income-approach-expert

Income approach land valuation (subset of appraisal expertise). This skill provides deep, focused expertise on the income capitalization method applied to land valuation—NOT general appraisal theory.

The income approach estimates land value by capitalizing the net operating income (NOI) that the land generates as a rental producing asset. This approach is particularly applicable to:

• Telecom sites (tower ground leases, carrier rental income)
• Agricultural land (pasture/row crop rental income)
• Ground leases (fee simple land under long-term commercial lease)
• Easement lands (perpetual income from utility transmission rights)
• Parking lots (surface parking income)
• Land lease communities (mobile home parks, RV parks)

Fundamental formula:

```

Land Value = Net Operating Income ÷ Capitalization Rate

```

---

The foundation of income approach valuation is determining defensible market rent for the land use.

Comparable Rent Selection

Ideal comparable rent criteria:

• Same use: Land generating same type of income (telecom with telecom, agricultural with agricultural)
• Same location market: Within 5-15 km radius for local income-producing land
• Same lease type: Similar lease terms, duration, renewal provisions
• Recent timing: Within 12-18 months of valuation date (for volatile markets, within 6-12 months)
• Arm's length: Market-rate transaction, not subsidized or distressed

Rent evidence sources:

• Market leases: Actual ground lease/agricultural lease agreements
• Broker quotes: Real estate agents managing comparable rent agreements
• Agricultural extension data: USDA, provincial agriculture ministries, commodity organizations
• Published surveys: CoStar, Marcus & Millichap, Farm Bureau rental surveys
• IRS Form 1040 Schedule F: Agricultural rent claimed in federal tax filings (proprietary databases)

Market Rent Conclusion

Documentation requirements:

1. Identify 3-5 comparable rents in same market and use
2. Adjust comparables for material differences (term length, escalation, repairs/maintenance responsibility)
3. Reconcile to single market rent conclusion
4. Document reasoning and supporting evidence

Example (Telecom Ground Lease Rent):

Comparable 1 (same tower compound, 2 km away):

• Annual rent: $2,500/month = $30,000/year
• Lease term: 25 years with 2 × 5-year renewals
• Escalation: 2.5% annually
• Tenant responsible: Maintenance, insurance, property taxes

Comparable 2 (cellular carrier, rooftop site, adjacent neighborhood):

• Annual rent: $3,000/month = $36,000/year
• Lease term: 20 years with renewal option
• Escalation: 3% annually
• Landlord responsible: Rooftop maintenance, structural repairs

Comparable 3 (co-location site, shared tower, 8 km away):

• Per-carrier rent: $800/month = $9,600/year
• Lease term: 20 years
• Escalation: 2% annually
• Multiple carriers on same tower

Analysis:

• Comp 1 & 2 are single-carrier ground leases: $30,000-$36,000/year
• Comp 1 is most similar (comparable size, term, escalation)
• Market rent conclusion: $32,000/year (conservative, reflecting landlord maintenance responsibilities)

Example (Agricultural Rent):

Comparable 1 (Class 1 soil, corn/soybean rotation, 50-acre parcel):

• Annual rent: $250/acre = $12,500/year total
• Lease term: 5 years with automatic renewal
• Rent adjustment: Indexed to corn/soybean prices (formula-based, not fixed)

Comparable 2 (Class 1 soil, same township, mixed grain/forage):

• Annual rent: $280/acre = $14,000/year for 80-acre parcel
• Lease term: 10 years
• Rent adjustment: Fixed, no escalation

Comparable 3 (Class 2 soil, same county, row crops):

• Annual rent: $200/acre
• Lease term: 5 years
• Rent adjustment: 3% annually

Analysis:

• Class 1 soil rents: $250-$280/acre
• Comp 1 includes commodity price risk (lower base rate to compensate), Comp 2 is fixed rate
• Market rent conclusion for subject Class 1 land: $260/acre/year (blended, assuming commodity price hedge)

Adjustment for Lease Characteristics

Common adjustments to rent comparables:

Term length adjustment:

• Shorter terms command higher base rates (risk of non-renewal)
• Example: 5-year lease commands 5-10% higher rent than 20-year lease for same property

Escalation provisions:

• Fixed escalations (2-3% annually) worth 2-5% premium vs. no escalation
• Formula-based escalations (commodity price, CPI) reduce base rate by 5-10%

