08 January 2009
The equity capitalization rate is the ratio of annual equity dividend to the amount of equity investment. It is different than the equity yield rate, which is affected again by amortization of the loan. Usually, a building's anticipated cash flow to the investor is divided by the initial equity investment to obtain the equity capitalization rate. The above overall rate is very dependent on good market data. Appraisers should select equity capitalization rates from comparables that have the same risk characteristics as the subject property. Refer: The Modigliani Miller theorem and mortgage equity capitalization
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