Slide 1

Chapter 24

The Student Handbook to
THE APPRAISAL OF REAL ESTATE
Discounted Cash Flow Analysis
and Special Applications in Income
Capitalization
1



Applications of Discounted Cash Flow Analysis (DCF)
 Both DCF and direct capitalization require an estimate
of next year’s net income.
 Discounted cash flow requires more than one year’s
estimate.
 Several years’ estimates of income, vacancy,
collection losses, and expenses are required.

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

2

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center
Estimated market (rollover) rate average
Tenant
Suite #
Sq. Ft.
Tenant A
100
1,500
Tenant B
102
1,500
Tenant C
104
1,500
Tenant D
106
1,500
Tenant E
108
1,500
Tenant F
110
1,500
Tenant G
112
1,500
Tenant H
114
1,500
Tenant I
116
1,500
Building size
13,500
Other income =
Pass-through income
Potential gross income =
Vacancy loss (22.2%, decreasing 3.00% per year)
Collection loss
Total V & C loss
Effect. gross income

3.00%
Leased
1,500
1,500
0
1,500
1,500
1,500
0
1,500
1,500
10,500

Rate
11.00
11.25
0.00
11.50
11.00
MTM
0.00
10.00
8.00
77.8%

$14.00

$
$
$
$
$
$
$
$
$

Year 1
16,500
16,875
21,000
17,250
16,500
21,000
21,000
15,000
12,000
$9,000
$48,750
214,875
19.2%
2.0%
21.2%
$169,274

$14.42

$
$
$
$
$
$
$
$
$

Year 2
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000
$9,270
$51,188
218,213
16.2%
2.0%
18.2%
$178,450

$14.85

$
$
$
$
$
$
$
$
$

$15.30

Year 3
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000

Year 4
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000

$9,548
$53,747
221,050
13.2%
2.0%
15.2%
$187,401

$9,835
$56,434
224,024
10.2%
2.0%
12.2%
$196,643

$15.76
Year 5
16,500
23,636
21,000
23,636
16,500
21,630
21,000
15,000
12,000
$10,130
$59,256
240,287
7.2%
2.0%
9.2%
$218,127

$16.23
Resale Year 6
24,345
23,636
24,345
23,636
24,345
21,630
24,345
15,000
21,345
$10,433
$62,219
275,278
4.2%
2.0%
6.2%
$258,150

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

3

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center, continued
Effect. gross income
Expense items (rate of increase in expenses = 3.00%)
Administrative
$0.02
/sq. ft.
All utilities
$0.25
/sq. ft.
Outside services
$0.14
/sq. ft.
Management expense
5.0% EGI
Advertising, promotion
$0.10
/sq. ft.
Maintenance salary
$0.50
/sq. ft.
Insurance
$0.25
/sq. ft.
Taxes & licenses
$1.10
/sq. ft.
Maintenance (snow, trash, etc.)
$0.45
/sq. ft.
Contract cleaning
$1.00
/sq. ft.
Supplies (HVAC, janitorial, etc.)
$0.50
/sq. ft.
Total expenses from operations
Expenses per sq. ft.
Build-out and leasing expenses
Repainting/carpets/existing
1,500
sq. ft. @
$6.50
New space build-out
1,500
sq. ft. @
$12.00
Capital exp (roof, HVAC, etc.)
Leasing commissions
4% for five years
Total build-out, capital expense
Build-out per sq. ft. GFA
Total all expenses
Net operating income

$169,274

$178,450

$187,401

$196,643

$218,127

270
3,375
1,890
8,464
1,350
6,750
3,375
14,850
6,075
13,500
6,750
66,649
$4.94

278
3,476
1,947
8,923
1,391
6,953
3,476
15,296
6,257
13,905
6,953
68,854
$5.10

286
3,581
2,005
9,371
1,432
7,161
3,581
15,754
6,445
14,322
7,161
71,099
$5.27

295
3,688
2,065
9,833
1,475
7,376
3,688
16,227
6,638
14,752
7,376
73,413
$5.44

304
3,799
2,127
10,906
1,519
7,597
3,799
16,714
6,837
15,194
7,597
76,394
$5.66

9,750
18,000

10,043
18,540
22,000
$4,326
$54,909
$4.07

10,344
19,096
$4,456
$33,896
$2.51

10,654
19,669
$4,589
$34,913
$2.59

10,974
20,259
11,000
$4,727
$46,960
$3.48

0
$4,200
$31,950
$2.37
$98,599
$70,675

$123,762
$54,688

$

$104,995
$82,407

$

$108,326
$88,318

$123,355
$94,773

$258,150
313
3,913
2,191
12,908
1,565
7,825
3,913
17,215
7,043
15,650
7,825
80,361
$5.95
11,303
20,867
0
$4,869
$37,039
$2.74
$117,399
$140,751

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

4

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center, continued
Net operating income
$70,675
$54,688
The reversion of the property is estimated by applying a terminal cap rate of 11.00% of the last year's income less selling expenses.
Cash flows with reversion
Discounted @
Present value
Discounted @
Present value

Equity Analysis (Optional)
Mortgage amount based on a price of
Annual payments

$70,675
0.917431
$64,840
0.913242
$64,544

9.0%
9.5%

Sale Price
1,069,492
68,031

First Mortgage
0

Cash flow to equity
DSCR (with reserves)

-267,373

$82,407

$88,318

$54,688
0.841680
$46,030
0.834011
$45,611

$82,407
0.772183
$63,633
0.761654
$62,766

$88,318
0.708425
$62,567
0.695574
$61,432

68,031

Mort. Amnt
802,119
68,031

1
2,645
1.04

2
-13,342
0.80

$140,751

Reversion of property = $1,202,782
$1,297,555
0.649931
Value
$843,322
1,080,391
0.635228
Value
$824,243
1,058,594

Mort. Rate
7.00%
68,031
3

14,377
1.21

$94,773

Term
25
799,260
4

20,287
1.30

5
498,295
0.12

Balance 5th yr.
$731,229
pmt+pay off
IRR
14.44%

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

5

Table 24.2 Calculating Net Present Value
0.08
Year

Cash flow

Discount Rate

Present Value

0

-$550,000*

1.0000

-$550,000

1

$35,000

0.925926

$32,407

2

$40,000

0.857339

$34,294

3

$45,000

0.793832

$35,722

4

$50,000

0.735030

$36,751

5

$51,000

0.680583

$34,710

6

$56,000

0.630170

$35,289

7

$60,000

0.583490

$35,009

8

$61,000

0.540269

$32,956

9

$64,000

0.500249

$32,016

10

$65,000

0.463193

$30,108

11

$49,000

0.428883

$21,015

12

$54,000

0.397114

$21,444

13

$55,000

0.367698

$20,223

14

$60,000

0.340461

$20,428

14

$625,000

0.340461

$212,788

Net present value of the investment

†

$85,162

* Acqusition price
  Reversion

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

6

Table 24.3 Calculating Net Present Value
IRR = 0.0973208
Year

Cash flow

Discount Rate

Present Value

0

-$550,000

1.0000

-$550,000

1

$35,000

0.911311

$31,896

2

$40,000

0.830487

$33,219

3

$45,000

0.756831

$34,057

4

$50,000

0.689708

$34,485

5

$51,000

0.628539

$32,055

6

$56,000

0.572794

$32,076

7

$60,000

0.521993

$31,320

8

$61,000

0.475698

$29,018

9

$64,000

0.433508

$27,745

10

$65,000

0.395061

$25,679

11

$49,000

0.360023

$17,641

12

$54,000

0.328093

$17,717

13

$55,000

0.298994

$16,445

14

$60,000

0.272477

$16,349

14

$625,000

0.272477

$170,298

Net present value of the investment

$0

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

7

Table 24.4 Payback Period
Amount invested = $1,250,000
Year

Annual Cash Flows

Running Total

1

$142,589

2

$146,268

$142,589
$288,857

3

$150,042

$438,898

4

$153,913

$592,811

5

$157,884

$750,694

6

$161,957

$912,651

7

$166,135

$1,078,787

8

$170,422

$1,249,208

9

$174,819

$1,424,027

10

$179,329

$1,603,356

Payback period

Payback point

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

8

Table 24.5 Profitability Index
Discount rate = 8.00%
Purchase price = $1,250,000
Year

1

Cash flow

$89,000

x

0.9259259

=

$82,407

Year

2

Cash flow

$97,500

x

0.8573388

=

$83,591

Year

3

Cash flow

$103,300

x

0.7938322

=

$82,003

Year

4

Cash flow

$109,800

x

0.7350299

=

$80,706

Year

5

Cash flow

$114,000

x

0.6805832

=

$77,586

Year

6

Cash flow

$116,300

x

0.6301696

=

$73,289

Year

7

Cash flow

$118,650

x

0.5834904

=

$69,231

Year

8

Cash flow

$119,850

x

0.5402689

=

$64,751

Year

9

Cash flow

$121,350

x

0.500249

=

$60,705

Year

10

Cash flow

$123,850

x

0.4631935

=

$57,367

10

Reversion

x

0.4631935

=

$1,548,125

Sum of the present values of the CFs

$717,081
$1,448,718

Profitability index = $1,448,718/$1,250,000 = 1.16

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

9

Case Study: Analysis of an Office Building
Investment
Suite
100
Suite
101
Suite
112
Suite
114
Suite
205
Suite
210
Suite
215
Total
Other income & pass-throughs
Potential gross income
Estimated market (rollover) rate
Vacancy loss
Collection loss
Total V& C loss
Effect. gross income

Sq. Ft.
2,500
3,900
4,600
4,000
5,000
5,000
5,000
30,000

Leased
2,500
3,900
4,000
5,000
5,000
5,000
25,400

Rate
25.00
26.50
25.00
21.00
24.00
23.50
22.00
84.67%

Year 1
62,500
103,350
115,000
84,000
120,000
125,000
110,000

Year 2
62,500
103,350
115,000
100,000
120,000
125,000
110,000

Year 3
66,307
103,350
115,000
100,000
120,000
125,000
132,613

Year 4
66,307
103,350
115,000
100,000
120,000
125,000
132,613

$49,000
768,850
$25.00
-5%
-1%

$49,000
784,850
$25.75
-5%
-1%

$49,000
814,253
$26.52
-10%
-1%

$49,000
815,813
$27.32
-10%
-1%

$49,000
853,796
$28.14
-10%
-1%

-6%

-11%
$724,685

-11%
$726,073

-11%
$759,879

-6%
$722,719

$737,759

Year 5
66,307
103,350
115,000
100,000
140,689
140,689
132,613

Year 6/Resale
66,307
103,350
133,317
100,000
140,689
140,689
132,613
$49,000
873,767
$28.98
-5%
-1%
-6%
$821,341

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

10

Case Study: Analysis of an Office Building
Investment, continued
Effect. gross income
Expense item

Year 1
$722,719

Year 2
$739,141

Year 3
$724,685

Year 4
$726,073

Year 5
$759,879

Year 6/Resale
$821,341

42,750
36,136
15,000
37,500
22,500
42,750
15,000
$211,636
$7.05

44,033
39,757
15,450
38,625
23,175
44,033
15,450
$217,722
$7.26

42,966
36,234
15,914
39,784
23,870
42,966
15,914
$217,648
$7.25

44,255
36,304
16,391
40,977
24,586
44,255
16,391
$223,159
$7.44

45,583
37,994
16,883
42,207
25,324
45,583
16,883
$230,456
$7.68

49,559
41,067
17,389
43,473
26,084
49,559
17,389
$244,520
$8.15

$92,000
$23,000

$60,000
$20,000
$25,000

$112,500
$39,784
$35,000

$150,000
$56,275
$42,000

$46,000

$115,000
$3.83
$326,636

$105,000
$3.50
$322,722

$187,284
$6.24
$404,932

$0
$0.00
$223,160

$248,275
$8.28
$478,731

$46,000
$1.53
$290,520

$396,083

$416,419

$319,753

$502,913

$281,147

$530,822

Rate of increase in expenses = 3%

All utilities
Management expense
Maintenance salary
Taxes, insurance & licenses
Maintenance (snow, trash, etc.)
Contract cleaning, etc.
Supplies (HVAC, janitorial, etc.)
Total expenses from operations
Operating expenses per sq. ft.
Build out and leasing expenses
New space build-out
Leasing commissions

$1.50
5.00%
$0.50
$1.25
$0.75
$1.50
$0.50

/Occ. sq. ft.
of EGI
/sq. ft.
/sq. ft.
/sq. ft.
/Occ. sq. ft.
/sq. ft.

$0

Capital replacements (HVA C, roof)
Total build-out reserves exp.
Build-out per sq. ft. GFA
Total all expenses
Income overall (I
O)

$0
$0
$0

$0
$0

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

11

Value Opinion – Case Study
Income overall (I

O

)

Year 1

Year 2

Year 3

Year 4

Year 5

$396,083

$416,419

$319,753

$502,913

$281,147

The reversion of the property is estimated via terminal cap rate of:
7% selling costs
Cash flows with reversion
Discounted @ 8.0%
Present value

$396,083
0.925926
$366,744

$416,419
0.857339
$357,012

Discounted @ 9.0%
Present value

0.917431
$363,379

0.814680
$350,490

9.00% of the last year's income less selling expenses
Reversion of property =
$5,485,157
$319,753
$502,913
$5,766,305
0.793832
0.735030
0.680583
$253,831
$369,656
$3,924,450

0.772183
$246,908

0.708425
$356,277

0.649931
$3,747,703

Year 6/Resale
$530,822

Value
$5,271,693
$175.72
Value
$5,064,758

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

12


Slide 2

Chapter 24

The Student Handbook to
THE APPRAISAL OF REAL ESTATE
Discounted Cash Flow Analysis
and Special Applications in Income
Capitalization
1



Applications of Discounted Cash Flow Analysis (DCF)
 Both DCF and direct capitalization require an estimate
of next year’s net income.
 Discounted cash flow requires more than one year’s
estimate.
 Several years’ estimates of income, vacancy,
collection losses, and expenses are required.

