Income Approach

Three Approaches to Appraisal

Income approach Value is determined by estimating the income for

the property Sales approach

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

Income Approach 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

Appraisal Principles Behind Income Approach

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?

Appraisal Principles Behind Income Approach

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

Income estimate 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

1982 1992 2002 20070%

10%

20%

30%

40%

50%

60%

Percent of Iowa Farmland, Excluding Acres in Gov-ernment Programs or Custom Farmed, by Operator

and Year

Owner-operated Cash rented Crop share

Percent of Leased Farmland by Lease Arrangement

0%

10%

20%

30%

40%

50%

60%

70%

80%

1982 1992 2002 2007

Cash rent Crop share Other

Percent of Iowa Farmland Rented

0%

10%

20%

30%

40%

50%

60%

1900 1910 1920 1925 1930 1935 1940 1945 1950 1992 1997 2002 2007

Percent of County Land Rented, 2007

Decatur DavisAppanoose

Clarke Lucas

Ringgold Wayne

Allamakee

Monroe

Dubuque

Clayton

Van Buren

Jefferson

Mahaska

Jackson

Taylor

WapelloAdams

Marion Keokuk

Lee

Warren

Union

Winneshiek

Henry

Iowa

Washington

Delaware

Madison

Jones

Louisa

Page

Adair

Poweshiek

Johnson

Guthrie

Fayette

Howard

Des Moines

Cass

Chickasaw

Bremer

Muscatine

Montgomery

Tama Linn

Mills

Buchanan

JasperAudubon

Marshall

Black Hawk

Plymouth

Carroll

Mitchell

Benton

Worth

Harrison

Butler

Kossuth

Clinton

Woodbury

Floyd

Cedar

Scott

Fremont

Pottawattamie

Winnebago

Cherokee

Lyon

Hardin

Story

DallasShelby

Ida

Sioux

Cerro Gordo

Crawford

O'Brien

Webster

Franklin

Calhoun

Emmet

Greene Boone

Polk

Buena Vista

Sac

Monona

DickinsonOsceola

GrundyHamilton

Wright

Humboldt

Pocahontas

Clay HancockPalo Alto

0% to 40%40% to 50%50% to 60%60% to 75%

NW SW N NC S NE E0%

10%

20%

30%

40%

50%

60%

Percent of Land by Type of Operator by Region, 2007

Owner Cash Crop sh.

Percent of rented acres Written lease Leased to relative Fixed term lease0%

10%

20%

30%

40%

50%

60%

70%

80%

Distribution of Cash and Crop Share Acres by Characteristics

Cash Rent Crop Share

Procedure 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

Procedure

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

Procedure 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

Data Sources

Ag Decision Maker Extension Farmers in the area Dealers Lenders NASS and other state and Federal govt. Owner

Owner/Operator

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

Data; income

Owner/operator Crops Application rates and practices Yields Prices

Data; Expenses

Taxes Insurance Maintenance Management Utilities Crop

Data; income

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

Data; income

Crop share; Crops Participation Yields, prices, costs,…. for the area

Who pays what? How are the costs and returns divided?

Additional Considerations

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?

Capitalization Rate

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

NW NC NE WC C EC SW SC SE0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

Average Capitalization Rate by Crop Reporting District from Farm Credit Services, 2008

