Property Valuation
A Minnesota commercial appraiser uses the direct capitalization method to value a stabilized income property. This method is most appropriate when:
AThe property has volatile income with many vacancies
BThe property has stable, predictable income and the appraiser can identify a reliable cap rate from market data✓ Correct
CThe property is under construction with no current income
DMarket data on comparable cap rates is unavailable
Explanation
Direct capitalization is most appropriate for stabilized income properties with relatively stable, predictable net operating income and when the market provides reliable comparable cap rate data. It converts a single year's NOI into an indication of value by dividing by the market-derived cap rate (Value = NOI / Cap Rate). For properties with complex cash flows, the discounted cash flow (DCF) method may be more appropriate.
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