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

2

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center
Estimated market (rollover) rate average
Tenant
Suite #
Sq. Ft.
Tenant A
100
1,500
Tenant B
102
1,500
Tenant C
104
1,500
Tenant D
106
1,500
Tenant E
108
1,500
Tenant F
110
1,500
Tenant G
112
1,500
Tenant H
114
1,500
Tenant I
116
1,500
Building size
13,500
Other income =
Pass-through income
Potential gross income =
Vacancy loss (22.2%, decreasing 3.00% per year)
Collection loss
Total V & C loss
Effect. gross income

3.00%
Leased
1,500
1,500
0
1,500
1,500
1,500
0
1,500
1,500
10,500

Rate
11.00
11.25
0.00
11.50
11.00
MTM
0.00
10.00
8.00
77.8%

$14.00

$
$
$
$
$
$
$
$
$

Year 1
16,500
16,875
21,000
17,250
16,500
21,000
21,000
15,000
12,000
$9,000
$48,750
214,875
19.2%
2.0%
21.2%
$169,274

$14.42

$
$
$
$
$
$
$
$
$

Year 2
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000
$9,270
$51,188
218,213
16.2%
2.0%
18.2%
$178,450

$14.85

$
$
$
$
$
$
$
$
$

$15.30

Year 3
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000

Year 4
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000

$9,548
$53,747
221,050
13.2%
2.0%
15.2%
$187,401

$9,835
$56,434
224,024
10.2%
2.0%
12.2%
$196,643

$15.76
Year 5
16,500
23,636
21,000
23,636
16,500
21,630
21,000
15,000
12,000
$10,130
$59,256
240,287
7.2%
2.0%
9.2%
$218,127

$16.23
Resale Year 6
24,345
23,636
24,345
23,636
24,345
21,630
24,345
15,000
21,345
$10,433
$62,219
275,278
4.2%
2.0%
6.2%
$258,150

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

3

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center, continued
Effect. gross income
Expense items (rate of increase in expenses = 3.00%)
Administrative
$0.02
/sq. ft.
All utilities
$0.25
/sq. ft.
Outside services
$0.14
/sq. ft.
Management expense
5.0% EGI
Advertising, promotion
$0.10
/sq. ft.
Maintenance salary
$0.50
/sq. ft.
Insurance
$0.25
/sq. ft.
Taxes & licenses
$1.10
/sq. ft.
Maintenance (snow, trash, etc.)
$0.45
/sq. ft.
Contract cleaning
$1.00
/sq. ft.
Supplies (HVAC, janitorial, etc.)
$0.50
/sq. ft.
Total expenses from operations
Expenses per sq. ft.
Build-out and leasing expenses
Repainting/carpets/existing
1,500
sq. ft. @
$6.50
New space build-out
1,500
sq. ft. @
$12.00
Capital exp (roof, HVAC, etc.)
Leasing commissions
4% for five years
Total build-out, capital expense
Build-out per sq. ft. GFA
Total all expenses
Net operating income

$169,274

$178,450

$187,401

$196,643

$218,127

270
3,375
1,890
8,464
1,350
6,750
3,375
14,850
6,075
13,500
6,750
66,649
$4.94

278
3,476
1,947
8,923
1,391
6,953
3,476
15,296
6,257
13,905
6,953
68,854
$5.10

286
3,581
2,005
9,371
1,432
7,161
3,581
15,754
6,445
14,322
7,161
71,099
$5.27

295
3,688
2,065
9,833
1,475
7,376
3,688
16,227
6,638
14,752
7,376
73,413
$5.44

304
3,799
2,127
10,906
1,519
7,597
3,799
16,714
6,837
15,194
7,597
76,394
$5.66

9,750
18,000

10,043
18,540
22,000
$4,326
$54,909
$4.07

10,344
19,096
$4,456
$33,896
$2.51

10,654
19,669
$4,589
$34,913
$2.59

10,974
20,259
11,000
$4,727
$46,960
$3.48

0
$4,200
$31,950
$2.37
$98,599
$70,675

$123,762
$54,688

$

$104,995
$82,407

$

$108,326
$88,318

$123,355
$94,773

$258,150
313
3,913
2,191
12,908
1,565
7,825
3,913
17,215
7,043
15,650
7,825
80,361
$5.95
11,303
20,867
0
$4,869
$37,039
$2.74
$117,399
$140,751

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

4

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center, continued
Net operating income
$70,675
$54,688
The reversion of the property is estimated by applying a terminal cap rate of 11.00% of the last year's income less selling expenses.
Cash flows with reversion
Discounted @
Present value
Discounted @
Present value

Equity Analysis (Optional)
Mortgage amount based on a price of
Annual payments

$70,675
0.917431
$64,840
0.913242
$64,544

9.0%
9.5%

Sale Price
1,069,492
68,031

First Mortgage
0

Cash flow to equity
DSCR (with reserves)

-267,373

$82,407

$88,318

$54,688
0.841680
$46,030
0.834011
$45,611

$82,407
0.772183
$63,633
0.761654
$62,766

$88,318
0.708425
$62,567
0.695574
$61,432

68,031

Mort. Amnt
802,119
68,031

1
2,645
1.04

2
-13,342
0.80

$140,751

Reversion of property = $1,202,782
$1,297,555
0.649931
Value
$843,322
1,080,391
0.635228
Value
$824,243
1,058,594

Mort. Rate
7.00%
68,031
3

14,377
1.21

$94,773

Term
25
799,260
4

20,287
1.30

5
498,295
0.12

Balance 5th yr.
$731,229
pmt+pay off
IRR
14.44%

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

5

Table 24.2 Calculating Net Present Value
0.08
Year

Cash flow

Discount Rate

Present Value

0

-$550,000*

1.0000

-$550,000

1

$35,000

0.925926

$32,407

2

$40,000

0.857339

$34,294

3

$45,000

0.793832

$35,722

4

$50,000

0.735030

$36,751

5

$51,000

0.680583

$34,710

6

$56,000

0.630170

$35,289

7

$60,000

0.583490

$35,009

8

$61,000

0.540269

$32,956

9

$64,000

0.500249

$32,016

10

$65,000

0.463193

$30,108

11

$49,000

0.428883

$21,015

12

$54,000

0.397114

$21,444

13

$55,000

0.367698

$20,223

14

$60,000

0.340461

$20,428

14

$625,000

0.340461

$212,788

Net present value of the investment

†

$85,162

* Acqusition price
  Reversion

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

6

Table 24.3 Calculating Net Present Value
IRR = 0.0973208
Year

Cash flow

Discount Rate

Present Value

0

-$550,000

1.0000

-$550,000

1

$35,000

0.911311

$31,896

2

$40,000

0.830487

$33,219

3

$45,000

0.756831

$34,057

4

$50,000

0.689708

$34,485

5

$51,000

0.628539

$32,055

6

$56,000

0.572794

$32,076

7

$60,000

0.521993

$31,320

8

$61,000

0.475698

$29,018

9

$64,000

0.433508

$27,745

10

$65,000

0.395061

$25,679

11

$49,000

0.360023

$17,641

12

$54,000

0.328093

$17,717

13

$55,000

0.298994

$16,445

14

$60,000

0.272477

$16,349

14

$625,000

0.272477

$170,298

Net present value of the investment

$0

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

7

Table 24.4 Payback Period
Amount invested = $1,250,000
Year

Annual Cash Flows

Running Total

1

$142,589

2

$146,268

$142,589
$288,857

3

$150,042

$438,898

4

$153,913

$592,811

5

$157,884

$750,694

6

$161,957

$912,651

7

$166,135

$1,078,787

8

$170,422

$1,249,208

9

$174,819

$1,424,027

10

$179,329

$1,603,356

Payback period

Payback point

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

8

Table 24.5 Profitability Index
Discount rate = 8.00%
Purchase price = $1,250,000
Year

1

Cash flow

$89,000

x

0.9259259

=

$82,407

Year

2

Cash flow

$97,500

x

0.8573388

=

$83,591

Year

3

Cash flow

$103,300

x

0.7938322

=

$82,003

Year

4

Cash flow

$109,800

x

0.7350299

=

$80,706

Year

5

Cash flow

$114,000

x

0.6805832

=

$77,586

Year

6

Cash flow

$116,300

x

0.6301696

=

$73,289

Year

7

Cash flow

$118,650

x

0.5834904

=

$69,231

Year

8

Cash flow

$119,850

x

0.5402689

=

$64,751

Year

9

Cash flow

$121,350

x

0.500249

=

$60,705

Year

10

Cash flow

$123,850

x

0.4631935

=

$57,367

10

Reversion

x

0.4631935

=

$1,548,125

Sum of the present values of the CFs

$717,081
$1,448,718

Profitability index = $1,448,718/$1,250,000 = 1.16

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

9

Case Study: Analysis of an Office Building
Investment
Suite
100
Suite
101
Suite
112
Suite
114
Suite
205
Suite
210
Suite
215
Total
Other income & pass-throughs
Potential gross income
Estimated market (rollover) rate
Vacancy loss
Collection loss
Total V& C loss
Effect. gross income

Sq. Ft.
2,500
3,900
4,600
4,000
5,000
5,000
5,000
30,000

Leased
2,500
3,900
4,000
5,000
5,000
5,000
25,400

Rate
25.00
26.50
25.00
21.00
24.00
23.50
22.00
84.67%

Year 1
62,500
103,350
115,000
84,000
120,000
125,000
110,000

Year 2
62,500
103,350
115,000
100,000
120,000
125,000
110,000

Year 3
66,307
103,350
115,000
100,000
120,000
125,000
132,613

Year 4
66,307
103,350
115,000
100,000
120,000
125,000
132,613

$49,000
768,850
$25.00
-5%
-1%

$49,000
784,850
$25.75
-5%
-1%

$49,000
814,253
$26.52
-10%
-1%

$49,000
815,813
$27.32
-10%
-1%

$49,000
853,796
$28.14
-10%
-1%

-6%

-11%
$724,685

-11%
$726,073

-11%
$759,879

-6%
$722,719

$737,759

Year 5
66,307
103,350
115,000
100,000
140,689
140,689
132,613

Year 6/Resale
66,307
103,350
133,317
100,000
140,689
140,689
132,613
$49,000
873,767
$28.98
-5%
-1%
-6%
$821,341

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

10

Case Study: Analysis of an Office Building
Investment, continued
Effect. gross income
Expense item

Year 1
$722,719

Year 2
$739,141

Year 3
$724,685

Year 4
$726,073

Year 5
$759,879

Year 6/Resale
$821,341

42,750
36,136
15,000
37,500
22,500
42,750
15,000
$211,636
$7.05

44,033
39,757
15,450
38,625
23,175
44,033
15,450
$217,722
$7.26

42,966
36,234
15,914
39,784
23,870
42,966
15,914
$217,648
$7.25

44,255
36,304
16,391
40,977
24,586
44,255
16,391
$223,159
$7.44

45,583
37,994
16,883
42,207
25,324
45,583
16,883
$230,456
$7.68

49,559
41,067
17,389
43,473
26,084
49,559
17,389
$244,520
$8.15

$92,000
$23,000

$60,000
$20,000
$25,000

$112,500
$39,784
$35,000

$150,000
$56,275
$42,000

$46,000

$115,000
$3.83
$326,636

$105,000
$3.50
$322,722

$187,284
$6.24
$404,932

$0
$0.00
$223,160

$248,275
$8.28
$478,731

$46,000
$1.53
$290,520

$396,083

$416,419

$319,753

$502,913

$281,147

$530,822

Rate of increase in expenses = 3%

All utilities
Management expense
Maintenance salary
Taxes, insurance & licenses
Maintenance (snow, trash, etc.)
Contract cleaning, etc.
Supplies (HVAC, janitorial, etc.)
Total expenses from operations
Operating expenses per sq. ft.
Build out and leasing expenses
New space build-out
Leasing commissions

$1.50
5.00%
$0.50
$1.25
$0.75
$1.50
$0.50

/Occ. sq. ft.
of EGI
/sq. ft.
/sq. ft.
/sq. ft.
/Occ. sq. ft.
/sq. ft.

$0

Capital replacements (HVA C, roof)
Total build-out reserves exp.
Build-out per sq. ft. GFA
Total all expenses
Income overall (I
O)

$0
$0
$0

$0
$0

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

11

Value Opinion – Case Study
Income overall (I

O

)

Year 1

Year 2

Year 3

Year 4

Year 5

$396,083

$416,419

$319,753

$502,913

$281,147

The reversion of the property is estimated via terminal cap rate of:
7% selling costs
Cash flows with reversion
Discounted @ 8.0%
Present value

$396,083
0.925926
$366,744

$416,419
0.857339
$357,012

Discounted @ 9.0%
Present value

0.917431
$363,379

0.814680
$350,490

9.00% of the last year's income less selling expenses
Reversion of property =
$5,485,157
$319,753
$502,913
$5,766,305
0.793832
0.735030
0.680583
$253,831
$369,656
$3,924,450

0.772183
$246,908

0.708425
$356,277

0.649931
$3,747,703

Year 6/Resale
$530,822

Value
$5,271,693
$175.72
Value
$5,064,758

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

12


Slide 3

Chapter 24

The Student Handbook to
THE APPRAISAL OF REAL ESTATE
Discounted Cash Flow Analysis
and Special Applications in Income
Capitalization
1



Applications of Discounted Cash Flow Analysis (DCF)
 Both DCF and direct capitalization require an estimate
of next year’s net income.
 Discounted cash flow requires more than one year’s
estimate.
 Several years’ estimates of income, vacancy,
collection losses, and expenses are required.