2007 2008 20090.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

3.53% 3.58%3.73%

2.32%2.39% 2.42%

Average and Range in Capitialization Rates, Iowa, 2007-2009

Average Range

Average Sales Price, 2007, Farm Credit Services

Ringgold WayneDecatur

MonroeLucasClarke

Taylor

Union

DavisAppanoosePage

Marion

Montgomery

Van Buren

Adams

Adair

Monona

Guthrie

WarrenMadison

Jackson

Lee

Winneshiek

Cass

Allamakee

Wapello

Fremont

Muscatine

AudubonIowa

Des Moines

Mills

Mahaska

Worth

Keokuk

HarrisonPoweshiek

Fayette

Louisa

Woodbury

Clayton

Jefferson

Crawford

Shelby

WinnebagoEmmetDickinson

Jasper

Butler

Clay

Howard

Pottawattamie

Henry

Pocahontas

Floyd

Kossuth

Calhoun

Chickasaw

Wright

Marshall

HancockPalo Alto

Mitchell

Buena Vista

Tama

Ida

Cherokee

Hardin

Carroll

Franklin

Sac

Greene

Dallas

Cerro Gordo

Johnson

Benton

Cedar

Hamilton

Polk

Humboldt

Dubuque

Washington

Buchanan

Plymouth

Webster

Osceola

Story

Bremer

Linn

Black Hawk Delaware

Lyon

Boone

Clinton

Scott

Jones

Grundy

O'Brien

Sioux

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

Allamakee

Dubuque

Sioux

Boone

Lee

Dallas

Johnson

Lyon

Washington

Henry

Jackson

Polk

Delaware

Grundy

Van Buren

Carroll

Plymouth

Davis

Jones

O'Brien

Clayton

Keokuk

Jasper

Scott

Linn

Madison Marion

Greene

Webster

Clinton

Bremer

Shelby

Crawford

Cherokee

Hamilton

Jefferson

Buena Vista

Audubon

Cedar

Osceola

Warren

Iowa

Sac

Adair

Poweshiek

Story

Tama

Black Hawk

Pottawattamie

Winneshiek

Benton

Appanoose

Ida

Wapello

Humboldt

Woodbury

Guthrie

ButlerFranklin

Louisa

Harrison

Marshall

Buchanan

Cass

Palo Alto

Muscatine

Decatur Wayne

Des Moines

Clarke

Pocahontas

Union

Hardin

Monroe

Fayette

Ringgold

Calhoun

Wright

Clay

Dickinson

Lucas

Chickasaw

Emmet

Mills

Kossuth

Hancock

Monona

Montgomery

Cerro Gordo

Howard

TaylorFremont

MitchellWorth

Floyd

Mahaska

Adams

Page

Winnebago

2.4% - 3.1%3.1% - 3.4%

3.4% - 3.8%

3.8% - 5.1%

Implied Net Operating Income, 2007

WayneRinggold Decatur Davis

MonroeClarke Lucas

Van Buren

Marion

Union

AppanooseTaylor

Allamakee

Adair

Lee

Montgomery

Jackson

Madison

Page

Monona

Warren

Adams

Guthrie

Winneshiek

Audubon

Keokuk

Iowa

Wapello

Cass

Clayton

Muscatine

Henry

Jasper

Des Moines

ShelbyPoweshiek

Crawford

Jefferson

Dubuque

Harrison

Louisa

Woodbury

Dallas

Johnson

Fremont

Mills

Fayette

Pottawattamie

Carroll

Butler

Polk

Washington

Greene

Buena Vista

Dickinson

Clay

Cherokee Pocahontas

Emmet Worth

Boone

Mahaska

Tama

Marshall

HamiltonSac

Lyon

Plymouth

Palo Alto

Cedar

Ida

Delaware

Calhoun

Franklin

Benton

Wright

Webster

Linn

Howard

Chickasaw

Humboldt

Kossuth

Bremer

Hardin

Osceola

FloydHancock

Clinton

Story

BuchananBlack Hawk

Scott

Mitchell

Cerro Gordo

Grundy

Jones

O'Brien

Sioux

Winnebago

$63 to $116

$116 to $140

$140 to $158

$158 to $196

Average Sales Price, 2008, Farm Credit Services

Appanoose

Lucas

Taylor DecaturRinggold

Clarke

Davis

Union