Renewal terms:

• Favorable renewals (at-will, extended options) justify lower base rent by 3-7%
• Uncertain renewals (landlord discretion, no renewal options) command 5-10% higher rent

Maintenance responsibility:

• Tenant pays all (NNNR) justifies lower rent than landlord-maintained properties
• Landlord maintains = higher rent (landlord bears cost risk)

Example adjustment:

• Base comparable rent: $30,000/year
• Comp has 20-year renewal option (favorable to tenant)
• Subject has no renewal option (landlord discretion)
• Adjustment: +$2,000/year (+6.7%)
• Adjusted market rent: $32,000/year

---

The capitalization rate (cap rate) is the discount rate that converts annual NOI to present value. Cap rate selection is critical—small variations have large impact on value.

Three Methods to Derive Cap Rate

#### Method 1: Market Extraction (Ideal When Available)

Principle: Extract cap rates from actual transactions where both NOI and sale price are known.

Formula:

```

Cap Rate = Net Operating Income ÷ Sale Price

```

Ideal transaction data:

• Income-producing land recently sold (within 12 months)
• Well-documented NOI (lease agreement + actual/projected income)
• Arm's length transaction, market price
• Same or similar use as subject

Example (Telecom ground lease extraction):

Transaction data:

• Ground lease parcel sold 3 months ago
• Sale price: $500,000
• Ground lease income: $30,000/year (documented in lease)
• Extracted cap rate: $30,000 ÷ $500,000 = 6.0%

Multiple transactions for reliability:

| Transaction | Sale Price | NOI | Cap Rate |

|-------------|-----------|-----|----------|

| Comp 1 | $500,000 | $30,000 | 6.0% |

| Comp 2 | $480,000 | $28,000 | 5.8% |

| Comp 3 | $550,000 | $32,500 | 5.9% |

| Market range | - | - | 5.8%-6.0% |

Conclusion: Cap rate = 5.9% (midpoint of 3 transactions)

Example (Agricultural land extraction):

Transaction data:

• 80-acre Class 1 agricultural land
• Sale price: $960,000 ($12,000/acre)
• Agricultural rent: $20,800/year ($260/acre)
• Extracted cap rate: $20,800 ÷ $960,000 = 2.17%

Analysis of low cap rate:

• Agricultural land extraction often yields 2-4% cap rates
• Reflects land value appreciation expectations (capital appreciation + income)
• Agricultural buyers often accept low NOI yields for expected appreciation

---

#### Method 2: Band of Investment (Build-Up from Components)

Principle: Build cap rate from weighted cost of debt and equity components.

Formula:

```

Cap Rate = (Loan-to-Value % × Debt Yield) + (Equity % × Equity Yield)

```

Typical structure for income land:

• Loan-to-Value: 50-75%
• Debt Yield: 4-6% (mortgage rate for land loans)
• Equity Yield: 8-12% (required return by investor)

Example (Telecom ground lease):

Assumptions:

• Loan-to-Value: 60%
• Debt yield (mortgage rate): 5.5%
• Equity yield (investor required return): 10%

Calculation:

```

Cap Rate = (60% × 5.5%) + (40% × 10%)

= 3.3% + 4.0%

= 7.3%

```

Example (Agricultural land):

Assumptions:

• Loan-to-Value: 50% (conservative, agricultural lending restrictive)
• Debt yield: 6% (higher rate for agricultural/commodity risk)
• Equity yield: 9% (includes commodity/weather risk premium)

Calculation:

```

Cap Rate = (50% × 6%) + (50% × 9%)

= 3% + 4.5%

= 7.5%

```

---

#### Method 3: Build-Up Method (From Market Factors)

Principle: Build cap rate from risk-free rate plus premiums for specific risk factors.