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

2

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center
Estimated market (rollover) rate average
Tenant
Suite #
Sq. Ft.
Tenant A
100
1,500
Tenant B
102
1,500
Tenant C
104
1,500
Tenant D
106
1,500
Tenant E
108
1,500
Tenant F
110
1,500
Tenant G
112
1,500
Tenant H
114
1,500
Tenant I
116
1,500
Building size
13,500
Other income =
Pass-through income
Potential gross income =
Vacancy loss (22.2%, decreasing 3.00% per year)
Collection loss
Total V & C loss
Effect. gross income

3.00%
Leased
1,500
1,500
0
1,500
1,500
1,500
0
1,500
1,500
10,500

Rate
11.00
11.25
0.00
11.50
11.00
MTM
0.00
10.00
8.00
77.8%

$14.00

$
$
$
$
$
$
$
$
$

Year 1
16,500
16,875
21,000
17,250
16,500
21,000
21,000
15,000
12,000
$9,000
$48,750
214,875
19.2%
2.0%
21.2%
$169,274

$14.42

$
$
$
$
$
$
$
$
$

Year 2
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000
$9,270
$51,188
218,213
16.2%
2.0%
18.2%
$178,450

$14.85

$
$
$
$
$
$
$
$
$

$15.30

Year 3
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000

Year 4
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000

$9,548
$53,747
221,050
13.2%
2.0%
15.2%
$187,401

$9,835
$56,434
224,024
10.2%
2.0%
12.2%
$196,643

$15.76
Year 5
16,500
23,636
21,000
23,636
16,500
21,630
21,000
15,000
12,000
$10,130
$59,256
240,287
7.2%
2.0%
9.2%
$218,127

$16.23
Resale Year 6
24,345
23,636
24,345
23,636
24,345
21,630
24,345
15,000
21,345
$10,433
$62,219
275,278
4.2%
2.0%
6.2%
$258,150

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

3

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center, continued
Effect. gross income
Expense items (rate of increase in expenses = 3.00%)
Administrative
$0.02
/sq. ft.
All utilities
$0.25
/sq. ft.
Outside services
$0.14
/sq. ft.
Management expense
5.0% EGI
Advertising, promotion
$0.10
/sq. ft.
Maintenance salary
$0.50
/sq. ft.
Insurance
$0.25
/sq. ft.
Taxes & licenses
$1.10
/sq. ft.
Maintenance (snow, trash, etc.)
$0.45
/sq. ft.
Contract cleaning
$1.00
/sq. ft.
Supplies (HVAC, janitorial, etc.)
$0.50
/sq. ft.
Total expenses from operations
Expenses per sq. ft.
Build-out and leasing expenses
Repainting/carpets/existing
1,500
sq. ft. @
$6.50
New space build-out
1,500
sq. ft. @
$12.00
Capital exp (roof, HVAC, etc.)
Leasing commissions
4% for five years
Total build-out, capital expense
Build-out per sq. ft. GFA
Total all expenses
Net operating income

$169,274

$178,450

$187,401

$196,643

$218,127

270
3,375
1,890
8,464
1,350
6,750
3,375
14,850
6,075
13,500
6,750
66,649
$4.94

278
3,476
1,947
8,923
1,391
6,953
3,476
15,296
6,257
13,905
6,953
68,854
$5.10

286
3,581
2,005
9,371
1,432
7,161
3,581
15,754
6,445
14,322
7,161
71,099
$5.27

295
3,688
2,065
9,833
1,475
7,376
3,688
16,227
6,638
14,752
7,376
73,413
$5.44

304
3,799
2,127
10,906
1,519
7,597
3,799
16,714
6,837
15,194
7,597
76,394
$5.66

9,750
18,000

10,043
18,540
22,000
$4,326
$54,909
$4.07

10,344
19,096
$4,456
$33,896
$2.51

10,654
19,669
$4,589
$34,913
$2.59

10,974
20,259
11,000
$4,727
$46,960
$3.48

0
$4,200
$31,950
$2.37
$98,599
$70,675

$123,762
$54,688

$

$104,995
$82,407

$

$108,326
$88,318

$123,355
$94,773

$258,150
313
3,913
2,191
12,908
1,565
7,825
3,913
17,215
7,043
15,650
7,825
80,361
$5.95
11,303
20,867
0
$4,869
$37,039
$2.74
$117,399
$140,751

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

4

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center, continued
Net operating income
$70,675
$54,688
The reversion of the property is estimated by applying a terminal cap rate of 11.00% of the last year's income less selling expenses.
Cash flows with reversion
Discounted @
Present value
Discounted @
Present value

Equity Analysis (Optional)
Mortgage amount based on a price of
Annual payments

$70,675
0.917431
$64,840
0.913242
$64,544

9.0%
9.5%

Sale Price
1,069,492
68,031

First Mortgage
0

Cash flow to equity
DSCR (with reserves)

-267,373

$82,407

$88,318

$54,688
0.841680
$46,030
0.834011
$45,611

$82,407
0.772183
$63,633
0.761654
$62,766

$88,318
0.708425
$62,567
0.695574
$61,432

68,031

Mort. Amnt
802,119
68,031

1
2,645
1.04

2
-13,342
0.80

$140,751

Reversion of property = $1,202,782
$1,297,555
0.649931
Value
$843,322
1,080,391
0.635228
Value
$824,243
1,058,594

Mort. Rate
7.00%
68,031
3

14,377
1.21

$94,773

Term
25
799,260
4

20,287
1.30

5
498,295
0.12

Balance 5th yr.
$731,229
pmt+pay off
IRR
14.44%

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

5

Table 24.2 Calculating Net Present Value
0.08
Year

Cash flow

Discount Rate

Present Value

0

-$550,000*

1.0000

-$550,000

1

$35,000

0.925926

$32,407

2

$40,000

0.857339

$34,294

3

$45,000

0.793832

$35,722

4

$50,000

0.735030

$36,751

5

$51,000

0.680583

$34,710

6

$56,000

0.630170

$35,289

7

$60,000

0.583490

$35,009

8

$61,000

0.540269

$32,956

9

$64,000

0.500249

$32,016

10

$65,000

0.463193

$30,108

11

$49,000

0.428883

$21,015

12

$54,000

0.397114

$21,444

13

$55,000

0.367698

$20,223

14

$60,000

0.340461

$20,428

14

$625,000

0.340461

$212,788

Net present value of the investment

†

$85,162

* Acqusition price
  Reversion

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

6

Table 24.3 Calculating Net Present Value
IRR = 0.0973208
Year

Cash flow

Discount Rate

Present Value

0

-$550,000

1.0000

-$550,000

1

$35,000

0.911311

$31,896

2

$40,000

0.830487

$33,219

3

$45,000

0.756831

$34,057

4

$50,000

0.689708

$34,485

5

$51,000

0.628539

$32,055

6

$56,000

0.572794

$32,076

7

$60,000

0.521993

$31,320

8

$61,000

0.475698

$29,018

9

$64,000

0.433508

$27,745

10

$65,000

0.395061

$25,679

11

$49,000

0.360023

$17,641

12

$54,000

0.328093

$17,717

13

$55,000

0.298994

$16,445

14

$60,000

0.272477

$16,349

14

$625,000

0.272477

$170,298

Net present value of the investment

$0

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

7

Table 24.4 Payback Period
Amount invested = $1,250,000
Year

Annual Cash Flows

Running Total

1

$142,589

2

$146,268

$142,589
$288,857

3

$150,042

$438,898

4

$153,913

$592,811

5

$157,884

$750,694

6

$161,957

$912,651

7

$166,135

$1,078,787

8

$170,422

$1,249,208

9

$174,819

$1,424,027

10

$179,329

$1,603,356

Payback period

Payback point

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

8

Table 24.5 Profitability Index
Discount rate = 8.00%
Purchase price = $1,250,000
Year

1

Cash flow

$89,000

x

0.9259259

=

$82,407

Year

2

Cash flow

$97,500

x

0.8573388

=

$83,591

Year

3

Cash flow

$103,300

x

0.7938322

=

$82,003

Year

4

Cash flow

$109,800

x

0.7350299

=

$80,706

Year

5

Cash flow

$114,000

x

0.6805832

=

$77,586

Year

6

Cash flow

$116,300

x

0.6301696

=

$73,289

Year

7

Cash flow

$118,650

x

0.5834904

=

$69,231

Year

8

Cash flow

$119,850

x

0.5402689

=

$64,751

Year

9

Cash flow

$121,350

x

0.500249

=

$60,705

Year

10

Cash flow

$123,850

x

0.4631935

=

$57,367

10

Reversion

x

0.4631935

=

$1,548,125

Sum of the present values of the CFs

$717,081
$1,448,718

Profitability index = $1,448,718/$1,250,000 = 1.16

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

9

Case Study: Analysis of an Office Building
Investment
Suite
100
Suite
101
Suite
112
Suite
114
Suite
205
Suite
210
Suite
215
Total
Other income & pass-throughs
Potential gross income
Estimated market (rollover) rate
Vacancy loss
Collection loss
Total V& C loss
Effect. gross income

Sq. Ft.
2,500
3,900
4,600
4,000
5,000
5,000
5,000
30,000

Leased
2,500
3,900
4,000
5,000
5,000
5,000
25,400

Rate
25.00
26.50
25.00
21.00
24.00
23.50
22.00
84.67%

Year 1
62,500
103,350
115,000
84,000
120,000
125,000
110,000

Year 2
62,500
103,350
115,000
100,000
120,000
125,000
110,000

Year 3
66,307
103,350
115,000
100,000
120,000
125,000
132,613

Year 4
66,307
103,350
115,000
100,000
120,000
125,000
132,613

$49,000
768,850
$25.00
-5%
-1%

$49,000
784,850
$25.75
-5%
-1%

$49,000
814,253
$26.52
-10%
-1%

$49,000
815,813
$27.32
-10%
-1%

$49,000
853,796
$28.14
-10%
-1%

-6%

-11%
$724,685

-11%
$726,073

-11%
$759,879

-6%
$722,719

$737,759

Year 5
66,307
103,350
115,000
100,000
140,689
140,689
132,613

Year 6/Resale
66,307
103,350
133,317
100,000
140,689
140,689
132,613
$49,000
873,767
$28.98
-5%
-1%
-6%
$821,341

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

10

Case Study: Analysis of an Office Building
Investment, continued
Effect. gross income
Expense item

Year 1
$722,719

Year 2
$739,141

Year 3
$724,685

Year 4
$726,073

Year 5
$759,879

Year 6/Resale
$821,341

42,750
36,136
15,000
37,500
22,500
42,750
15,000
$211,636
$7.05

44,033
39,757
15,450
38,625
23,175
44,033
15,450
$217,722
$7.26

42,966
36,234
15,914
39,784
23,870
42,966
15,914
$217,648
$7.25

44,255
36,304
16,391
40,977
24,586
44,255
16,391
$223,159
$7.44

45,583
37,994
16,883
42,207
25,324
45,583
16,883
$230,456
$7.68

49,559
41,067
17,389
43,473
26,084
49,559
17,389
$244,520
$8.15

$92,000
$23,000

$60,000
$20,000
$25,000

$112,500
$39,784
$35,000

$150,000
$56,275
$42,000

$46,000

$115,000
$3.83
$326,636

$105,000
$3.50
$322,722

$187,284
$6.24
$404,932

$0
$0.00
$223,160

$248,275
$8.28
$478,731

$46,000
$1.53
$290,520

$396,083

$416,419

$319,753

$502,913

$281,147

$530,822

Rate of increase in expenses = 3%

All utilities
Management expense
Maintenance salary
Taxes, insurance & licenses
Maintenance (snow, trash, etc.)
Contract cleaning, etc.
Supplies (HVAC, janitorial, etc.)
Total expenses from operations
Operating expenses per sq. ft.
Build out and leasing expenses
New space build-out
Leasing commissions

$1.50
5.00%
$0.50
$1.25
$0.75
$1.50
$0.50

/Occ. sq. ft.
of EGI
/sq. ft.
/sq. ft.
/sq. ft.
/Occ. sq. ft.
/sq. ft.

$0

Capital replacements (HVA C, roof)
Total build-out reserves exp.
Build-out per sq. ft. GFA
Total all expenses
Income overall (I
O)

$0
$0
$0

$0
$0

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

11

Value Opinion – Case Study
Income overall (I

O

)

Year 1

Year 2

Year 3

Year 4

Year 5

$396,083

$416,419

$319,753

$502,913

$281,147

The reversion of the property is estimated via terminal cap rate of:
7% selling costs
Cash flows with reversion
Discounted @ 8.0%
Present value

$396,083
0.925926
$366,744

$416,419
0.857339
$357,012

Discounted @ 9.0%
Present value

0.917431
$363,379

0.814680
$350,490

9.00% of the last year's income less selling expenses
Reversion of property =
$5,485,157
$319,753
$502,913
$5,766,305
0.793832
0.735030
0.680583
$253,831
$369,656
$3,924,450

0.772183
$246,908

0.708425
$356,277

0.649931
$3,747,703

Year 6/Resale
$530,822

Value
$5,271,693
$175.72
Value
$5,064,758

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

12


Slide 4

Chapter 24

The Student Handbook to
THE APPRAISAL OF REAL ESTATE
Discounted Cash Flow Analysis
and Special Applications in Income
Capitalization
1



Applications of Discounted Cash Flow Analysis (DCF)
 Both DCF and direct capitalization require an estimate
of next year’s net income.
 Discounted cash flow requires more than one year’s
estimate.
 Several years’ estimates of income, vacancy,
collection losses, and expenses are required.

