| What it is |
A property valued primarily for what can be built on it, not what it currently earns. The existing structure, if any, is secondary or incidental to the land's development potential |
A property whose value is driven by the income it produces today. The asset is the building, its tenants, and the cash flow they generate, while the land serves as the foundation rather than the primary source of value. |
| How it is valued |
Price per buildable square foot (PPBSF). Buyers underwrite the future development, back out construction costs, profit margin, and financing, and arrive at what they can pay for the land today |
Cap rate applied to net operating income (NOI). Value = NOI divided by cap rate. A building generating $1M NOI at a 5% cap is worth $20M regardless of what could theoretically be built there |
| What drives each valuation |
Zoning (FAR, use, height), neighborhood trajectory, construction costs, projected rents or sale prices for the future development, and how competitive the site is among developers |
In-place rents, occupancy, lease terms, operating expenses, and the risk premium investors attach to that income stream |
| How it works in NYC |
NYC zoning assigns FAR to every lot. A site with 2.0 FAR on a 10,000 SF lot has 20,000 buildable SF. Developers pay for those buildable feet based on what the finished product will be worth. As-of-right development commands a premium over sites requiring rezoning, which carry entitlement risk. Air rights purchases and zoning lot mergers can increase buildable area beyond the base lot. |
NYC income properties trade on cap rates that vary by asset class, location, and rent regulation status. Free-market residential, commercial, and mixed-use each have their own cap rate ranges. Rent-stabilized buildings trade differently than free-market because rent growth is capped, compressing NOI upside and pushing cap rates accordingly |
| When it applies to an owner |
Your property is underbuilt relative to its zoning; the neighborhood has rezoned or is being rezoned upward; the land beneath your building is worth more than the building itself on a capitalized basis |
Your property is fully or nearly fully built to its FAR; cash flow is stable and growing; you are focused on yield and long-term hold |
| When land value exceeds income value |
When the capitalized value of current income falls below what a developer would pay for the site. This happens when rents are below market (long-term leases, rent stabilization), when the building is old and requires heavy capex, when FAR is significantly underutilized, or when a neighborhood rezoning creates development potential that income cannot price in. |
Land value exceeding income value is a signal. It tells you the market sees higher and better use than what the building currently produces. Ignoring that signal means leaving money on the table |
| What triggers an owner to switch frames |
A tenant vacating and leaving you with a large block of empty space. Construction costs dropping or rents rising enough to make a development pro forma work. A realization that deferred capex on the existing building is approaching the cost of demolition |
A market where cap rate compression is driving valuations higher regardless of NOI growth. Personal risk tolerance shifting toward income and away from development exposure |
| How it affects property value or owner decisions |
Framing a property as a development site can unlock a valuation 30-100%+ above what the income approach would yield, depending on how underbuilt the site is. |
Income-based valuation rewards strong operations, high occupancy, and effective lease structures. Owners maximize value through tenant retention, rental growth, and disciplined expense management. |
| Common misconception |
"If I have unused FAR, I should develop it." Unused FAR has value but development is not always the right answer. Construction risk, timeline, capital requirements, and opportunity cost have to pencil against simply selling the land value to a developer who specializes in that risk. |
"A lower cap rate always means a better asset."A lower cap rate always means a better asset." A low cap rate means the market is paying a high multiple for the income, which reflects investor demand, not asset quality. |
| Key question an owner should ask |
What is my buildable SF, and what are developers paying per buildable foot in my submarket right now? Is my property as-of-right or does development require a variance or rezoning? |
Is my income growing, flat, or declining, and how does that trajectory affect my hold vs. sell decision? |