Wayne Van Buren

Monroe

Page

Wapello

Madison

Adams

Marion

Montgomery

Winneshiek

Adair Warren

Allamakee

Lee

Jackson

Cass

Fremont

Jefferson

Jones

Audubon

Mahaska

Guthrie

Keokuk

Howard

Poweshiek Iowa

Louisa

Harrison

Fayette

Monona

Chickasaw

Clinton

Woodbury

Dickinson

Henry

Muscatine

Mills

Dubuque

Jasper

Johnson

Buchanan

Palo Alto

Winnebago

Buena Vista

Crawford

Clay

Emmet

Humboldt

Worth

Pottawattamie

Des Moines

Bremer

Clayton

Kossuth

Pocahontas

Polk

Scott

Hardin

Benton

Wright

Hancock

Shelby

Floyd

Mitchell

Delaware

Plymouth

Calhoun

Cerro Gordo

Hamilton

Tama

Greene

Linn

Butler

Osceola

Marshall

Cherokee Franklin

Boone

Cedar

Ida

Washington

Dallas

Webster

Sac

Black Hawk

StoryCarroll

O'Brien

Grundy

Lyon

Sioux

$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

Clayton

Allamakee

Monroe

Dubuque

Van Buren

Sioux

Carroll

Washington

Greene

Linn

Davis

Guthrie

Delaware

Decatur

Boone

Johnson

Crawford

Jefferson

Madison

Cherokee

DallasShelby

Ida

Plymouth

Tama

Jackson

Poweshiek

Jones

Lyon

Audubon

Keokuk

Benton

Lee

Franklin

Henry

O'Brien

Adair

Grundy

Cass

Sac

Warren

Jasper

Cedar

Clinton

Webster

Black Hawk

Mills

Osceola

Woodbury

Marshall

Scott

Story

Pottawattamie

Butler

Lucas Wapello

Calhoun

Buena Vista

Harrison

Clay

Monona

Humboldt

Des Moines

Iowa

Muscatine

Adams

Hardin

Clarke

Hamilton

Pocahontas

Buchanan

Fayette

Polk

Louisa

Ringgold Wayne

Dickinson

Bremer

Wright

Emmet

Union

Palo Alto

Chickasaw

Marion Mahaska

Cerro Gordo

Montgomery

Kossuth

Hancock

Mitchell

Winneshiek

Floyd

Winnebago WorthHoward

Fremont Page Taylor Appanoose

2.4% - 3.1%

3.1% - 3.4%

3.4% - 3.8%

3.8% - 4.4%

Implied Net Operating Income, 2008

Decatur Davis

Lucas MonroeClarke

Van BurenAppanooseRinggold

Union

WayneTaylor

Allamakee

Madison

Clayton

Wapello

Adair Warren

Adams

Jackson

Lee

Guthrie

Jefferson

Page

Cass

Dubuque

Marion

Jones

Audubon

Keokuk

Montgomery

Poweshiek

Winneshiek

Clinton

Johnson

Woodbury

HarrisonIowa

Crawford

Henry

Monona

Mahaska

Louisa

Fayette

Jasper

Mills

Fremont

Delaware

Chickasaw

Greene

Muscatine

Dickinson

Linn

Shelby

WashingtonPottawattamie

Buena VistaPlymouth

Howard

Clay

Buchanan

BentonTama

Humboldt

Boone

Scott

Cherokee

Des Moines

Palo Alto

Ida

Emmet

Pocahontas

Dallas

Hardin

Carroll

Franklin

Polk

Bremer

Osceola

Calhoun

Cedar

Marshall

Butler

Hamilton

Winnebago

Wright

Kossuth

Webster

Sac

Worth

Hancock Cerro Gordo

Black Hawk

Mitchell

Floyd

Story

Sioux

O'Brien

Lyon

Grundy

$70 to $130

$130 to $165

$165 to $185

$185 to $228

Cap Rate, 2009

2.45

Clayton

2.92

Dubuque

3.00

Allamakee

3.00

Wapello

3.01

Osceola

3.03

Jackson

3.06

Carroll

3.08

Madison

3.18

Lyon

3.18

Sioux

3.20

Washington

3.25

Jasper

3.27

Cherokee

3.27

Des Moines

3.30

Ida

3.31

Emmet

3.32

Crawford

3.34

Cass

3.35

Shelby

3.40

Monroe

3.40

Sac

3.41

Poweshiek

3.42

Dallas

3.42

Delaware

3.42

Linn

3.42

Van Buren

3.44