Formula:

```

Cap Rate = Risk-Free Rate + Liquidity Premium + Inflation Premium + Business Risk Premium

```

Component breakdown:

Risk-free rate (baseline):

• Government bond yield (10-year Treasury) for comparable holding period
• Example: 4.5% (current government bond rate)

Liquidity premium (discount for lack of liquidity):

• Unique income-producing land less liquid than traded securities
• Range: 1-3% depending on market depth
• Telecom sites (liquid, multiple operators): 1-1.5%
• Agricultural land (limited buyers): 2-3%

Inflation premium (discount for purchasing power risk):

• Agricultural land with formula-based rent adjustments: 0.5-1%
• Fixed-rate telecom leases: 1.5-2.5% (higher inflation risk)

Business/operational risk (discount for use-specific risk):

• Telecom sites (stable, creditworthy carriers): 0.5-1%
• Agricultural land (commodity price, weather, policy risk): 2-3%

Example (Telecom ground lease):

```

Risk-free rate: 4.5%

Liquidity premium: + 1.0% (telecom sites moderately liquid)

Inflation premium: + 1.5% (fixed-rate lease, inflation risk)

Business risk: + 0.5% (creditworthy carrier operator)

─────────────────────────────────────

Cap Rate: = 7.5%

```

Example (Agricultural land):

```

Risk-free rate: 4.5%

Liquidity premium: + 2.5% (limited agricultural buyer pool)

Inflation premium: + 1.0% (commodity price indexation, some inflation protection)

Business risk: + 2.5% (commodity, weather, policy risk)

─────────────────────────────────────

Cap Rate: = 10.5%

```

---

Cap Rate Justification and Sensitivity

Documentation requirements for defensible cap rate:

1. If extracted from comparable transactions:

- Identify 3+ transactions with documented sale price and NOI

- Show extraction calculations for each transaction

- Reconcile to single cap rate or range

1. If derived from band of investment:

- Document LTV, debt yield, equity yield sources (market survey, broker interviews, comparable financing)

- Show weighted calculation

- Explain market reasonableness of equity yield

1. If derived from build-up method:

- Show each component (risk-free rate, liquidity premium, inflation premium, risk premium)

- Justify each component with market evidence

- Compare final cap rate to extracted rates (if available)

1. Sensitivity analysis:

- Show how ±0.5% cap rate variation affects land value

Example sensitivity analysis:

Base scenario (cap rate = 6.0%, NOI = $30,000):

```

Land Value = $30,000 ÷ 6.0% = $500,000

```

Sensitivity to cap rate variation:

| Cap Rate | Land Value | % Change from Base |

|----------|-----------|-------------------|

| 5.0% | $600,000 | +20.0% |

| 5.5% | $545,455 | +9.1% |

| 6.0% | $500,000 | — |

| 6.5% | $461,538 | -7.7% |

| 7.0% | $428,571 | -14.3% |

Analysis:

• Each 0.5% change in cap rate = approximately ±8-10% change in land value
• Cap rate selection is critical—must be well-documented and defensible

Range approach (if cap rate uncertain):

• If cap rate justified as 5.8%-6.2%, use both extremes:

- Low cap rate (5.8%): Land value = $517,241

- High cap rate (6.2%): Land value = $483,871

- Value range: $484,000-$517,000

- Concluded value: $500,000 (midpoint)

---

Simple once market rent and cap rate are determined.

Formula:

```

Land Value = Net Operating Income ÷ Cap Rate

```

NOI determination:

1. Gross Rental Income: Market rent × applicable unit (annual, per acre, per sq ft)
2. Less Vacancy: Market vacancy rate for comparable properties
3. Plus Other Income: Ancillary income (parking, utilities, equipment)
4. Equals Effective Gross Income
5. Less Operating Expenses:

- Property taxes

- Insurance

- Maintenance and repairs

- Management fees

- Utilities (if landlord-paid)

1. Equals Net Operating Income

Telecom Ground Lease Example

Gross rental income:

• Market rent: $32,000/year
• Vacancy rate: 0% (ground leases have stable, long-term tenants)
• Effective gross income: $32,000

Operating expenses:

• Property taxes: $2,000/year
• Insurance: $800/year
• Maintenance/repairs: $1,200/year
• Management fee: 5% × $32,000 = $1,600/year
• Total operating expenses: $5,600/year

Net Operating Income:

```

NOI = $32,000 - $5,600 = $26,400/year

```

Land value calculation (using 6.0% cap rate):

```

Land Value = $26,400 ÷ 0.060 = $440,000

```

Agricultural Lease Example

Gross rental income:

• Market rent: $260/acre/year
• Property size: 80 acres
• Vacancy/non-rent years: 5% (occasional equipment/crop failure)
• Effective gross income: $260 × 80 × 0.95 = $19,760/year

Operating expenses:

• Property taxes: $800/year (common on agricultural land)
• Landlord maintenance (fencing, drainage): $1,200/year
• Management: $500/year
• Total operating expenses: $2,500/year

Net Operating Income:

```

NOI = $19,760 - $2,500 = $17,260/year

```

Land value calculation (using 7.5% cap rate):

```

Land Value = $17,260 ÷ 0.075 = $230,133 (approximately $2,877/acre)

```

---

For income-producing land, reconcile income approach conclusion with comparable sales when both approaches available.

