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| The Functional Relationships and Use of
Going-In and Going-Out Capitalization Rates Author: Ko Wang, Terry V. Grissom, and Su Han Chan Start Page: 231 Abstract: In performing a
Discounted Cash Flow Analysis for an income-producing property, a traditional
rule-of-thumb indicates that the going-out capitalization rate should be one-half to one
percent higher than the going-in capitalization rate. So far, there has been no
theoretical model or empirical evidence to support or to dispute this assertion. This
paper develops a model to examine the determinants of the going-out capitalization rate,
as well as the relationship between going-in and going-out capitalization rates in a
complete market setting. The proposed model indicates that the rule-of-thumb can be
challenged, and the selection of an appropriate going-out capitalization rate requires a
careful examination of the changes in the assumed income-growth rates, changes in the
assumed required rates of return, and changes in the assumed property-appreciation rates
during and after the projected holding period. The functional relationship between the
property-appreciation rate assumption required for Ellwood methods and the going-out
capitalization rate assumption required for DCF analysis also is derived. |
