Lesson 1 – Overview (The Income Approach to Value)

There are three major appraisal approaches for estimating value: the cost approach, the comparative sales approach, and the income approach. The focus of this training is on the income approach. The income approach to value is applicable when the property being appraised is typically purchased in anticipation of the income it will produce (commonly referred to as income producing property.) Property Tax Rule 8, which will be discussed in Lesson 5, prescribes the conditions under which the income approach may be applied.

This learning session is designed to equip appraisers with an understanding of the fundamental principles of valuing property for ad valorem property tax purposes using the income approach to value; ad valorem meaning according to value. It explains the basic assumptions of the income approach to value and various steps in the valuation process. It discusses capitalization techniques used to derive rates and estimates of value.

This learning session is intended for participants that are familiar with the basic appraisal procedures for valuation of property in California. This session provides specific instruction on the income approach to value. To put it simply, when using the income approach, an appraiser values an income property by computing the present worth of a future income stream.

After the successful completion of this session, you will understand:

• The application of the income approach to valuing property
• Principles and assumptions associated with the income approach
• The provisions of Property Tax Rule 8
• Components and shapes of an income stream
• How to derive income multipliers and capitalization rates to use in valuation
• Methods of converting an income stream to value

In this learning session, instruction is provided through structured reading and illustrated examples. To assist in attainment of the learning objectives, various examples are incorporated within the lessons to illustrate the concept being discussed. Additionally, demonstrations are used in certain lessons to show more complex topics, or to tie related subjects together. Questions and exercises are available at the end of each session to be worked by participants (herein referred to as students) to ensure comprehension of concepts and calculations discussed in the lesson. In completing the questions and exercises in the “Check Your Knowledge” section, students are to print the section and answer all the questions and exercises before reviewing the solutions. A final exam is also available at the conclusion of this session in order that certified property tax appraisers of California county assessor's offices may demonstrate their overall comprehension of the subject matter, attest to their participation in the training, and receive training credit for completing the learning session. Passage of this learning session in conjunction with a timed note examination administered by BOE will count toward advanced appraiser certification by means of completion of a prescribed course of study.

The Assessors' Handbook is a series of manuals developed by the Board of Equalization (BOE). The Assessors' Handbook serves as a guide for the appraisal and assessment of real and personal property for property tax purposes and is intended to promote uniformity of assessment in California. All Assessors' Handbooks are available on the BOE's website and can be accessed through the Assessors' Handbook.

Assessors' Handbook Section 501 (AH 501), Basic Appraisal, provides guidance on the basic principles of real and personal property appraisal for property tax purposes. It discusses the theory of value, standard of value for property tax purposes, taxable value, measurement of value, and the approaches to value.

Chapter 6 of AH 501 focuses on the various approaches to value, one of which is the income approach to value, which is the topic of this learning session. Participants are encouraged to read pages 95 through 109 of AH 501, which will be cited and referenced throughout this learning session. AH 501 is available on the BOE's website and can be accessed via the Assessors' Handbook Section 501.

In addition to the AH 501, Assessors' Handbook Section 502, Advanced Appraisal, discusses the income approach to value on pages 55 through 107. AH 502 is available on the BOE's website and can be accessed via the Assessors' Handbook Section 502. Please note that the focus of this self-paced online learning session is not on advanced concepts presented in AH 502. The focus is on the material presented in this learning session.

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This learning session consists of 20 lessons providing fundamental information on the income approach to value.