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

2

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center
Estimated market (rollover) rate average
Tenant
Suite #
Sq. Ft.
Tenant A
100
1,500
Tenant B
102
1,500
Tenant C
104
1,500
Tenant D
106
1,500
Tenant E
108
1,500
Tenant F
110
1,500
Tenant G
112
1,500
Tenant H
114
1,500
Tenant I
116
1,500
Building size
13,500
Other income =
Pass-through income
Potential gross income =
Vacancy loss (22.2%, decreasing 3.00% per year)
Collection loss
Total V & C loss
Effect. gross income

3.00%
Leased
1,500
1,500
0
1,500
1,500
1,500
0
1,500
1,500
10,500

Rate
11.00
11.25
0.00
11.50
11.00
MTM
0.00
10.00
8.00
77.8%

$14.00

$
$
$
$
$
$
$
$
$

Year 1
16,500
16,875
21,000
17,250
16,500
21,000
21,000
15,000
12,000
$9,000
$48,750
214,875
19.2%
2.0%
21.2%
$169,274

$14.42

$
$
$
$
$
$
$
$
$

Year 2
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000
$9,270
$51,188
218,213
16.2%
2.0%
18.2%
$178,450

$14.85

$
$
$
$
$
$
$
$
$

$15.30

Year 3
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000

Year 4
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000

$9,548
$53,747
221,050
13.2%
2.0%
15.2%
$187,401

$9,835
$56,434
224,024
10.2%
2.0%
12.2%
$196,643

$15.76
Year 5
16,500
23,636
21,000
23,636
16,500
21,630
21,000
15,000
12,000
$10,130
$59,256
240,287
7.2%
2.0%
9.2%
$218,127

$16.23
Resale Year 6
24,345
23,636
24,345
23,636
24,345
21,630
24,345
15,000
21,345
$10,433
$62,219
275,278
4.2%
2.0%
6.2%
$258,150

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

3

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center, continued
Effect. gross income
Expense items (rate of increase in expenses = 3.00%)
Administrative
$0.02
/sq. ft.
All utilities
$0.25
/sq. ft.
Outside services
$0.14
/sq. ft.
Management expense
5.0% EGI
Advertising, promotion
$0.10
/sq. ft.
Maintenance salary
$0.50
/sq. ft.
Insurance
$0.25
/sq. ft.
Taxes & licenses
$1.10
/sq. ft.
Maintenance (snow, trash, etc.)
$0.45
/sq. ft.
Contract cleaning
$1.00
/sq. ft.
Supplies (HVAC, janitorial, etc.)
$0.50
/sq. ft.
Total expenses from operations
Expenses per sq. ft.
Build-out and leasing expenses
Repainting/carpets/existing
1,500
sq. ft. @
$6.50
New space build-out
1,500
sq. ft. @
$12.00
Capital exp (roof, HVAC, etc.)
Leasing commissions
4% for five years
Total build-out, capital expense
Build-out per sq. ft. GFA
Total all expenses
Net operating income

$169,274

$178,450

$187,401

$196,643

$218,127

270
3,375
1,890
8,464
1,350
6,750
3,375
14,850
6,075
13,500
6,750
66,649
$4.94

278
3,476
1,947
8,923
1,391
6,953
3,476
15,296
6,257
13,905
6,953
68,854
$5.10

286
3,581
2,005
9,371
1,432
7,161
3,581
15,754
6,445
14,322
7,161
71,099
$5.27

295
3,688
2,065
9,833
1,475
7,376
3,688
16,227
6,638
14,752
7,376
73,413
$5.44

304
3,799
2,127
10,906
1,519
7,597
3,799
16,714
6,837
15,194
7,597
76,394
$5.66

9,750
18,000

10,043
18,540
22,000
$4,326
$54,909
$4.07

10,344
19,096
$4,456
$33,896
$2.51

10,654
19,669
$4,589
$34,913
$2.59

10,974
20,259
11,000
$4,727
$46,960
$3.48

0
$4,200
$31,950
$2.37
$98,599
$70,675

$123,762
$54,688

$

$104,995
$82,407

$

$108,326
$88,318

$123,355
$94,773

$258,150
313
3,913
2,191
12,908
1,565
7,825
3,913
17,215
7,043
15,650
7,825
80,361
$5.95
11,303
20,867
0
$4,869
$37,039
$2.74
$117,399
$140,751

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

4

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center, continued
Net operating income
$70,675
$54,688
The reversion of the property is estimated by applying a terminal cap rate of 11.00% of the last year's income less selling expenses.
Cash flows with reversion
Discounted @
Present value
Discounted @
Present value

Equity Analysis (Optional)
Mortgage amount based on a price of
Annual payments

$70,675
0.917431
$64,840
0.913242
$64,544

9.0%
9.5%

Sale Price
1,069,492
68,031

First Mortgage
0

Cash flow to equity
DSCR (with reserves)

-267,373

$82,407

$88,318

$54,688
0.841680
$46,030
0.834011
$45,611

$82,407
0.772183
$63,633
0.761654
$62,766

$88,318
0.708425
$62,567
0.695574
$61,432

68,031

Mort. Amnt
802,119
68,031

1
2,645
1.04

2
-13,342
0.80

$140,751

Reversion of property = $1,202,782
$1,297,555
0.649931
Value
$843,322
1,080,391
0.635228
Value
$824,243
1,058,594

Mort. Rate
7.00%
68,031
3

14,377
1.21

$94,773

Term
25
799,260
4

20,287
1.30

5
498,295
0.12

Balance 5th yr.
$731,229
pmt+pay off
IRR
14.44%

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

5

Table 24.2 Calculating Net Present Value
0.08
Year

Cash flow

Discount Rate

Present Value

0

-$550,000*

1.0000

-$550,000

1

$35,000

0.925926

$32,407

2

$40,000

0.857339

$34,294

3

$45,000

0.793832

$35,722

4

$50,000

0.735030

$36,751

5

$51,000

0.680583

$34,710

6

$56,000

0.630170

$35,289

7

$60,000

0.583490

$35,009

8

$61,000

0.540269

$32,956

9

$64,000

0.500249

$32,016

10

$65,000

0.463193

$30,108

11

$49,000

0.428883

$21,015

12

$54,000

0.397114

$21,444

13

$55,000

0.367698

$20,223

14

$60,000

0.340461

$20,428

14

$625,000

0.340461

$212,788

Net present value of the investment

†

$85,162

* Acqusition price
  Reversion

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

6

Table 24.3 Calculating Net Present Value
IRR = 0.0973208
Year

Cash flow

Discount Rate

Present Value

0

-$550,000

1.0000

-$550,000

1

$35,000

0.911311

$31,896

2

$40,000

0.830487

$33,219

3

$45,000

0.756831

$34,057

4

$50,000

0.689708

$34,485

5

$51,000

0.628539

$32,055

6

$56,000

0.572794

$32,076

7

$60,000

0.521993

$31,320

8

$61,000

0.475698

$29,018

9

$64,000

0.433508

$27,745

10

$65,000

0.395061

$25,679

11

$49,000

0.360023

$17,641

12

$54,000

0.328093

$17,717

13

$55,000

0.298994

$16,445

14

$60,000

0.272477

$16,349

14

$625,000

0.272477

$170,298

Net present value of the investment

$0

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

7

Table 24.4 Payback Period
Amount invested = $1,250,000
Year

Annual Cash Flows

Running Total

1

$142,589

2

$146,268

$142,589
$288,857

3

$150,042

$438,898

4

$153,913

$592,811

5

$157,884

$750,694

6

$161,957

$912,651

7

$166,135

$1,078,787

8

$170,422

$1,249,208

9

$174,819

$1,424,027

10

$179,329

$1,603,356

Payback period

Payback point

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

8

Table 24.5 Profitability Index
Discount rate = 8.00%
Purchase price = $1,250,000
Year

1

Cash flow

$89,000

x

0.9259259

=

$82,407

Year

2

Cash flow

$97,500

x

0.8573388

=

$83,591

Year

3

Cash flow

$103,300

x

0.7938322

=

$82,003

Year

4

Cash flow

$109,800

x

0.7350299

=

$80,706

Year

5

Cash flow

$114,000

x

0.6805832

=

$77,586

Year

6

Cash flow

$116,300

x

0.6301696

=

$73,289

Year

7

Cash flow

$118,650

x

0.5834904

=

$69,231

Year

8

Cash flow

$119,850

x

0.5402689

=

$64,751

Year

9

Cash flow

$121,350

x

0.500249

=

$60,705

Year

10

Cash flow

$123,850

x

0.4631935

=

$57,367

10

Reversion

x

0.4631935

=

$1,548,125

Sum of the present values of the CFs

$717,081
$1,448,718

Profitability index = $1,448,718/$1,250,000 = 1.16

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

9

Case Study: Analysis of an Office Building
Investment
Suite
100
Suite
101
Suite
112
Suite
114
Suite
205
Suite
210
Suite
215
Total
Other income & pass-throughs
Potential gross income
Estimated market (rollover) rate
Vacancy loss
Collection loss
Total V& C loss
Effect. gross income

Sq. Ft.
2,500
3,900
4,600
4,000
5,000
5,000
5,000
30,000

Leased
2,500
3,900
4,000
5,000
5,000
5,000
25,400

Rate
25.00
26.50
25.00
21.00
24.00
23.50
22.00
84.67%

Year 1
62,500
103,350
115,000
84,000
120,000
125,000
110,000

Year 2
62,500
103,350
115,000
100,000
120,000
125,000
110,000

Year 3
66,307
103,350
115,000
100,000
120,000
125,000
132,613

Year 4
66,307
103,350
115,000
100,000
120,000
125,000
132,613

$49,000
768,850
$25.00
-5%
-1%

$49,000
784,850
$25.75
-5%
-1%

$49,000
814,253
$26.52
-10%
-1%

$49,000
815,813
$27.32
-10%
-1%

$49,000
853,796
$28.14
-10%
-1%

-6%

-11%
$724,685

-11%
$726,073

-11%
$759,879

-6%
$722,719

$737,759

Year 5
66,307
103,350
115,000
100,000
140,689
140,689
132,613

Year 6/Resale
66,307
103,350
133,317
100,000
140,689
140,689
132,613
$49,000
873,767
$28.98
-5%
-1%
-6%
$821,341

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

10

Case Study: Analysis of an Office Building
Investment, continued
Effect. gross income
Expense item

Year 1
$722,719

Year 2
$739,141

Year 3
$724,685

Year 4
$726,073

Year 5
$759,879

Year 6/Resale
$821,341

42,750
36,136
15,000
37,500
22,500
42,750
15,000
$211,636
$7.05

44,033
39,757
15,450
38,625
23,175
44,033
15,450
$217,722
$7.26

42,966
36,234
15,914
39,784
23,870
42,966
15,914
$217,648
$7.25

44,255
36,304
16,391
40,977
24,586
44,255
16,391
$223,159
$7.44

45,583
37,994
16,883
42,207
25,324
45,583
16,883
$230,456
$7.68

49,559
41,067
17,389
43,473
26,084
49,559
17,389
$244,520
$8.15

$92,000
$23,000

$60,000
$20,000
$25,000

$112,500
$39,784
$35,000

$150,000
$56,275
$42,000

$46,000

$115,000
$3.83
$326,636

$105,000
$3.50
$322,722

$187,284
$6.24
$404,932

$0
$0.00
$223,160

$248,275
$8.28
$478,731

$46,000
$1.53
$290,520

$396,083

$416,419

$319,753

$502,913

$281,147

$530,822

Rate of increase in expenses = 3%

All utilities
Management expense
Maintenance salary
Taxes, insurance & licenses
Maintenance (snow, trash, etc.)
Contract cleaning, etc.
Supplies (HVAC, janitorial, etc.)
Total expenses from operations
Operating expenses per sq. ft.
Build out and leasing expenses
New space build-out
Leasing commissions

$1.50
5.00%
$0.50
$1.25
$0.75
$1.50
$0.50

/Occ. sq. ft.
of EGI
/sq. ft.
/sq. ft.
/sq. ft.
/Occ. sq. ft.
/sq. ft.

$0

Capital replacements (HVA C, roof)
Total build-out reserves exp.
Build-out per sq. ft. GFA
Total all expenses
Income overall (I
O)

$0
$0
$0

$0
$0

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

11

Value Opinion – Case Study
Income overall (I

O

)

Year 1

Year 2

Year 3

Year 4

Year 5

$396,083

$416,419

$319,753

$502,913

$281,147

The reversion of the property is estimated via terminal cap rate of:
7% selling costs
Cash flows with reversion
Discounted @ 8.0%
Present value

$396,083
0.925926
$366,744

$416,419
0.857339
$357,012

Discounted @ 9.0%
Present value

0.917431
$363,379

0.814680
$350,490

9.00% of the last year's income less selling expenses
Reversion of property =
$5,485,157
$319,753
$502,913
$5,766,305
0.793832
0.735030
0.680583
$253,831
$369,656
$3,924,450

0.772183
$246,908

0.708425
$356,277

0.649931
$3,747,703

Year 6/Resale
$530,822

Value
$5,271,693
$175.72
Value
$5,064,758

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

12


Slide 5

Chapter 24

The Student Handbook to
THE APPRAISAL OF REAL ESTATE
Discounted Cash Flow Analysis
and Special Applications in Income
Capitalization
1



Applications of Discounted Cash Flow Analysis (DCF)
 Both DCF and direct capitalization require an estimate
of next year’s net income.
 Discounted cash flow requires more than one year’s
estimate.
 Several years’ estimates of income, vacancy,
collection losses, and expenses are required.

