312.02: Determining the Capitalization Rate

When the community has an active real estate market that includes sales of properties owned as fee simple estates and sales of properties subject to leasehold estates (other than those held by community land trusts), the appraiser can use the most direct method for determining the capitalization rate-extracting it from the market activity (with all things being equal).  To extract the capitalization rate, the appraiser should divide the annual ground rent for the properties subject to leasehold estates by the difference in the sales prices for the comparable sales of properties owned as fee simple estates and the comparable sales of properties subject to leasehold estates.

If there are no available comparable sales of properties subject to leasehold estates (other than those held by a community land trust), the appraiser may develop a capitalization rate by comparing alternative low-risk investment rates (such as the rates for long-term bonds) and selecting a rate that best reflects a "riskless" (safe) rate.