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Explanation of the Simultaneous Valuation Formula
The algebraic equation known as the simultaneous valuation formula, which
solves for the total property value using a ten-year mortgage and equity technique,
was developed by Suzanne R. Mellen, CRE, MAI, FRICS, ISHC, Managing Director of
the San Francisco office of HVS. A complete discussion of the technique is
presented in her article entitled “Simultaneous Valuation: A New Technique.” 14
The process of solving for the value of the mortgage and equity components begins
by deducting the annual debt service from the projected income before debt
service, leaving the net income to equity for each year. The net income as of the
eleventh year is capitalized into a reversionary value using the terminal
capitalization rate. The equity residual, which is the total reversionary value less
the mortgage balance at that point in time and less any brokerage and legal costs
associated with the sale, is discounted to the date of value at the equity yield rate.
The net income to equity for each projection year is also discounted back to the
date of value. The sum of these discounted values equals the value of the equity
component. Because the equity component comprises a specific percentage of the
total value, the value of the mortgage and the total property can be computed
easily. This process can be expressed in two algebraic equations that set forth the
mathematical relationships between the known and unknown variables using the
following symbols.
14 Suzanne R. Mellen. "Simultaneous Valuation: A New Technique," Appraisal Journal,
April, 1983.
February-2011 Explanation of the Simultaneous Valuation Formula
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