Glossary

Band of Investment Technique

Also known as: Mortgage-Equity Capitalization

A method for deriving an overall capitalization rate by weighting the mortgage capitalization rate (debt constant) and the equity capitalization rate (equity dividend rate) by their respective shares of total property value, on the theory that the blended rate must satisfy both the lender's and the equity investor's return requirements.

The classic formula is Ro = (M x Rm) + [(1 - M) x Re], where M is the loan-to-value ratio, Rm is the mortgage constant (annual debt service divided by loan amount), and Re is the equity dividend rate (before-tax cash flow to equity divided by the equity investment); the resulting Ro can then be applied to stabilized NOI under direct capitalization. Because the technique is built entirely from financing terms and investor return targets rather than from actual sale transactions, it is best used as a cross-check against, or a substitute for, market-extracted cap rates when comparable sales data is thin, and it is especially sensitive to the mortgage terms assumed — a shift in available loan-to-value or interest rate can move the derived Ro meaningfully even with no change in the property's own income or risk. The technique's core limitation is that it treats debt and equity capital costs as simply additive without capturing the effect of income growth or reversion on equity returns, which is precisely the gap the more complete mortgage-equity (Ellwood) analysis was developed to close.