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

2

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center
Estimated market (rollover) rate average
Tenant
Suite #
Sq. Ft.
Tenant A
100
1,500
Tenant B
102
1,500
Tenant C
104
1,500
Tenant D
106
1,500
Tenant E
108
1,500
Tenant F
110
1,500
Tenant G
112
1,500
Tenant H
114
1,500
Tenant I
116
1,500
Building size
13,500
Other income =
Pass-through income
Potential gross income =
Vacancy loss (22.2%, decreasing 3.00% per year)
Collection loss
Total V & C loss
Effect. gross income

3.00%
Leased
1,500
1,500
0
1,500
1,500
1,500
0
1,500
1,500
10,500

Rate
11.00
11.25
0.00
11.50
11.00
MTM
0.00
10.00
8.00
77.8%

$14.00

$
$
$
$
$
$
$
$
$

Year 1
16,500
16,875
21,000
17,250
16,500
21,000
21,000
15,000
12,000
$9,000
$48,750
214,875
19.2%
2.0%
21.2%
$169,274

$14.42

$
$
$
$
$
$
$
$
$

Year 2
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000
$9,270
$51,188
218,213
16.2%
2.0%
18.2%
$178,450

$14.85

$
$
$
$
$
$
$
$
$

$15.30

Year 3
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000

Year 4
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000

$9,548
$53,747
221,050
13.2%
2.0%
15.2%
$187,401

$9,835
$56,434
224,024
10.2%
2.0%
12.2%
$196,643

$15.76
Year 5
16,500
23,636
21,000
23,636
16,500
21,630
21,000
15,000
12,000
$10,130
$59,256
240,287
7.2%
2.0%
9.2%
$218,127

$16.23
Resale Year 6
24,345
23,636
24,345
23,636
24,345
21,630
24,345
15,000
21,345
$10,433
$62,219
275,278
4.2%
2.0%
6.2%
$258,150

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

3

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center, continued
Effect. gross income
Expense items (rate of increase in expenses = 3.00%)
Administrative
$0.02
/sq. ft.
All utilities
$0.25
/sq. ft.
Outside services
$0.14
/sq. ft.
Management expense
5.0% EGI
Advertising, promotion
$0.10
/sq. ft.
Maintenance salary
$0.50
/sq. ft.
Insurance
$0.25
/sq. ft.
Taxes & licenses
$1.10
/sq. ft.
Maintenance (snow, trash, etc.)
$0.45
/sq. ft.
Contract cleaning
$1.00
/sq. ft.
Supplies (HVAC, janitorial, etc.)
$0.50
/sq. ft.
Total expenses from operations
Expenses per sq. ft.
Build-out and leasing expenses
Repainting/carpets/existing
1,500
sq. ft. @
$6.50
New space build-out
1,500
sq. ft. @
$12.00
Capital exp (roof, HVAC, etc.)
Leasing commissions
4% for five years
Total build-out, capital expense
Build-out per sq. ft. GFA
Total all expenses
Net operating income

$169,274

$178,450

$187,401

$196,643

$218,127

270
3,375
1,890
8,464
1,350
6,750
3,375
14,850
6,075
13,500
6,750
66,649
$4.94

278
3,476
1,947
8,923
1,391
6,953
3,476
15,296
6,257
13,905
6,953
68,854
$5.10

286
3,581
2,005
9,371
1,432
7,161
3,581
15,754
6,445
14,322
7,161
71,099
$5.27

295
3,688
2,065
9,833
1,475
7,376
3,688
16,227
6,638
14,752
7,376
73,413
$5.44

304
3,799
2,127
10,906
1,519
7,597
3,799
16,714
6,837
15,194
7,597
76,394
$5.66

9,750
18,000

10,043
18,540
22,000
$4,326
$54,909
$4.07

10,344
19,096
$4,456
$33,896
$2.51

10,654
19,669
$4,589
$34,913
$2.59

10,974
20,259
11,000
$4,727
$46,960
$3.48

0
$4,200
$31,950
$2.37
$98,599
$70,675

$123,762
$54,688

$

$104,995
$82,407

$

$108,326
$88,318

$123,355
$94,773

$258,150
313
3,913
2,191
12,908
1,565
7,825
3,913
17,215
7,043
15,650
7,825
80,361
$5.95
11,303
20,867
0
$4,869
$37,039
$2.74
$117,399
$140,751

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

4

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center, continued
Net operating income
$70,675
$54,688
The reversion of the property is estimated by applying a terminal cap rate of 11.00% of the last year's income less selling expenses.
Cash flows with reversion
Discounted @
Present value
Discounted @
Present value

Equity Analysis (Optional)
Mortgage amount based on a price of
Annual payments

$70,675
0.917431
$64,840
0.913242
$64,544

9.0%
9.5%

Sale Price
1,069,492
68,031

First Mortgage
0

Cash flow to equity
DSCR (with reserves)

-267,373

$82,407

$88,318

$54,688
0.841680
$46,030
0.834011
$45,611

$82,407
0.772183
$63,633
0.761654
$62,766

$88,318
0.708425
$62,567
0.695574
$61,432

68,031

Mort. Amnt
802,119
68,031

1
2,645
1.04

2
-13,342
0.80

$140,751

Reversion of property = $1,202,782
$1,297,555
0.649931
Value
$843,322
1,080,391
0.635228
Value
$824,243
1,058,594

Mort. Rate
7.00%
68,031
3

14,377
1.21

$94,773

Term
25
799,260
4

20,287
1.30

5
498,295
0.12

Balance 5th yr.
$731,229
pmt+pay off
IRR
14.44%

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

5

Table 24.2 Calculating Net Present Value
0.08
Year

Cash flow

Discount Rate

Present Value

0

-$550,000*

1.0000

-$550,000

1

$35,000

0.925926

$32,407

2

$40,000

0.857339

$34,294

3

$45,000

0.793832

$35,722

4

$50,000

0.735030

$36,751

5

$51,000

0.680583

$34,710

6

$56,000

0.630170

$35,289

7

$60,000

0.583490

$35,009

8

$61,000

0.540269

$32,956

9

$64,000

0.500249

$32,016

10

$65,000

0.463193

$30,108

11

$49,000

0.428883

$21,015

12

$54,000

0.397114

$21,444

13

$55,000

0.367698

$20,223

14

$60,000

0.340461

$20,428

14

$625,000

0.340461

$212,788

Net present value of the investment

†

$85,162

* Acqusition price
  Reversion

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

6

Table 24.3 Calculating Net Present Value
IRR = 0.0973208
Year

Cash flow

Discount Rate

Present Value

0

-$550,000

1.0000

-$550,000

1

$35,000

0.911311

$31,896

2

$40,000

0.830487

$33,219

3

$45,000

0.756831

$34,057

4

$50,000

0.689708

$34,485

5

$51,000

0.628539

$32,055

6

$56,000

0.572794

$32,076

7

$60,000

0.521993

$31,320

8

$61,000

0.475698

$29,018

9

$64,000

0.433508

$27,745

10

$65,000

0.395061

$25,679

11

$49,000

0.360023

$17,641

12

$54,000

0.328093

$17,717

13

$55,000

0.298994

$16,445

14

$60,000

0.272477

$16,349

14

$625,000

0.272477

$170,298

Net present value of the investment

$0

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

7

Table 24.4 Payback Period
Amount invested = $1,250,000
Year

Annual Cash Flows

Running Total

1

$142,589

2

$146,268

$142,589
$288,857

3

$150,042

$438,898

4

$153,913

$592,811

5

$157,884

$750,694

6

$161,957

$912,651

7

$166,135

$1,078,787

8

$170,422

$1,249,208

9

$174,819

$1,424,027

10

$179,329

$1,603,356

Payback period

Payback point

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

8

Table 24.5 Profitability Index
Discount rate = 8.00%
Purchase price = $1,250,000
Year

1

Cash flow

$89,000

x

0.9259259

=

$82,407

Year

2

Cash flow

$97,500

x

0.8573388

=

$83,591

Year

3

Cash flow

$103,300

x

0.7938322

=

$82,003

Year

4

Cash flow

$109,800

x

0.7350299

=

$80,706

Year

5

Cash flow

$114,000

x

0.6805832

=

$77,586

Year

6

Cash flow

$116,300

x

0.6301696

=

$73,289

Year

7

Cash flow

$118,650

x

0.5834904

=

$69,231

Year

8

Cash flow

$119,850

x

0.5402689

=

$64,751

Year

9

Cash flow

$121,350

x

0.500249

=

$60,705

Year

10

Cash flow

$123,850

x

0.4631935

=

$57,367

10

Reversion

x

0.4631935

=

$1,548,125

Sum of the present values of the CFs

$717,081
$1,448,718

Profitability index = $1,448,718/$1,250,000 = 1.16

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

9

Case Study: Analysis of an Office Building
Investment
Suite
100
Suite
101
Suite
112
Suite
114
Suite
205
Suite
210
Suite
215
Total
Other income & pass-throughs
Potential gross income
Estimated market (rollover) rate
Vacancy loss
Collection loss
Total V& C loss
Effect. gross income

Sq. Ft.
2,500
3,900
4,600
4,000
5,000
5,000
5,000
30,000

Leased
2,500
3,900
4,000
5,000
5,000
5,000
25,400

Rate
25.00
26.50
25.00
21.00
24.00
23.50
22.00
84.67%

Year 1
62,500
103,350
115,000
84,000
120,000
125,000
110,000

Year 2
62,500
103,350
115,000
100,000
120,000
125,000
110,000

Year 3
66,307
103,350
115,000
100,000
120,000
125,000
132,613

Year 4
66,307
103,350
115,000
100,000
120,000
125,000
132,613

$49,000
768,850
$25.00
-5%
-1%

$49,000
784,850
$25.75
-5%
-1%

$49,000
814,253
$26.52
-10%
-1%

$49,000
815,813
$27.32
-10%
-1%

$49,000
853,796
$28.14
-10%
-1%

-6%

-11%
$724,685

-11%
$726,073

-11%
$759,879

-6%
$722,719

$737,759

Year 5
66,307
103,350
115,000
100,000
140,689
140,689
132,613

Year 6/Resale
66,307
103,350
133,317
100,000
140,689
140,689
132,613
$49,000
873,767
$28.98
-5%
-1%
-6%
$821,341

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

10

Case Study: Analysis of an Office Building
Investment, continued
Effect. gross income
Expense item

Year 1
$722,719

Year 2
$739,141

Year 3
$724,685

Year 4
$726,073

Year 5
$759,879

Year 6/Resale
$821,341

42,750
36,136
15,000
37,500
22,500
42,750
15,000
$211,636
$7.05

44,033
39,757
15,450
38,625
23,175
44,033
15,450
$217,722
$7.26

42,966
36,234
15,914
39,784
23,870
42,966
15,914
$217,648
$7.25

44,255
36,304
16,391
40,977
24,586
44,255
16,391
$223,159
$7.44

45,583
37,994
16,883
42,207
25,324
45,583
16,883
$230,456
$7.68

49,559
41,067
17,389
43,473
26,084
49,559
17,389
$244,520
$8.15

$92,000
$23,000

$60,000
$20,000
$25,000

$112,500
$39,784
$35,000

$150,000
$56,275
$42,000

$46,000

$115,000
$3.83
$326,636

$105,000
$3.50
$322,722

$187,284
$6.24
$404,932

$0
$0.00
$223,160

$248,275
$8.28
$478,731

$46,000
$1.53
$290,520

$396,083

$416,419

$319,753

$502,913

$281,147

$530,822

Rate of increase in expenses = 3%

All utilities
Management expense
Maintenance salary
Taxes, insurance & licenses
Maintenance (snow, trash, etc.)
Contract cleaning, etc.
Supplies (HVAC, janitorial, etc.)
Total expenses from operations
Operating expenses per sq. ft.
Build out and leasing expenses
New space build-out
Leasing commissions

$1.50
5.00%
$0.50
$1.25
$0.75
$1.50
$0.50

/Occ. sq. ft.
of EGI
/sq. ft.
/sq. ft.
/sq. ft.
/Occ. sq. ft.
/sq. ft.

$0

Capital replacements (HVA C, roof)
Total build-out reserves exp.
Build-out per sq. ft. GFA
Total all expenses
Income overall (I
O)

$0
$0
$0

$0
$0

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

11

Value Opinion – Case Study
Income overall (I

O

)

Year 1

Year 2

Year 3

Year 4

Year 5

$396,083

$416,419

$319,753

$502,913

$281,147

The reversion of the property is estimated via terminal cap rate of:
7% selling costs
Cash flows with reversion
Discounted @ 8.0%
Present value

$396,083
0.925926
$366,744

$416,419
0.857339
$357,012

Discounted @ 9.0%
Present value

0.917431
$363,379

0.814680
$350,490

9.00% of the last year's income less selling expenses
Reversion of property =
$5,485,157
$319,753
$502,913
$5,766,305
0.793832
0.735030
0.680583
$253,831
$369,656
$3,924,450

0.772183
$246,908

0.708425
$356,277

0.649931
$3,747,703

Year 6/Resale
$530,822

Value
$5,271,693
$175.72
Value
$5,064,758

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

12


Slide 6

Chapter 24

The Student Handbook to
THE APPRAISAL OF REAL ESTATE
Discounted Cash Flow Analysis
and Special Applications in Income
Capitalization
1



Applications of Discounted Cash Flow Analysis (DCF)
 Both DCF and direct capitalization require an estimate
of next year’s net income.
 Discounted cash flow requires more than one year’s
estimate.
 Several years’ estimates of income, vacancy,
collection losses, and expenses are required.

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

2

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center
Estimated market (rollover) rate average
Tenant
Suite #
Sq. Ft.
Tenant A
100
1,500
Tenant B
102
1,500
Tenant C
104
1,500
Tenant D
106
1,500
Tenant E
108
1,500
Tenant F
110
1,500
Tenant G
112
1,500
Tenant H
114
1,500
Tenant I
116
1,500
Building size
13,500
Other income =
Pass-through income
Potential gross income =
Vacancy loss (22.2%, decreasing 3.00% per year)
Collection loss
Total V & C loss
Effect. gross income

3.00%
Leased
1,500
1,500
0
1,500
1,500
1,500
0
1,500
1,500
10,500

Rate
11.00
11.25
0.00
11.50
11.00
MTM
0.00
10.00
8.00
77.8%

$14.00

$
$
$
$
$
$
$
$
$

Year 1
16,500
16,875
21,000
17,250
16,500
21,000
21,000
15,000
12,000
$9,000
$48,750
214,875
19.2%
2.0%
21.2%
$169,274

$14.42

$
$
$
$
$
$
$
$
$

Year 2
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000
$9,270
$51,188
218,213
16.2%
2.0%
18.2%
$178,450

$14.85

$
$
$
$
$
$
$
$
$

$15.30

Year 3
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000

Year 4
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000

$9,548
$53,747
221,050
13.2%
2.0%
15.2%
$187,401

$9,835
$56,434
224,024
10.2%
2.0%
12.2%
$196,643

$15.76
Year 5
16,500
23,636
21,000
23,636
16,500
21,630
21,000
15,000
12,000
$10,130
$59,256
240,287
7.2%
2.0%
9.2%
$218,127

$16.23
Resale Year 6
24,345
23,636
24,345
23,636
24,345
21,630
24,345
15,000
21,345
$10,433
$62,219
275,278
4.2%
2.0%
6.2%
$258,150

