4.4.4. Income Capitalization Approach.The third recognized approach to value in federal acquisitions is the income capitalization approach, which involves capitalizing582 a property’s anticipated net income to derive an indication of its present market value.583 When properly applied, the income approach can indicate what a buyer would pay at the present time for the anticipated future benefits, discounted for risk and other variables, of owning a property.584 The income capitalization approach is relevant only in certain circumstances—namely, in the valuation of income-producing property with no available comparable sales.585 Even then, “[g]reat care must be taken, or such valuations can reach wonderland proportions.”586 

For this reason, federal courts have often found iterations of the income capitalization approach to value “ill-suited to the purposes” of just compensation.587 

These valuations almost always achieve chimerical magnitude, because, in the mythical business world of income capitalization, nothing ever goes wrong. There is always a demand; prices always go up; no competing material displaces the market.588 

As the Fourth Circuit warned, “to allow value to be proved in such a suspect manner, impeccably objective and convincing evidence is required.”589 Accordingly, every factor to be considered in the income capitalization approach in federal acquisitions must be properly supported.590 In valuations for just compensation purposes, the goal is “to duplicate marketplace calculations to the greatest possible extent.”591 Courts have therefore rejected income capitalization without evidence that “rates are in fact fixed in the marketplace by a process which parallels [the expert’s] calculations.”592 

Proper application of the income capitalization approach requires a distinction between income generated by the property itself (such as rental or royalty income), which can be considered, and income generated by a business conducted on the property, which must be disregarded.593