Dictionary of Real Estate Terms: building capitalization rate
building capitalization rate
in appraisal, the capitalization rate is used to convert an income stream into one lump sum value. The rate for the building may differ from that for the land because the building is a wasting asset.
Example: A discount rate of 10% is used as the land capitalization rate. The building, with a 50-year useful life, requires a 2% straight-line annual capital recovery rate. So the building capitalization rate is 12% (10% discount plus 2% capital recovery). If the building generates $15,000 annual income, its estimated value is $125,000 ($15,000 ÷ 0.12 = $125,000). (However, straight-line capital recovery is applicable only when a declining income stream is expected.)