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

3

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center, continued
Effect. gross income
Expense items (rate of increase in expenses = 3.00%)
Administrative
$0.02
/sq. ft.
All utilities
$0.25
/sq. ft.
Outside services
$0.14
/sq. ft.
Management expense
5.0% EGI
Advertising, promotion
$0.10
/sq. ft.
Maintenance salary
$0.50
/sq. ft.
Insurance
$0.25
/sq. ft.
Taxes & licenses
$1.10
/sq. ft.
Maintenance (snow, trash, etc.)
$0.45
/sq. ft.
Contract cleaning
$1.00
/sq. ft.
Supplies (HVAC, janitorial, etc.)
$0.50
/sq. ft.
Total expenses from operations
Expenses per sq. ft.
Build-out and leasing expenses
Repainting/carpets/existing
1,500
sq. ft. @
$6.50
New space build-out
1,500
sq. ft. @
$12.00
Capital exp (roof, HVAC, etc.)
Leasing commissions
4% for five years
Total build-out, capital expense
Build-out per sq. ft. GFA
Total all expenses
Net operating income

$169,274

$178,450

$187,401

$196,643

$218,127

270
3,375
1,890
8,464
1,350
6,750
3,375
14,850
6,075
13,500
6,750
66,649
$4.94

278
3,476
1,947
8,923
1,391
6,953
3,476
15,296
6,257
13,905
6,953
68,854
$5.10

286
3,581
2,005
9,371
1,432
7,161
3,581
15,754
6,445
14,322
7,161
71,099
$5.27

295
3,688
2,065
9,833
1,475
7,376
3,688
16,227
6,638
14,752
7,376
73,413
$5.44

304
3,799
2,127
10,906
1,519
7,597
3,799
16,714
6,837
15,194
7,597
76,394
$5.66

9,750
18,000

10,043
18,540
22,000
$4,326
$54,909
$4.07

10,344
19,096
$4,456
$33,896
$2.51

10,654
19,669
$4,589
$34,913
$2.59

10,974
20,259
11,000
$4,727
$46,960
$3.48

0
$4,200
$31,950
$2.37
$98,599
$70,675

$123,762
$54,688

$

$104,995
$82,407

$

$108,326
$88,318

$123,355
$94,773

$258,150
313
3,913
2,191
12,908
1,565
7,825
3,913
17,215
7,043
15,650
7,825
80,361
$5.95
11,303
20,867
0
$4,869
$37,039
$2.74
$117,399
$140,751

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

4

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center, continued
Net operating income
$70,675
$54,688
The reversion of the property is estimated by applying a terminal cap rate of 11.00% of the last year's income less selling expenses.
Cash flows with reversion
Discounted @
Present value
Discounted @
Present value

Equity Analysis (Optional)
Mortgage amount based on a price of
Annual payments

$70,675
0.917431
$64,840
0.913242
$64,544

9.0%
9.5%

Sale Price
1,069,492
68,031

First Mortgage
0

Cash flow to equity
DSCR (with reserves)

-267,373

$82,407

$88,318

$54,688
0.841680
$46,030
0.834011
$45,611

$82,407
0.772183
$63,633
0.761654
$62,766

$88,318
0.708425
$62,567
0.695574
$61,432

68,031

Mort. Amnt
802,119
68,031

1
2,645
1.04

2
-13,342
0.80

$140,751

Reversion of property = $1,202,782
$1,297,555
0.649931
Value
$843,322
1,080,391
0.635228
Value
$824,243
1,058,594

Mort. Rate
7.00%
68,031
3

14,377
1.21

$94,773

Term
25
799,260
4

20,287
1.30

5
498,295
0.12

Balance 5th yr.
$731,229
pmt+pay off
IRR
14.44%

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

5

Table 24.2 Calculating Net Present Value
0.08
Year

Cash flow

Discount Rate

Present Value

0

-$550,000*

1.0000

-$550,000

1

$35,000

0.925926

$32,407

2

$40,000

0.857339

$34,294

3

$45,000

0.793832

$35,722

4

$50,000

0.735030

$36,751

5

$51,000

0.680583

$34,710

6

$56,000

0.630170

$35,289

7

$60,000

0.583490

$35,009

8

$61,000

0.540269

$32,956

9

$64,000

0.500249

$32,016

10

$65,000

0.463193

$30,108

11

$49,000

0.428883

$21,015

12

$54,000

0.397114

$21,444

13

$55,000

0.367698

$20,223

14

$60,000

0.340461

$20,428

14

$625,000

0.340461

$212,788

Net present value of the investment

†

$85,162

* Acqusition price
  Reversion

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

6

Table 24.3 Calculating Net Present Value
IRR = 0.0973208
Year

Cash flow

Discount Rate

Present Value

0

-$550,000

1.0000

-$550,000

1

$35,000

0.911311

$31,896

2

$40,000

0.830487

$33,219

3

$45,000

0.756831

$34,057

4

$50,000

0.689708

$34,485

5

$51,000

0.628539

$32,055

6

$56,000

0.572794

$32,076

7

$60,000

0.521993

$31,320

8

$61,000

0.475698

$29,018

9

$64,000

0.433508

$27,745

10

$65,000

0.395061

$25,679

11

$49,000

0.360023

$17,641

12

$54,000

0.328093

$17,717

13

$55,000

0.298994

$16,445

14

$60,000

0.272477

$16,349

14

$625,000

0.272477

$170,298

Net present value of the investment

$0

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

7

Table 24.4 Payback Period
Amount invested = $1,250,000
Year

Annual Cash Flows

Running Total

1

$142,589

2

$146,268

$142,589
$288,857

3

$150,042

$438,898

4

$153,913

$592,811

5

$157,884

$750,694

6

$161,957

$912,651

7

$166,135

$1,078,787

8

$170,422

$1,249,208

9

$174,819

$1,424,027

10

$179,329

$1,603,356

Payback period

Payback point

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

8

Table 24.5 Profitability Index
Discount rate = 8.00%
Purchase price = $1,250,000
Year

1

Cash flow

$89,000

x

0.9259259

=

$82,407

Year

2

Cash flow

$97,500

x

0.8573388

=

$83,591

Year

3

Cash flow

$103,300

x

0.7938322

=

$82,003

Year

4

Cash flow

$109,800

x

0.7350299

=

$80,706

Year

5

Cash flow

$114,000

x

0.6805832

=

$77,586

Year

6

Cash flow

$116,300

x

0.6301696

=

$73,289

Year

7

Cash flow

$118,650

x

0.5834904

=

$69,231

Year

8

Cash flow

$119,850

x

0.5402689

=

$64,751

Year

9

Cash flow

$121,350

x

0.500249

=

$60,705

Year

10

Cash flow

$123,850

x

0.4631935

=

$57,367

10

Reversion

x

0.4631935

=

$1,548,125

Sum of the present values of the CFs

$717,081
$1,448,718

Profitability index = $1,448,718/$1,250,000 = 1.16

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

9

Case Study: Analysis of an Office Building
Investment
Suite
100
Suite
101
Suite
112
Suite
114
Suite
205
Suite
210
Suite
215
Total
Other income & pass-throughs
Potential gross income
Estimated market (rollover) rate
Vacancy loss
Collection loss
Total V& C loss
Effect. gross income

Sq. Ft.
2,500
3,900
4,600
4,000
5,000
5,000
5,000
30,000

Leased
2,500
3,900
4,000
5,000
5,000
5,000
25,400

Rate
25.00
26.50
25.00
21.00
24.00
23.50
22.00
84.67%

Year 1
62,500
103,350
115,000
84,000
120,000
125,000
110,000

Year 2
62,500
103,350
115,000
100,000
120,000
125,000
110,000

Year 3
66,307
103,350
115,000
100,000
120,000
125,000
132,613

Year 4
66,307
103,350
115,000
100,000
120,000
125,000
132,613

$49,000
768,850
$25.00
-5%
-1%

$49,000
784,850
$25.75
-5%
-1%

$49,000
814,253
$26.52
-10%
-1%

$49,000
815,813
$27.32
-10%
-1%

$49,000
853,796
$28.14
-10%
-1%

-6%

-11%
$724,685

-11%
$726,073

-11%
$759,879

-6%
$722,719

$737,759

Year 5
66,307
103,350
115,000
100,000
140,689
140,689
132,613

Year 6/Resale
66,307
103,350
133,317
100,000
140,689
140,689
132,613
$49,000
873,767
$28.98
-5%
-1%
-6%
$821,341

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

10

Case Study: Analysis of an Office Building
Investment, continued
Effect. gross income
Expense item

Year 1
$722,719

Year 2
$739,141

Year 3
$724,685

Year 4
$726,073

Year 5
$759,879

Year 6/Resale
$821,341

42,750
36,136
15,000
37,500
22,500
42,750
15,000
$211,636
$7.05

44,033
39,757
15,450
38,625
23,175
44,033
15,450
$217,722
$7.26

42,966
36,234
15,914
39,784
23,870
42,966
15,914
$217,648
$7.25

44,255
36,304
16,391
40,977
24,586
44,255
16,391
$223,159
$7.44

45,583
37,994
16,883
42,207
25,324
45,583
16,883
$230,456
$7.68

49,559
41,067
17,389
43,473
26,084
49,559
17,389
$244,520
$8.15

$92,000
$23,000

$60,000
$20,000
$25,000

$112,500
$39,784
$35,000

$150,000
$56,275
$42,000

$46,000

$115,000
$3.83
$326,636

$105,000
$3.50
$322,722

$187,284
$6.24
$404,932

$0
$0.00
$223,160

$248,275
$8.28
$478,731

$46,000
$1.53
$290,520

$396,083

$416,419

$319,753

$502,913

$281,147

$530,822

Rate of increase in expenses = 3%

All utilities
Management expense
Maintenance salary
Taxes, insurance & licenses
Maintenance (snow, trash, etc.)
Contract cleaning, etc.
Supplies (HVAC, janitorial, etc.)
Total expenses from operations
Operating expenses per sq. ft.
Build out and leasing expenses
New space build-out
Leasing commissions

$1.50
5.00%
$0.50
$1.25
$0.75
$1.50
$0.50

/Occ. sq. ft.
of EGI
/sq. ft.
/sq. ft.
/sq. ft.
/Occ. sq. ft.
/sq. ft.

$0

Capital replacements (HVA C, roof)
Total build-out reserves exp.
Build-out per sq. ft. GFA
Total all expenses
Income overall (I
O)

$0
$0
$0

$0
$0

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

11

Value Opinion – Case Study
Income overall (I

O

)

Year 1

Year 2

Year 3

Year 4

Year 5

$396,083

$416,419

$319,753

$502,913

$281,147

The reversion of the property is estimated via terminal cap rate of:
7% selling costs
Cash flows with reversion
Discounted @ 8.0%
Present value

$396,083
0.925926
$366,744

$416,419
0.857339
$357,012

Discounted @ 9.0%
Present value

0.917431
$363,379

0.814680
$350,490

9.00% of the last year's income less selling expenses
Reversion of property =
$5,485,157
$319,753
$502,913
$5,766,305
0.793832
0.735030
0.680583
$253,831
$369,656
$3,924,450

0.772183
$246,908

0.708425
$356,277

0.649931
$3,747,703

Year 6/Resale
$530,822

Value
$5,271,693
$175.72
Value
$5,064,758

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

12


Slide 7

Chapter 24

The Student Handbook to
THE APPRAISAL OF REAL ESTATE
Discounted Cash Flow Analysis
and Special Applications in Income
Capitalization
1



Applications of Discounted Cash Flow Analysis (DCF)
 Both DCF and direct capitalization require an estimate
of next year’s net income.
 Discounted cash flow requires more than one year’s
estimate.
 Several years’ estimates of income, vacancy,
collection losses, and expenses are required.

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

2

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center
Estimated market (rollover) rate average
Tenant
Suite #
Sq. Ft.
Tenant A
100
1,500
Tenant B
102
1,500
Tenant C
104
1,500
Tenant D
106
1,500
Tenant E
108
1,500
Tenant F
110
1,500
Tenant G
112
1,500
Tenant H
114
1,500
Tenant I
116
1,500
Building size
13,500
Other income =
Pass-through income
Potential gross income =
Vacancy loss (22.2%, decreasing 3.00% per year)
Collection loss
Total V & C loss
Effect. gross income

3.00%
Leased
1,500
1,500
0
1,500
1,500
1,500
0
1,500
1,500
10,500

Rate
11.00
11.25
0.00
11.50
11.00
MTM
0.00
10.00
8.00
77.8%

$14.00

$
$
$
$
$
$
$
$
$

Year 1
16,500
16,875
21,000
17,250
16,500
21,000
21,000
15,000
12,000
$9,000
$48,750
214,875
19.2%
2.0%
21.2%
$169,274

$14.42

$
$
$
$
$
$
$
$
$

Year 2
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000
$9,270
$51,188
218,213
16.2%
2.0%
18.2%
$178,450

$14.85

$
$
$
$
$
$
$
$
$

$15.30

Year 3
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000

Year 4
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000

$9,548
$53,747
221,050
13.2%
2.0%
15.2%
$187,401

$9,835
$56,434
224,024
10.2%
2.0%
12.2%
$196,643

$15.76
Year 5
16,500
23,636
21,000
23,636
16,500
21,630
21,000
15,000
12,000
$10,130
$59,256
240,287
7.2%
2.0%
9.2%
$218,127

$16.23
Resale Year 6
24,345
23,636
24,345
23,636
24,345
21,630
24,345
15,000
21,345
$10,433
$62,219
275,278
4.2%
2.0%
6.2%
$258,150

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

3

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center, continued
Effect. gross income
Expense items (rate of increase in expenses = 3.00%)
Administrative
$0.02
/sq. ft.
All utilities
$0.25
/sq. ft.
Outside services
$0.14
/sq. ft.
Management expense
5.0% EGI
Advertising, promotion
$0.10
/sq. ft.
Maintenance salary
$0.50
/sq. ft.
Insurance
$0.25
/sq. ft.
Taxes & licenses
$1.10
/sq. ft.
Maintenance (snow, trash, etc.)
$0.45
/sq. ft.
Contract cleaning
$1.00
/sq. ft.
Supplies (HVAC, janitorial, etc.)
$0.50
/sq. ft.
Total expenses from operations
Expenses per sq. ft.
Build-out and leasing expenses
Repainting/carpets/existing
1,500
sq. ft. @
$6.50
New space build-out
1,500
sq. ft. @
$12.00
Capital exp (roof, HVAC, etc.)
Leasing commissions
4% for five years
Total build-out, capital expense
Build-out per sq. ft. GFA
Total all expenses
Net operating income

