The Mortgage Equity method considers the blended position of the cost of borrowed capital with the equity position in deriving a capitalization rate. The rate composition is based on actual market observations.

The cost of borrowed capital is determined by market lending terms typically available for a specific investment type. Loan terms are considered to be investor and project specific making it possible to derive a typical market interest rate and term through a survey of lending institutions.

The cash flow requirement for the mortgage segment is simply debt service including principle payments and interest while the equity requirement reflects the cash flow rate that will satisfy an equity investor in the current market. To distinguish, an equity cash flow rate is not the same as an equity yield rate as the true rate of return on capital may be higher or lower depending upon the reversion at the termination of the holding period and other factors. Because equity usually builds up through gradual debt reduction and capital appreciation, an investor may be satisfied with a cash flow rate that is not a full measure of real expectations (i.e. yield rate).