When Sales Comparison Differs from Income Approach

Typical reconciliation scenarios:

Scenario 1: Income approach lower than sales comparison

• Implied explanation: Buyers expect capital appreciation beyond NOI
• Common in: Agricultural land, developing markets, land held for speculation
• Reconciliation: If sales comparison (transaction-based) supported by 3+ recent sales, typically more reliable

Scenario 2: Income approach higher than sales comparison

• Implied explanation: Market undervalues income-producing potential, or comparable sales include non-income-producing attributes
• Common in: Illiquid markets, distressed sales, special-purpose land
• Reconciliation: Investigate why comparable sales are priced below NOI capitalization

Example reconciliation:

Subject: 80-acre Class 1 agricultural land

Income approach:

• Market rent: $260/acre
• NOI: $17,260 (as calculated above)
• Cap rate: 7.5%
• Income approach value: $230,133

Sales comparison approach:

• Comparable 1: 75 acres, $2,400/acre = $180,000
• Comparable 2: 100 acres, $2,500/acre = $250,000
• Comparable 3: 85 acres, $2,350/acre = $199,750
• Sales comparison value range: $180,000-$250,000 (midpoint $215,000)

Reconciliation analysis:

• Sales comparison: $215,000 ($2,688/acre)
• Income approach: $230,133 ($2,877/acre)
• Difference: +$15,133 (+7.0%)

Interpretation:

• Both approaches suggest land value in $215K-$230K range
• Sales comparison implies buyers value at $2,688/acre
• Income approach (7.5% cap) implies $2,877/acre
• Reconciled value: $220,000 (blend of both, reflecting some capital appreciation expectation beyond NOI)

---

Critical for communicating uncertainty and defensibility.

Single-Variable Sensitivity

Test impact of key assumptions on final land value.

Example (Telecom ground lease):

Base assumptions:

• Market rent: $32,000/year
• Operating expenses: $5,600/year (17.5% of GRI)
• Cap rate: 6.0%
• Base land value: $440,000

Sensitivity table (varying cap rate):

| Cap Rate | NOI | Land Value | % Change |

|----------|-----|-----------|----------|

| 5.0% | $26,400 | $528,000 | +20.0% |

| 5.5% | $26,400 | $480,000 | +9.1% |

| 6.0% | $26,400 | $440,000 | — |

| 6.5% | $26,400 | $406,154 | -7.7% |

| 7.0% | $26,400 | $377,143 | -14.3% |

Sensitivity table (varying market rent):

| Market Rent | NOI | Land Value | % Change |

|------------|-----|-----------|----------|

| $28,000 | $22,400 | $373,333 | -15.2% |

| $30,000 | $24,400 | $406,667 | -7.6% |

| $32,000 | $26,400 | $440,000 | — |

| $34,000 | $28,400 | $473,333 | +7.6% |

| $36,000 | $30,400 | $506,667 | +15.2% |

Sensitivity table (varying operating expense ratio):

| OpEx Ratio | NOI | Land Value | % Change |

|-----------|-----|-----------|----------|

| 15% | $27,200 | $453,333 | +3.0% |

| 17.5% | $26,400 | $440,000 | — |

| 20% | $25,600 | $426,667 | -3.0% |

| 25% | $24,000 | $400,000 | -9.1% |

Analysis:

• Land value most sensitive to cap rate (±0.5% = ±8-10% value change)
• Moderately sensitive to market rent (±6.3% change in rent = ±7.6% value change)
• Less sensitive to operating expense ratio (±2.5 points = ±3-9% value change)
• Valuation priority: Cap rate selection > Market rent > OpEx estimates

Multi-Variable Scenarios

Combine changes in multiple assumptions for realistic scenarios.

