Valuing a Real Estate Entity with Little or No Income

When valuing a going concern, the Income Approach is applied in most circumstances and the Market Approach is applied as often as available reliable data will allow.  This is true for both operating companies and asset-holding companies (i.e., real estate entities).  But consider an entity whose primary asset is real estate that does not generate any annual income.  This may be the case when undeveloped land is being held for possible future development, expansion, or for a time when the marketplace is stronger to present the property for sale.

It may be possible to find market transactions of non-income producing real estate for use in the Market Approach, but what of the Income Approach?  In such a case, the analyst will need to estimate one or more possible liquidation horizons for when the property might either be sold or begin generating significant cash flow from tenants.  These estimates may be made after speaking with the controlling owner, the real estate appraiser or others with knowledge of the company’s plans and the marketplace.  After estimating an appropriate rate of return and the assumed growth in the value of the property from the valuation date to the presumed liquidation date(s), it becomes a matter of discounting those cash flows back to the valuation date.