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Dcf Yield Rate Using Band Of Investment

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justinschroeder

Sophomore Member
Joined
Sep 13, 2007
Professional Status
Certified General Appraiser
State
Illinois
Looking at an appraisal where the appraiser used a Band of Investment to get the yield rate for a discounted cash flow. Can this be done? I though this was only for direct cap.
 

Gobears81

Senior Member
Joined
Nov 7, 2013
Professional Status
Certified General Appraiser
State
Illinois
It depends how they did it. There are property models to convert cap rates to yield rates. Based on constant growth of, say 2%, if a band of investment suggests a cap rate of 8%, the implied yield rate is 10%. But if they determine the cap rate to be 8% (in this example) and use a yield rate of 8%, the methodology is off unless constant growth is assumed to be 0 or the property model suggests the same yield rate as the cap rate.
 

Michael S

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Mar 18, 2009
Professional Status
Certified General Appraiser
State
New Mexico
Better than just making it up out of thin air. Depending on how it's done it could be applicable. I used it as one of a few methods to try and determine an appropriate yield for a solar PV array with a 15-year remaining income stream. I looked at mortgage yields assuming a buyer financed the solar panels along with the property and then what sort of equity return might be demanded by an investor.
 

justinschroeder

Sophomore Member
Joined
Sep 13, 2007
Professional Status
Certified General Appraiser
State
Illinois
DCF is 5 years
Income is the same all 5 years
Expense increases 1% each year
BoI indicates 9%
Yield in DCF is 9%

I have never see it done this way. I myself have gotten away from using a BoI.
 

Gobears81

Senior Member
Joined
Nov 7, 2013
Professional Status
Certified General Appraiser
State
Illinois
DCF is 5 years
Income is the same all 5 years
Expense increases 1% each year
BoI indicates 9%
Yield in DCF is 9%

I have never see it done this way. I myself have gotten away from using a BoI.
What types of assumptions or changes are incorporated into the reversion? Based on the Year 1 NOI, what is the implied cap rate, and why did they use DCF rather than direct cap given what appears to be a somewhat level income stream?
 

justinschroeder

Sophomore Member
Joined
Sep 13, 2007
Professional Status
Certified General Appraiser
State
Illinois
What types of assumptions or changes are incorporated into the reversion? They used a 9.5% rate at year 6
and why did they use DCF rather than direct cap given what appears to be a somewhat level income stream? Not sure...a direct cap would have been almost equal to their sales.
 
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