Example (Agricultural land):

Base scenario (most likely):

• Market rent: $260/acre
• Cap rate: 7.5%
• Property value: $230,133

Conservative scenario (lower rents, higher cap rate):

• Market rent: $240/acre (commodity downturn)
• Cap rate: 8.0% (higher risk premium)
• NOI: ($240 × 80 × 0.95) - $2,500 = $16,080
• Property value: $16,080 ÷ 0.080 = $201,000 (-12.6%)

Optimistic scenario (higher rents, lower cap rate):

• Market rent: $280/acre (commodity recovery, organic demand)
• Cap rate: 7.0% (improved investor appetite)
• NOI: ($280 × 80 × 0.95) - $2,500 = $19,840
• Property value: $19,840 ÷ 0.070 = $283,429 (+23.2%)

Valuation range:

| Scenario | Value | % of Base | Notes |

|----------|-------|----------|-------|

| Conservative | $201,000 | 87% | Commodity downturn |

| Most likely | $230,133 | 100% | Base assumptions |

| Optimistic | $283,429 | 123% | Commodity recovery |

Range: $201,000-$283,429

Concluded value: $230,000 (most likely scenario)

---

Telecom Sites (Ground Leases, Rooftop Agreements)

Unique characteristics:

• Stable income: Multi-decade leases, creditworthy major carriers (Verizon, AT&T, Bell, etc.)
• Renewal certainty: Carriers renew because infrastructure already sunk
• Limited tenant pool: Few operators, reduces competition for rent
• Capital improvements: Carrier builds/maintains towers (landlord receives improved asset post-lease)
• Location specificity: Site value tied to network coverage needs (not easily relocated)

Market rent sources:

• CoStar TowerWatch database (US market)
• Marcus & Millichap Telecom Real Estate Report
• Direct lease agreements for comparable tower sites
• Broker quotes from tower-focused intermediaries

Typical telecom cap rates:

• Ground lease sites: 5.5-7.0% (stable, creditworthy operators)
• Rooftop sites: 6.0-7.5% (higher risk of relocation)
• Co-location (shared tower): 7.0-8.5% (multiple operators, variable occupancy)

Example valuation:

Subject: Ground lease parcel for cellular tower

• Signed lease with major carrier: $35,000/year
• 20-year term with 2 × 5-year renewal options
• 2% annual escalation
• Carrier maintains tower structure

Market rent analysis:

• Comparable 1: Similar site, same carrier, $32,000/year
• Comparable 2: Shared tower site (more risk), $28,000/year
• Conclusion: Market rent = $34,000/year (accounts for less restrictive operator profile vs. Comp 1)

Operating expenses:

• Property taxes: $1,500/year (rural location)
• Insurance: $600/year
• Maintenance: $800/year
• Total OpEx: $2,900/year

NOI: $34,000 - $2,900 = $31,100/year

Cap rate selection:

• Extracted from 2 comparable sales of ground leases: 6.2%, 6.0%
• Conclusion: Cap rate = 6.0%

Land value:

```

$31,100 ÷ 0.060 = $518,333

```

Sensitivity (±0.5% cap rate):

• At 5.5%: $565,455
• At 6.5%: $478,462
• Value range: $478,000-$565,000 (most likely $518,000)

---

Agricultural Land (Row Crops, Pasture, Forage)

Unique characteristics:

• Commodity price exposure: Rent tied to (or indexed to) crop prices, weather
• Annual renewal: Most ag leases year-to-year with renewal
• Multiple buyer pool: Higher transaction volume, more market comparables
• Capital appreciation: Land value typically exceeds NOI yield (expect 2-4% cap rates)
• Government programs: Crop insurance, commodity payments, conservation programs

Market rent sources:

• USDA Farmland Values: Annual survey by NASS (National Agricultural Statistics Service)
• Commodity extension services: University of Illinois, Michigan State, Purdue agricultural extension
• Farm Bureau agricultural rental surveys: State-level data on pasture, crop rent
• Federal crop insurance reports: Rental values in APH (Average Production History) database
• Published leases: Examine actual farm lease agreements from county recordings

Agricultural rent by use:

Row crop rent (corn, soybeans, small grains):

• Class 1 soil (prime agricultural): $250-$350/acre/year
• Class 2 soil (good agricultural): $200-$280/acre/year
• Class 3 soil (fair agricultural): $150-$220/acre/year

