Glossary

Yield Capitalization

Also known as: Discounted Cash Flow Analysis (appraisal)

An income-approach method that converts a multi-period projection of future cash flows and a reversionary value into a present value estimate by discounting each at a market-derived yield (discount) rate, in contrast to direct capitalization, which converts a single year's stabilized income into value using an overall capitalization rate.

Yield capitalization is the formal appraisal term for what is more commonly called discounted cash flow (DCF) analysis, and it is the preferred technique whenever a property's income stream is expected to be irregular over the holding period — due to scheduled lease rollover, phased lease-up, contractual rent steps that diverge from market growth, or a known near-term capital event — conditions under which a single stabilized-year direct capitalization would understate the analytical detail actually available and needed. The relationship between the two techniques is formally connected through the identity Ro is approximately equal to Y minus the product of the projected value change and a sinking fund factor, meaning direct capitalization is best understood as a mathematical simplification of yield capitalization under the special assumption of a level or steadily growing income stream, not a wholly separate theory of value. Appraisers frequently develop both a direct capitalization and a yield capitalization (DCF) value indication for the same property, reconciling between the two rather than relying on either alone, since each is more sensitive to different assumptions and disagreement between them is itself a useful signal of where an appraisal's supporting assumptions warrant closer scrutiny.