An appraisal method used to estimate the current fair market value of a real property by attempting to determine the amount that an investor would be willing to pay for the right to receive the future income the property is projected to generate. In other words, the income approach involves estimating the future income of the property and applying a capitalization rate to that income to determine the market value. The capitalization rate is the rate of interest investors require as a return on their money before they would invest in the income producing property, taking into account all the risk involved in that particular enterprise.
Union Pacific Railroad Co. v. State Bd. of Equalization, 231 Cal. App. 3d 983 (1991):
“The income approach estimates current fair market value of a property by attempting to determine the amount that an investor would be willing to pay for the right to receive the future income the property is projected to produce. It is frequently summarized by the formula V = I/R, where V is the estimated value of the property, I is the projected future income, and R is a capitalization rate by which the present value of the income stream is determined.”
Jefferson County Bd. of County Com’rs v. S.T. Spango Greenhouses, Inc., 155 P.3d 442 (Colo. App. 2006):
“The three approaches to appraisal, used to determine actual market value, are the market approach, the income approach, and the cost approach. The market approach, or comparable sales method, analyzes the sales of comparable properties in the market. The income approach generally involves a calculation of the income stream the property is capable of generating, capitalized to value at a rate typical within the relevant market. The cost approach involves adding the estimated value of the land to the current cost of constructing a reproduction or replacement for the improvements and then subtracting the amount of depreciation.”
Elk Hills Power, LLC v. Board of Equalization, 5 Cal.4th 593 (2013):
“Using the income approach, an appraiser estimates the future income stream a prospective purchaser could expect to receive from the enterprise and then discounts that amount to a present value by use of a capitalization rate. In other words, the fair market value of an income producing property is estimated as the present value of the property’s expected future income stream. The income approach may be called the capitalization method because capitalizing is the process of converting an income stream into a capital sum.
Chomiak v. City of Hartford, 1994 Ct. Sup. 7686 (1994):
“The income approach to value is also useful to determine the value of a subject property when there are insufficient sales of comparable properties on the open market to generate a fair comparison. Under that approach, the appraiser attempts to convert the anticipated benefits to be derived from ownership of the property into a value estimate by discounting anticipated future income and/or reversions to a present worth figure through the capitalization process.”