Pasture/hay rent:

• Improved pasture: $100-$150/acre/year
• Native/marginal pasture: $50-$100/acre/year

Formula-based adjustments:

• Commodity indexation: If rent = corn price × conversion factor

- Example: Rent = Corn Price ÷ 2 (if corn $6/bu, rent = $3/acre—extremely low, reflects commodity risk)

- More realistic: Base rent + 50% of commodity upside (e.g., $180 base + 50% of commodity above $4/bu)

Typical ag land cap rates (reflecting commodity risk):

• Non-indexed fixed rent: 3.5-5.0%
• Partially indexed rent: 4.0-6.0%
• Fully commodity-indexed rent: 5.5-8.0% (landlord bears commodity risk, demands higher yield)

Example valuation:

Subject: 80-acre Class 2 agricultural land

Market rent analysis:

• County extension survey: $240/acre for similar Class 2 land
• Comparable lease 1: $235/acre fixed
• Comparable lease 2: $280/acre (formula: 50% upside commodity participation)
• Conclusion: Market rent = $245/acre (conservative, mostly fixed, modest upside potential)

Per-acre NOI:

• Gross rent: $245/acre
• Landlord maintenance (fencing, drainage): $15/acre/year
• Property tax estimate: $10/acre/year
• Management: $5/acre/year
• Per-acre NOI: $245 - $30 = $215/acre

Cap rate selection:

• Agricultural land extraction (3 recent sales): 2.8%, 3.1%, 2.9% (range 2.8-3.1%)
• BUT: Sales extraction likely reflects capital appreciation expectations
• Income approach cap rate (NOI-only): 4.5% (conservative)

Per-acre value:

```

$215/acre ÷ 0.045 = $4,778/acre

```

Total land value (80 acres):

```

$4,778 × 80 = $382,222

```

Sales comparison check:

• Recent sales: $2,500/acre, $2,600/acre, $2,450/acre
• Average: $2,517/acre
• Sales value (80 acres): $2,517 × 80 = $201,360

Reconciliation:

• Income approach (4.5% cap): $382,222
• Sales comparison: $201,360
• Difference: 90% (significant difference indicates different buyer motivations)

Analysis:

• Sales comparison reflects transaction prices (includes capital appreciation expectations, investment activity)
• Income approach (4.5% cap) implies expecting only NOI return, not capital appreciation
• Reconciled value: $290,000 (blend, assumes 3% annual appreciation + 4.5% NOI yield)

---

Ground Leases (Fee Simple Land Under Long-Term Lease)

Unique characteristics:

• Dual interests: Fee owner and leaseholder have separate valuations
• Fee interest valuation: Reversion value + interim rent capitalized
• Leasehold interest valuation: Rent differential (market rent vs. lease rent) capitalized
• Lease length: Remaining lease term crucial (20-year lease much different from 99-year)
• Renewal/reversion: At lease end, does fee holder regain possession of improvements?

Fee interest valuation approach:

```

Fee Value = [Interim Rent ÷ Cap Rate] + [Reversion Value ÷ (1 + Cap Rate)^n]

```

Where:

• Interim Rent = Current ground lease rent
• Cap Rate = Discount rate for land
• Reversion Value = Estimated value of land at lease end (fee regains possession)
• n = Years to lease expiration

Example (Shopping center ground lease):

Subject: Fee simple interest in land under 25-year shopping center lease

Lease terms:

• Annual rent: $50,000 (fixed, no escalation)
• Remaining term: 25 years
• Tenant: Established retail operator (good credit)
• Upon expiration: Fee owner regains clear possession of land

Interim rent capitalization:

• Safe approach: Capitalize interim rent at lower cap rate (secure income stream)
• Cap rate: 5.5% (lower risk, contractual rent)
• Value of interim rent stream: $50,000 ÷ 0.055 = $909,091

Reversion value projection:

• Current land value (with lease): $909,091
• Expected land appreciation: 2.5% annually for 25 years
• Multiplier: (1.025)^25 = 1.85
• Projected fee value at lease end: $909,091 × 1.85 = $1,681,818

Discounting reversion:

• Discount rate for reversion (higher risk, 25-year projection): 6.5%
• Reversion discount factor: 1 ÷ (1.065)^25 = 0.1842
• Present value of reversion: $1,681,818 × 0.1842 = $309,788

