nschoch
Freshman Member
- Joined
- May 19, 2009
- Professional Status
- Banking/Mortgage Industry
- State
- California
Question Do I need to use a 10-year period in my discounted cash flow analysis to have a reasonable as-is value?
Background I am a loan officer and part of my job is to provide a desktop as-is value for my loan monitoring. My credit authorities are pushing for more discounted cash flow analysis, citing regulatory concerns. Thus, what was once using the direct cap to estimate a stabilized value, then subtracting costs to complete/rent loss, has became a discounted cash flow model.
Detailed Question In order to appease the DCF requirement when generating an as-is value, I used Excel to generate a quick discounted cash flow estimate for the stabilization period. I assume a straight-line lease up since my crystal ball is out for repair. Once the project is stabilized, I estimate a terminal value, discount it back and add it to the discounted cash flow to come up with my as-is value.
I am using this to get a quick estimate of as-is value for various property types including office, retail (large regional malls), etc.
Here is a hypothetical example of my model (PDF):
http://www.box.net/shared/pybjgag2dj
The problem is my credit authority does not believe this is appropriate since it isn't over a 10-year period. His concern is that lease turnover isn't accounted for and an investor would use a 10-year period. My response is that the vacancy rate in the terminal valuation includes the expectation for normal lease turnover for this product type.
My understanding is that the DCF has a lot more room for error than the direct capitalization approach (garbage-in, garbage-out). That's why I wanted to minimize the amount of prediction and stick with market cap rates and conservative vacancy estimates. I know that to properly appraise the leased-fee interest, I should use Argus and input each lease, but would it really get me that much better of a value estimate if the lease rates/terms are all around market?
Having searched the forum for this question already, I know I can expect some good insight with your responses.
Thanks in advance.
Nick
Background I am a loan officer and part of my job is to provide a desktop as-is value for my loan monitoring. My credit authorities are pushing for more discounted cash flow analysis, citing regulatory concerns. Thus, what was once using the direct cap to estimate a stabilized value, then subtracting costs to complete/rent loss, has became a discounted cash flow model.
Detailed Question In order to appease the DCF requirement when generating an as-is value, I used Excel to generate a quick discounted cash flow estimate for the stabilization period. I assume a straight-line lease up since my crystal ball is out for repair. Once the project is stabilized, I estimate a terminal value, discount it back and add it to the discounted cash flow to come up with my as-is value.
I am using this to get a quick estimate of as-is value for various property types including office, retail (large regional malls), etc.
Here is a hypothetical example of my model (PDF):
http://www.box.net/shared/pybjgag2dj
The problem is my credit authority does not believe this is appropriate since it isn't over a 10-year period. His concern is that lease turnover isn't accounted for and an investor would use a 10-year period. My response is that the vacancy rate in the terminal valuation includes the expectation for normal lease turnover for this product type.
My understanding is that the DCF has a lot more room for error than the direct capitalization approach (garbage-in, garbage-out). That's why I wanted to minimize the amount of prediction and stick with market cap rates and conservative vacancy estimates. I know that to properly appraise the leased-fee interest, I should use Argus and input each lease, but would it really get me that much better of a value estimate if the lease rates/terms are all around market?
Having searched the forum for this question already, I know I can expect some good insight with your responses.
Thanks in advance.
Nick