1.5.4.5. Yield Capitalization (Discounted Cash-Flow [DCF] Analysis). A second method of valuation used in the income capitalization approach is known as the yield capitalization method. This method is also often referred to as the discounted cash-flow (DCF) analysis and has been an accepted valuation method within the appraisal profession for several decades. This method is often used in the valuation of investment grade properties such as multi-tenant office buildings, retail centers, apartment complexes, and industrial warehouse facilities and reflects the way sophisticated buyers and sellers consider the potential income generated by a property to arrive at a purchase or sale price. 

The yield capitalization method has limited use in an eminent domain setting because it requires the appraiser to forecast a number of different factors into the future such as income change, holding period, property value at the end of the holding period, and the yield rate or discount rate to be applied to the future stream of income in order to arrive at the present value of the property. Because of this, valuations based on this method can be complicated, confusing, and speculative. If this method is to be used in developing an appraisal under these Standards, it is critical that the appraiser develop market support for each of the many factors that must be forecasted in order to show that the analysis reflects what buyers and sellers for that property type are considering on the effective date of value. If appraisers are considering the use of this method, they should discuss it with their client as part of the scope of work conversation. 

The yield capitalization method can be a useful tool in testing feasibility in highest and best analysis and as support for the other approaches to value. This method can be very useful in appraisals of leasehold acquisition involving potential damages to a remainder after the taking. It is useful as a means of determining the value of the property before and after the leasehold taking in order to identify the difference.71

71 Eaton, supra note 16, at 414.