4.4.4.3. Capitalization Rate or Discount Rate.Determination of the capitalization or discount rate in an income capitalization approach is critical. This rate “reflects the degree of risk in the undertaking involved. It is an extremely important figure in the computation because a change of even a fraction of one percent will produce a surprisingly material change in the result.”618 As a result, federal courts have rejected use of the income capitalization approach if the discount rate is not supported by appropriate market evidence.619

The capitalization or discount rate must be derived from actual market data, through comparison if possible: 

[A] capitalization rate…should be ascertained by reference to the best evidence—the most similar property—as well as dissimilar investments if that proves necessary. “The selection of a capitalization rate by comparison is perhaps the most widely accepted approach. It recognizes the behavioristic nature of economics, because by comparison one gets the reaction of people in the market place.”620