$169,274

$178,450

$187,401

$196,643

$218,127

270
3,375
1,890
8,464
1,350
6,750
3,375
14,850
6,075
13,500
6,750
66,649
$4.94

278
3,476
1,947
8,923
1,391
6,953
3,476
15,296
6,257
13,905
6,953
68,854
$5.10

286
3,581
2,005
9,371
1,432
7,161
3,581
15,754
6,445
14,322
7,161
71,099
$5.27

295
3,688
2,065
9,833
1,475
7,376
3,688
16,227
6,638
14,752
7,376
73,413
$5.44

304
3,799
2,127
10,906
1,519
7,597
3,799
16,714
6,837
15,194
7,597
76,394
$5.66

9,750
18,000

10,043
18,540
22,000
$4,326
$54,909
$4.07

10,344
19,096
$4,456
$33,896
$2.51

10,654
19,669
$4,589
$34,913
$2.59

10,974
20,259
11,000
$4,727
$46,960
$3.48

0
$4,200
$31,950
$2.37
$98,599
$70,675

$123,762
$54,688

$

$104,995
$82,407

$

$108,326
$88,318

$123,355
$94,773

$258,150
313
3,913
2,191
12,908
1,565
7,825
3,913
17,215
7,043
15,650
7,825
80,361
$5.95
11,303
20,867
0
$4,869
$37,039
$2.74
$117,399
$140,751

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

4

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center, continued
Net operating income
$70,675
$54,688
The reversion of the property is estimated by applying a terminal cap rate of 11.00% of the last year's income less selling expenses.
Cash flows with reversion
Discounted @
Present value
Discounted @
Present value

Equity Analysis (Optional)
Mortgage amount based on a price of
Annual payments

$70,675
0.917431
$64,840
0.913242
$64,544

9.0%
9.5%

Sale Price
1,069,492
68,031

First Mortgage
0

Cash flow to equity
DSCR (with reserves)

-267,373

$82,407

$88,318

$54,688
0.841680
$46,030
0.834011
$45,611

$82,407
0.772183
$63,633
0.761654
$62,766

$88,318
0.708425
$62,567
0.695574
$61,432

68,031

Mort. Amnt
802,119
68,031

1
2,645
1.04

2
-13,342
0.80

$140,751

Reversion of property = $1,202,782
$1,297,555
0.649931
Value
$843,322
1,080,391
0.635228
Value
$824,243
1,058,594

Mort. Rate
7.00%
68,031
3

14,377
1.21

$94,773

Term
25
799,260
4

20,287
1.30

5
498,295
0.12

Balance 5th yr.
$731,229
pmt+pay off
IRR
14.44%

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

5

Table 24.2 Calculating Net Present Value
0.08
Year

Cash flow

Discount Rate

Present Value

0

-$550,000*

1.0000

-$550,000

1

$35,000

0.925926

$32,407

2

$40,000

0.857339

$34,294

3

$45,000

0.793832

$35,722

4

$50,000

0.735030

$36,751

5

$51,000

0.680583

$34,710

6

$56,000

0.630170

$35,289

7

$60,000

0.583490

$35,009

8

$61,000

0.540269

$32,956

9

$64,000

0.500249

$32,016

10

$65,000

0.463193

$30,108

11

$49,000

0.428883

$21,015

12

$54,000

0.397114

$21,444

13

$55,000

0.367698

$20,223

14

$60,000

0.340461

$20,428

14

$625,000

0.340461

$212,788

Net present value of the investment

†

$85,162

* Acqusition price
  Reversion

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

6

Table 24.3 Calculating Net Present Value
IRR = 0.0973208
Year

Cash flow

Discount Rate

Present Value

0

-$550,000

1.0000

-$550,000

1

$35,000

0.911311

$31,896

2

$40,000

0.830487

$33,219

3

$45,000

0.756831

$34,057

4

$50,000

0.689708

$34,485

5

$51,000

0.628539

$32,055

6

$56,000

0.572794

$32,076

7

$60,000

0.521993

$31,320

8

$61,000

0.475698

$29,018

9

$64,000

0.433508

$27,745

10

$65,000

0.395061

$25,679

11

$49,000

0.360023

$17,641

12

$54,000

0.328093

$17,717

13

$55,000

0.298994

$16,445

14

$60,000

0.272477

$16,349

14

$625,000

0.272477

$170,298

Net present value of the investment

$0

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

7

Table 24.4 Payback Period
Amount invested = $1,250,000
Year

Annual Cash Flows

Running Total

1

$142,589

2

$146,268

$142,589
$288,857

3

$150,042

$438,898

4

$153,913

$592,811

5

$157,884

$750,694

6

$161,957

$912,651

7

$166,135

$1,078,787

8

$170,422

$1,249,208

9

$174,819

$1,424,027

10

$179,329

$1,603,356

Payback period

Payback point

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

8

Table 24.5 Profitability Index
Discount rate = 8.00%
Purchase price = $1,250,000
Year

1

Cash flow

$89,000

x

0.9259259

=

$82,407

Year

2

Cash flow

$97,500

x

0.8573388

=

$83,591

Year

3

Cash flow

$103,300

x

0.7938322

=

$82,003

Year

4

Cash flow

$109,800

x

0.7350299

=

$80,706

Year

5

Cash flow

$114,000

x

0.6805832

=

$77,586

Year

6

Cash flow

$116,300

x

0.6301696

=

$73,289

Year

7

Cash flow

$118,650

x

0.5834904

=

$69,231

Year

8

Cash flow

$119,850

x

0.5402689

=

$64,751

Year

9

Cash flow

$121,350

x

0.500249

=

$60,705

Year

10

Cash flow

$123,850

x

0.4631935

=

$57,367

10

Reversion

x

0.4631935

=

$1,548,125

Sum of the present values of the CFs

$717,081
$1,448,718

Profitability index = $1,448,718/$1,250,000 = 1.16

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

9

Case Study: Analysis of an Office Building
Investment
Suite
100
Suite
101
Suite
112
Suite
114
Suite
205
Suite
210
Suite
215
Total
Other income & pass-throughs
Potential gross income
Estimated market (rollover) rate
Vacancy loss
Collection loss
Total V& C loss
Effect. gross income

Sq. Ft.
2,500
3,900
4,600
4,000
5,000
5,000
5,000
30,000

Leased
2,500
3,900
4,000
5,000
5,000
5,000
25,400

Rate
25.00
26.50
25.00
21.00
24.00
23.50
22.00
84.67%

Year 1
62,500
103,350
115,000
84,000
120,000
125,000
110,000

Year 2
62,500
103,350
115,000
100,000
120,000
125,000
110,000

Year 3
66,307
103,350
115,000
100,000
120,000
125,000
132,613

Year 4
66,307
103,350
115,000
100,000
120,000
125,000
132,613

$49,000
768,850
$25.00
-5%
-1%

$49,000
784,850
$25.75
-5%
-1%

$49,000
814,253
$26.52
-10%
-1%

$49,000
815,813
$27.32
-10%
-1%

$49,000
853,796
$28.14
-10%
-1%

-6%

-11%
$724,685

-11%
$726,073

-11%
$759,879

-6%
$722,719

$737,759

Year 5
66,307
103,350
115,000
100,000
140,689
140,689
132,613

Year 6/Resale
66,307
103,350
133,317
100,000
140,689
140,689
132,613
$49,000
873,767
$28.98
-5%
-1%
-6%
$821,341

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

10

Case Study: Analysis of an Office Building
Investment, continued
Effect. gross income
Expense item

Year 1
$722,719

Year 2
$739,141

Year 3
$724,685

Year 4
$726,073

Year 5
$759,879

Year 6/Resale
$821,341

42,750
36,136
15,000
37,500
22,500
42,750
15,000
$211,636
$7.05

44,033
39,757
15,450
38,625
23,175
44,033
15,450
$217,722
$7.26

42,966
36,234
15,914
39,784
23,870
42,966
15,914
$217,648
$7.25

44,255
36,304
16,391
40,977
24,586
44,255
16,391
$223,159
$7.44

45,583
37,994
16,883
42,207
25,324
45,583
16,883
$230,456
$7.68

49,559
41,067
17,389
43,473
26,084
49,559
17,389
$244,520
$8.15

$92,000
$23,000

$60,000
$20,000
$25,000

$112,500
$39,784
$35,000

$150,000
$56,275
$42,000

$46,000

$115,000
$3.83
$326,636

$105,000
$3.50
$322,722

$187,284
$6.24
$404,932

$0
$0.00
$223,160

$248,275
$8.28
$478,731

$46,000
$1.53
$290,520

$396,083

$416,419

$319,753

$502,913

$281,147

$530,822

Rate of increase in expenses = 3%

All utilities
Management expense
Maintenance salary
Taxes, insurance & licenses
Maintenance (snow, trash, etc.)
Contract cleaning, etc.
Supplies (HVAC, janitorial, etc.)
Total expenses from operations
Operating expenses per sq. ft.
Build out and leasing expenses
New space build-out
Leasing commissions

$1.50
5.00%
$0.50
$1.25
$0.75
$1.50
$0.50

/Occ. sq. ft.
of EGI
/sq. ft.
/sq. ft.
/sq. ft.
/Occ. sq. ft.
/sq. ft.

$0

Capital replacements (HVA C, roof)
Total build-out reserves exp.
Build-out per sq. ft. GFA
Total all expenses
Income overall (I
O)

$0
$0
$0

$0
$0

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

11

Value Opinion – Case Study
Income overall (I

O

)

Year 1

Year 2

Year 3

Year 4

Year 5

$396,083

$416,419

$319,753

$502,913

$281,147

The reversion of the property is estimated via terminal cap rate of:
7% selling costs
Cash flows with reversion
Discounted @ 8.0%
Present value

$396,083
0.925926
$366,744

$416,419
0.857339
$357,012

Discounted @ 9.0%
Present value

0.917431
$363,379

0.814680
$350,490

9.00% of the last year's income less selling expenses
Reversion of property =
$5,485,157
$319,753
$502,913
$5,766,305
0.793832
0.735030
0.680583
$253,831
$369,656
$3,924,450

0.772183
$246,908

0.708425
$356,277

0.649931
$3,747,703

Year 6/Resale
$530,822

Value
$5,271,693
$175.72
Value
$5,064,758

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

12


Slide 8

Chapter 24

The Student Handbook to
THE APPRAISAL OF REAL ESTATE
Discounted Cash Flow Analysis
and Special Applications in Income
Capitalization
1



Applications of Discounted Cash Flow Analysis (DCF)
 Both DCF and direct capitalization require an estimate
of next year’s net income.
 Discounted cash flow requires more than one year’s
estimate.
 Several years’ estimates of income, vacancy,
collection losses, and expenses are required.

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

2

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center
Estimated market (rollover) rate average
Tenant
Suite #
Sq. Ft.
Tenant A
100
1,500
Tenant B
102
1,500
Tenant C
104
1,500
Tenant D
106
1,500
Tenant E
108
1,500
Tenant F
110
1,500
Tenant G
112
1,500
Tenant H
114
1,500
Tenant I
116
1,500
Building size
13,500
Other income =
Pass-through income
Potential gross income =
Vacancy loss (22.2%, decreasing 3.00% per year)
Collection loss
Total V & C loss
Effect. gross income

3.00%
Leased
1,500
1,500
0
1,500
1,500
1,500
0
1,500
1,500
10,500

Rate
11.00
11.25
0.00
11.50
11.00
MTM
0.00
10.00
8.00
77.8%

$14.00

$
$
$
$
$
$
$
$
$

Year 1
16,500
16,875
21,000
17,250
16,500
21,000
21,000
15,000
12,000
$9,000
$48,750
214,875
19.2%
2.0%
21.2%
$169,274

$14.42

$
$
$
$
$
$
$
$
$

Year 2
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000
$9,270
$51,188
218,213
16.2%
2.0%
18.2%
$178,450

$14.85

$
$
$
$
$
$
$
$
$

$15.30

Year 3
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000

Year 4
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000

$9,548
$53,747
221,050
13.2%
2.0%
15.2%
$187,401

$9,835
$56,434
224,024
10.2%
2.0%
12.2%
$196,643

$15.76
Year 5
16,500
23,636
21,000
23,636
16,500
21,630
21,000
15,000
12,000
$10,130
$59,256
240,287
7.2%
2.0%
9.2%
$218,127

$16.23
Resale Year 6
24,345
23,636
24,345
23,636
24,345
21,630
24,345
15,000
21,345
$10,433
$62,219
275,278
4.2%
2.0%
6.2%
$258,150

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

3

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center, continued
Effect. gross income
Expense items (rate of increase in expenses = 3.00%)
Administrative
$0.02
/sq. ft.
All utilities
$0.25
/sq. ft.
Outside services
$0.14
/sq. ft.
Management expense
5.0% EGI
Advertising, promotion
$0.10
/sq. ft.
Maintenance salary
$0.50
/sq. ft.
Insurance
$0.25
/sq. ft.
Taxes & licenses
$1.10
/sq. ft.
Maintenance (snow, trash, etc.)
$0.45
/sq. ft.
Contract cleaning
$1.00
/sq. ft.
Supplies (HVAC, janitorial, etc.)
$0.50
/sq. ft.
Total expenses from operations
Expenses per sq. ft.
Build-out and leasing expenses
Repainting/carpets/existing
1,500
sq. ft. @
$6.50
New space build-out
1,500
sq. ft. @
$12.00
Capital exp (roof, HVAC, etc.)
Leasing commissions
4% for five years
Total build-out, capital expense
Build-out per sq. ft. GFA
Total all expenses
Net operating income