Boone

3.45

Clinton

3.46

Johnson

3.46

Union

3.47

Keokuk

3.49

Plymouth

3.49

Pottawattamie

3.50

Guthrie

3.51

Audubon

3.51

Lee

3.54

Polk

3.55

Greene

3.56

Benton

3.56

Muscatine

3.56

Tama

3.57

Woodbury

3.58

Grundy

3.64

Iowa

3.64

Marshall

3.66

Louisa

3.66

Marion

3.67

Hamilton

3.67

O'Brien

3.68

Pocahontas

3.71

Adair

3.71

Mahaska

3.72

Buena Vista

3.72

Clarke

3.74

Clay

3.75

Davis

3.75

Dickinson

3.77

Warren

3.78

Henry

3.78

Lucas

3.80

Jones

3.81

Winneshiek

3.84

Decatur

3.85

Jefferson

3.86

Calhoun

3.92

Story

3.93

Scott

3.94

Cedar

3.95

Palo Alto

3.96

Harrison

4.00

Bremer

4.01

Taylor

4.03

Black Hawk

4.03

Buchanan

4.04

Wright

4.07

Humboldt

4.08

Webster

4.10

Hardin

4.13

Monona

4.14

Franklin

4.17

Fayette

4.21

Butler

4.22

Floyd

4.24

Ringgold

4.26

Kossuth

4.29

Montgomery

4.29

Wayne

4.32

Adams

4.33

Cerro Gordo

4.33

Winnebago

4.34

Worth

4.46

Howard

4.54

Hancock

4.54

Mills

4.57

Page

4.59

Chickasaw

4.64

Mitchell

4.68

Fremont

4.87

Appanoose

2.00 to 3.403.40 to 3.603.60 to 4.004.00 to 5.50

Implied Net Operating Income, 2009

49.44

Monroe

66.96

Clarke

68.43

Decatur

78.96

Taylor

81.98

Davis

83.53

Ringgold

84.11

Union

84.51

Wayne

91.38

Allamakee

92.65

Lucas

93.10

Clayton

94.08

Van Buren

100.20

Wapello

103.88

Adair

104.44

Madison

106.42

Lee

110.21

Appanoose

111.72

Cass

112.06

Adams

116.14

Jackson

116.22

Dubuque

122.14

Keokuk

123.47

Warren

127.55

Mahaska

129.33

Page

132.31

Iowa

134.34

Winneshiek

134.68

Guthrie

136.40

Audubon

136.88

Cherokee

137.13

Harrison

137.21

Jefferson

141.17

Clinton

142.47

Muscatine

143.06

Emmet

143.36

Des Moines

145.13

Poweshiek

145.44

Osceola

148.23

Marion

148.44

Woodbury

150.19

Montgomery

150.98

Shelby

151.82

Monona

151.94

Jasper

152.98

Henry

154.89

Louisa

155.71

Benton

157.08

Pottawattamie

158.85

Mills

160.14

Greene

161.01

Delaware

163.92

Fayette

165.15

Boone

166.78

Marshall

167.44

Dickinson

169.35

Crawford

172.78

Pocahontas

173.49

Fremont

173.54

Sac

174.63

Winnebago

174.72

Tama

174.91

Jones

177.29

Worth

177.31

Washington

178.50

Palo Alto

181.21

Franklin

181.43

Howard

181.65

Clay

183.04

Linn

183.07

Dallas

183.47

Calhoun

184.80

Kossuth

185.80

Carroll

186.19

Ida

186.40

Plymouth

186.56

Cedar

188.27

Buena Vista

189.49

Buchanan

189.92

Johnson

190.91

Polk

193.19

Chickasaw

193.56

Hardin

194.09

Mitchell

194.21

Webster

195.39

Butler

197.85

Hamilton

197.92

Lyon

201.84

Wright

202.51

Black Hawk

204.94

Cerro Gordo

206.19

Humboldt

206.80

Sioux

210.00

Bremer

211.21

Floyd

211.70

Hancock

218.81

Story

218.95

O'Brien

225.18

Grundy

226.92

Scott

0.00 to 120.00

120.00 to 160.00

160.00 to 190.00

190.00 to 240.00

Questions

Why would capitalization rates vary? Would you expect them to be the same?

Summary

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

Summary

Capitalization rate estimate is a key to this approach