Approach are used to analyze comparable sales in the Sales Comparison Approach, and to measure certain forms of depreciation—or obsolescence—in the Cost Approach.

Turner outlined the most basic form of Income Approach analysis is the Direct Capitalization Method as follows:

Develop the subject's Potential Gross Income (PGI) through analysis of the subject's actual historic income and an analysis of competitive current market income rates.

Estimate and deduct vacancy and collection losses to develop the Effective Gross Income (EGI).

Develop and subtract operating expenses to derive the Net Operating Income (NOI).

Develop the appropriate capitalization rate (Ro).

Divide the net operating income by the capitalization rate for an estimate of value through the income approach.