If the land capitalization rate in straight line capitalization is 9% and the remaining economic life of the improvement is 25 years, what is the building capitalization rate?

To determine the building capitalization rate when given the land capitalization rate and the remaining economic life of the improvement, one can use the relationship between the land and building rates in the context of straight-line capitalization.

In straight-line capitalization, the overall capitalization rate is comprised of both the land capitalization rate and the building capitalization rate. The equation can be summarized as follows:

Overall Capitalization Rate = (Land Capitalization Rate) + (Building Capitalization Rate × (1 - (Remaining Economic Life / Total Economic Life)))

With the provided land capitalization rate of 9% and the remaining economic life of 25 years, the typical assumption is that the total economic life of a building is considerably longer than the remaining life, often estimated to be around 40-50 years. In this scenario, if we assume a total economic life of 40 years for calculation purposes, we set this up:

1. The number of years remaining is 25.

2. Thus, the portion of the building's contribution to capitalization is determined by how many years it has left relative to its total lifespan.

3. If we consider a total economic life of 40 years, the proportion is (25 / 40) = 0.625.

When calculating the building capitalization rate