Reasons to Eliminate the Band-of-Investment Technique for Estimating the Overall Capitalization Rate

Abstract

Executive Summary: The purpose of this article is to present the idea that the band of investment (BOI) should be eliminated as an appropriate method for extracting an overall capitalization rate in the valuation of real property. This recommendation is derived from the very restrictive market presumptions that must hold for its correct usage. The traditional use of the (BOI) when the property has amortized debt and an expected change in value will consistently produce estimates that are too low. The commonly taught mortgage-equity technique that values the equity separately from the debt should be substituted in its place. The latter relies on the universally understood discounted cash flow and incorporates the effects of equity build-up.