Fee interest value:

```

Fee Value = $909,091 + $309,788 = $1,218,879

```

---

Easement Valuation Methods (Complementary)

Synergy: Income approach for perpetual easement income (telecom sites, utility corridors with rental value)

Income approach to easement value:

1. Estimate annual easement income (telecom carrier payment, agricultural rent loss capitalized)
2. Select cap rate appropriate to easement permanence and risk
3. Capitalize to land value

Example: Perpetual transmission easement with agricultural income loss

• Agricultural productivity loss: 20% of land value = 20% of $250/acre = $50/acre/year
• Cap rate for perpetual easement: 4.5% (very long-term, low risk)
• Easement value: $50 ÷ 0.045 = $1,111/acre

---

Comparable Sales Adjustment Methodology (Complementary)

Synergy: Use sales comparison to validate cap rates extracted from market transactions

Process:

1. Identify 3+ comparable income-producing land sales
2. Extract cap rates from each transaction: NOI ÷ Sale Price
3. Reconcile to single cap rate range
4. Apply to subject's NOI to determine land value
5. Compare income approach conclusion to unadjusted sales prices (reconcile differences)

---

Tool: land_capitalization_calculator.py (located in same folder as this SKILL.md)

Capabilities:

• Market rent analysis and reconciliation
• Multiple cap rate derivation methods (extraction, band of investment, build-up)
• NOI calculation with customizable operating expenses
• Land value calculation with sensitivity analysis
• Comparison to comparable sales approach
• PDF report generation

Input format (JSON):

```json

{

"subject_property": {

"property_type": "telecom_ground_lease",

"location": "Chicago, IL",

"size_acres": 0.5,

"valuation_date": "2024-11-17"

},

"market_rent_analysis": {

"comparable_rents": [

{

"rent_annual": 32000,

"adjustments": {"term_adjustment": 0},

"source": "Similar tower site, same carrier"

}

],

"concluded_market_rent": 32000

},

"operating_expenses": {

"property_tax": 2000,

"insurance": 800,

"maintenance": 1200,

"management_fee_percent": 5

},

"cap_rate_analysis": {

"method": "market_extraction",

"extracted_rates": [0.060, 0.062, 0.058],

"concluded_cap_rate": 0.060

}

}

```

Usage:

```bash

cd /workspaces/lease-abstract/.claude/skills/income-approach-expert/

python land_capitalization_calculator.py input.json --output results.json --verbose

```

Output:

• NOI calculation with expense breakdown
• Cap rate selection justification
• Land value conclusion
• Sensitivity tables (±0.5% cap rate, ±5% market rent)
• Reconciliation with comparable sales (if provided)
• PDF report suitable for appraisal assignments

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For defensible appraisal work, document:

1. Market rent conclusion:

- 3+ comparable rents identified and reconciled

- Adjustments for term length, escalation, renewal provisions

- Source and timing of rent evidence

1. Operating expenses:

- Breakdown by category (property tax, insurance, maintenance, management)

- Estimate methodology (% of GRI, per-unit costs, market survey)

- Justification for landlord vs. tenant responsibility

1. Capitalization rate:

- Primary method (extraction, band of investment, build-up)

- Supporting data (comparable transactions, mortgage terms, risk analysis)

- Sensitivity analysis showing impact of ±0.5% variation

- Comparison to published cap rate surveys (if applicable)

1. Highest and best use:

- Why income approach most appropriate for subject's use

- Why not other approaches (cost approach impractical for land; sales comparison insufficient comparables, etc.)

1. Limitations:

- Lease renewal uncertainty

- Commodity price risk (agricultural)

- Operator creditworthiness (telecom)

- Lack of comparable transaction data (if applicable)

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This skill activates when you:

• Value telecom ground leases or carrier site agreements
• Analyze agricultural land rental income and capitalization
• Evaluate fee interests in ground leases with uncertain reversion
• Estimate easement income value from perpetual rental streams
• Build cap rate from market extraction, band of investment, or build-up methodology
• Capitalize land rent to estimate land value in income-producing scenarios
• Reconcile income approach conclusions with sales comparison approach
• Perform sensitivity analysis on cap rate and market rent assumptions
• Document market rent analysis and NOI calculations for defensible appraisals