Built-up Method

Capitalization Rate R₀(BU) = pure rate + liquidity premium + recapture premium + risk premium

• The interest rate on U.S. government bonds after adjustments for real estate based tax savings = 5.0%
• → pure rate
• The premium investors require for the illiquidity of real estate investments = 2.5%
• → liquidity premium
• The average real estate return net of appreciation = 1.25%
• → recapture premium
• The real estate investment risk premium = 3.0%
• → risk premium

Capitalization Rate R₀(BU) = 5.0% + 2.5% + 1.25% + 3.0% = 11.75%