$169,274

$178,450

$187,401

$196,643

$218,127

270
3,375
1,890
8,464
1,350
6,750
3,375
14,850
6,075
13,500
6,750
66,649
$4.94

278
3,476
1,947
8,923
1,391
6,953
3,476
15,296
6,257
13,905
6,953
68,854
$5.10

286
3,581
2,005
9,371
1,432
7,161
3,581
15,754
6,445
14,322
7,161
71,099
$5.27

295
3,688
2,065
9,833
1,475
7,376
3,688
16,227
6,638
14,752
7,376
73,413
$5.44

304
3,799
2,127
10,906
1,519
7,597
3,799
16,714
6,837
15,194
7,597
76,394
$5.66

9,750
18,000

10,043
18,540
22,000
$4,326
$54,909
$4.07

10,344
19,096
$4,456
$33,896
$2.51

10,654
19,669
$4,589
$34,913
$2.59

10,974
20,259
11,000
$4,727
$46,960
$3.48

0
$4,200
$31,950
$2.37
$98,599
$70,675

$123,762
$54,688

$

$104,995
$82,407

$

$108,326
$88,318

$123,355
$94,773

$258,150
313
3,913
2,191
12,908
1,565
7,825
3,913
17,215
7,043
15,650
7,825
80,361
$5.95
11,303
20,867
0
$4,869
$37,039
$2.74
$117,399
$140,751

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

4

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center, continued
Net operating income
$70,675
$54,688
The reversion of the property is estimated by applying a terminal cap rate of 11.00% of the last year's income less selling expenses.
Cash flows with reversion
Discounted @
Present value
Discounted @
Present value

Equity Analysis (Optional)
Mortgage amount based on a price of
Annual payments

$70,675
0.917431
$64,840
0.913242
$64,544

9.0%
9.5%

Sale Price
1,069,492
68,031

First Mortgage
0

Cash flow to equity
DSCR (with reserves)

-267,373

$82,407

$88,318

$54,688
0.841680
$46,030
0.834011
$45,611

$82,407
0.772183
$63,633
0.761654
$62,766

$88,318
0.708425
$62,567
0.695574
$61,432

68,031

Mort. Amnt
802,119
68,031

1
2,645
1.04

2
-13,342
0.80

$140,751

Reversion of property = $1,202,782
$1,297,555
0.649931
Value
$843,322
1,080,391
0.635228
Value
$824,243
1,058,594

Mort. Rate
7.00%
68,031
3

14,377
1.21

$94,773

Term
25
799,260
4

20,287
1.30

5
498,295
0.12

Balance 5th yr.
$731,229
pmt+pay off
IRR
14.44%

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

5

Table 24.2 Calculating Net Present Value
0.08
Year

Cash flow

Discount Rate

Present Value

0

-$550,000*

1.0000

-$550,000

1

$35,000

0.925926

$32,407

2

$40,000

0.857339

$34,294

3

$45,000

0.793832

$35,722

4

$50,000

0.735030

$36,751

5

$51,000

0.680583

$34,710

6

$56,000

0.630170

$35,289

7

$60,000

0.583490

$35,009

8

$61,000

0.540269

$32,956

9

$64,000

0.500249

$32,016

10

$65,000

0.463193

$30,108

11

$49,000

0.428883

$21,015

12

$54,000

0.397114

$21,444

13

$55,000

0.367698

$20,223

14

$60,000

0.340461

$20,428

14

$625,000

0.340461

$212,788

Net present value of the investment

†

$85,162

* Acqusition price
  Reversion

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

6

Table 24.3 Calculating Net Present Value
IRR = 0.0973208
Year

Cash flow

Discount Rate

Present Value

0

-$550,000

1.0000

-$550,000

1

$35,000

0.911311

$31,896

2

$40,000

0.830487

$33,219

3

$45,000

0.756831

$34,057

4

$50,000

0.689708

$34,485

5

$51,000

0.628539

$32,055

6

$56,000

0.572794

$32,076

7

$60,000

0.521993

$31,320

8

$61,000

0.475698

$29,018

9

$64,000

0.433508

$27,745

10

$65,000

0.395061

$25,679

11

$49,000

0.360023

$17,641

12

$54,000

0.328093

$17,717

13

$55,000

0.298994

$16,445

14

$60,000

0.272477

$16,349

14

$625,000

0.272477

$170,298

Net present value of the investment

$0

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

7

Table 24.4 Payback Period
Amount invested = $1,250,000
Year

Annual Cash Flows

Running Total

1

$142,589

2

$146,268

$142,589
$288,857

3

$150,042

$438,898

4

$153,913

$592,811

5

$157,884

$750,694

6

$161,957

$912,651

7

$166,135

$1,078,787

8

$170,422

$1,249,208

9

$174,819

$1,424,027

10

$179,329

$1,603,356

Payback period

Payback point

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

8

Table 24.5 Profitability Index
Discount rate = 8.00%
Purchase price = $1,250,000
Year

1

Cash flow

$89,000

x

0.9259259

=

$82,407

Year

2

Cash flow

$97,500

x

0.8573388

=

$83,591

Year

3

Cash flow

$103,300

x

0.7938322

=

$82,003

Year

4

Cash flow

$109,800

x

0.7350299

=

$80,706

Year

5

Cash flow

$114,000

x

0.6805832

=

$77,586

Year

6

Cash flow

$116,300

x

0.6301696

=

$73,289

Year

7

Cash flow

$118,650

x

0.5834904

=

$69,231

Year

8

Cash flow

$119,850

x

0.5402689

=

$64,751

Year

9

Cash flow

$121,350

x

0.500249

=

$60,705

Year

10

Cash flow

$123,850

x

0.4631935

=

$57,367

10

Reversion

x

0.4631935

=

$1,548,125

Sum of the present values of the CFs

$717,081
$1,448,718

Profitability index = $1,448,718/$1,250,000 = 1.16

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

9

Case Study: Analysis of an Office Building
Investment
Suite
100
Suite
101
Suite
112
Suite
114
Suite
205
Suite
210
Suite
215
Total
Other income & pass-throughs
Potential gross income
Estimated market (rollover) rate
Vacancy loss
Collection loss
Total V& C loss
Effect. gross income

Sq. Ft.
2,500
3,900
4,600
4,000
5,000
5,000
5,000
30,000

Leased
2,500
3,900
4,000
5,000
5,000
5,000
25,400

Rate
25.00
26.50
25.00
21.00
24.00
23.50
22.00
84.67%

Year 1
62,500
103,350
115,000
84,000
120,000
125,000
110,000

Year 2
62,500
103,350
115,000
100,000
120,000
125,000
110,000

Year 3
66,307
103,350
115,000
100,000
120,000
125,000
132,613

Year 4
66,307
103,350
115,000
100,000
120,000
125,000
132,613

$49,000
768,850
$25.00
-5%
-1%

$49,000
784,850
$25.75
-5%
-1%

$49,000
814,253
$26.52
-10%
-1%

$49,000
815,813
$27.32
-10%
-1%

$49,000
853,796
$28.14
-10%
-1%

-6%

-11%
$724,685

-11%
$726,073

-11%
$759,879

-6%
$722,719

$737,759

Year 5
66,307
103,350
115,000
100,000
140,689
140,689
132,613

Year 6/Resale
66,307
103,350
133,317
100,000
140,689
140,689
132,613
$49,000
873,767
$28.98
-5%
-1%
-6%
$821,341

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

10

Case Study: Analysis of an Office Building
Investment, continued
Effect. gross income
Expense item

Year 1
$722,719

Year 2
$739,141

Year 3
$724,685

Year 4
$726,073

Year 5
$759,879

Year 6/Resale
$821,341

42,750
36,136
15,000
37,500
22,500
42,750
15,000
$211,636
$7.05

44,033
39,757
15,450
38,625
23,175
44,033
15,450
$217,722
$7.26

42,966
36,234
15,914
39,784
23,870
42,966
15,914
$217,648
$7.25

44,255
36,304
16,391
40,977
24,586
44,255
16,391
$223,159
$7.44

45,583
37,994
16,883
42,207
25,324
45,583
16,883
$230,456
$7.68

49,559
41,067
17,389
43,473
26,084
49,559
17,389
$244,520
$8.15

$92,000
$23,000

$60,000
$20,000
$25,000

$112,500
$39,784
$35,000

$150,000
$56,275
$42,000

$46,000

$115,000
$3.83
$326,636

$105,000
$3.50
$322,722

$187,284
$6.24
$404,932

$0
$0.00
$223,160

$248,275
$8.28
$478,731

$46,000
$1.53
$290,520

$396,083

$416,419

$319,753

$502,913

$281,147

$530,822

Rate of increase in expenses = 3%

All utilities
Management expense
Maintenance salary
Taxes, insurance & licenses
Maintenance (snow, trash, etc.)
Contract cleaning, etc.
Supplies (HVAC, janitorial, etc.)
Total expenses from operations
Operating expenses per sq. ft.
Build out and leasing expenses
New space build-out
Leasing commissions

$1.50
5.00%
$0.50
$1.25
$0.75
$1.50
$0.50

/Occ. sq. ft.
of EGI
/sq. ft.
/sq. ft.
/sq. ft.
/Occ. sq. ft.
/sq. ft.

$0

Capital replacements (HVA C, roof)
Total build-out reserves exp.
Build-out per sq. ft. GFA
Total all expenses
Income overall (I
O)

$0
$0
$0

$0
$0

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

11

Value Opinion – Case Study
Income overall (I

O

)

Year 1

Year 2

Year 3

Year 4

Year 5

$396,083

$416,419

$319,753

$502,913

$281,147

The reversion of the property is estimated via terminal cap rate of:
7% selling costs
Cash flows with reversion
Discounted @ 8.0%
Present value

$396,083
0.925926
$366,744

$416,419
0.857339
$357,012

Discounted @ 9.0%
Present value

0.917431
$363,379

0.814680
$350,490

9.00% of the last year's income less selling expenses
Reversion of property =
$5,485,157
$319,753
$502,913
$5,766,305
0.793832
0.735030
0.680583
$253,831
$369,656
$3,924,450

0.772183
$246,908

0.708425
$356,277

0.649931
$3,747,703

Year 6/Resale
$530,822

Value
$5,271,693
$175.72
Value
$5,064,758

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

12


Slide 9

Chapter 24

The Student Handbook to
THE APPRAISAL OF REAL ESTATE
Discounted Cash Flow Analysis
and Special Applications in Income
Capitalization
1



Applications of Discounted Cash Flow Analysis (DCF)
 Both DCF and direct capitalization require an estimate
of next year’s net income.
 Discounted cash flow requires more than one year’s
estimate.
 Several years’ estimates of income, vacancy,
collection losses, and expenses are required.

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

2

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center
Estimated market (rollover) rate average
Tenant
Suite #
Sq. Ft.
Tenant A
100
1,500
Tenant B
102
1,500
Tenant C
104
1,500
Tenant D
106
1,500
Tenant E
108
1,500
Tenant F
110
1,500
Tenant G
112
1,500
Tenant H
114
1,500
Tenant I
116
1,500
Building size
13,500
Other income =
Pass-through income
Potential gross income =
Vacancy loss (22.2%, decreasing 3.00% per year)
Collection loss
Total V & C loss
Effect. gross income

3.00%
Leased
1,500
1,500
0
1,500
1,500
1,500
0
1,500
1,500
10,500

Rate
11.00
11.25
0.00
11.50
11.00
MTM
0.00
10.00
8.00
77.8%

$14.00

$
$
$
$
$
$
$
$
$

Year 1
16,500
16,875
21,000
17,250
16,500
21,000
21,000
15,000
12,000
$9,000
$48,750
214,875
19.2%
2.0%
21.2%
$169,274

$14.42

$
$
$
$
$
$
$
$
$

Year 2
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000
$9,270
$51,188
218,213
16.2%
2.0%
18.2%
$178,450

$14.85

$
$
$
$
$
$
$
$
$

$15.30

Year 3
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000

Year 4
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000

$9,548
$53,747
221,050
13.2%
2.0%
15.2%
$187,401

$9,835
$56,434
224,024
10.2%
2.0%
12.2%
$196,643

$15.76
Year 5
16,500
23,636
21,000
23,636
16,500
21,630
21,000
15,000
12,000
$10,130
$59,256
240,287
7.2%
2.0%
9.2%
$218,127

$16.23
Resale Year 6
24,345
23,636
24,345
23,636
24,345
21,630
24,345
15,000
21,345
$10,433
$62,219
275,278
4.2%
2.0%
6.2%
$258,150

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

3

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center, continued
Effect. gross income
Expense items (rate of increase in expenses = 3.00%)
Administrative
$0.02
/sq. ft.
All utilities
$0.25
/sq. ft.
Outside services
$0.14
/sq. ft.
Management expense
5.0% EGI
Advertising, promotion
$0.10
/sq. ft.
Maintenance salary
$0.50
/sq. ft.
Insurance
$0.25
/sq. ft.
Taxes & licenses
$1.10
/sq. ft.
Maintenance (snow, trash, etc.)
$0.45
/sq. ft.
Contract cleaning
$1.00
/sq. ft.
Supplies (HVAC, janitorial, etc.)
$0.50
/sq. ft.
Total expenses from operations
Expenses per sq. ft.
Build-out and leasing expenses
Repainting/carpets/existing
1,500
sq. ft. @
$6.50
New space build-out
1,500
sq. ft. @
$12.00
Capital exp (roof, HVAC, etc.)
Leasing commissions
4% for five years
Total build-out, capital expense
Build-out per sq. ft. GFA
Total all expenses
Net operating income

$169,274

$178,450

$187,401

$196,643

$218,127

270
3,375
1,890
8,464
1,350
6,750
3,375
14,850
6,075
13,500
6,750
66,649
$4.94

278
3,476
1,947
8,923
1,391
6,953
3,476
15,296
6,257
13,905
6,953
68,854
$5.10

286
3,581
2,005
9,371
1,432
7,161
3,581
15,754
6,445
14,322
7,161
71,099
$5.27

295
3,688
2,065
9,833
1,475
7,376
3,688
16,227
6,638
14,752
7,376
73,413
$5.44

304
3,799
2,127
10,906
1,519
7,597
3,799
16,714
6,837
15,194
7,597
76,394
$5.66

9,750
18,000

10,043
18,540
22,000
$4,326
$54,909
$4.07

10,344
19,096
$4,456
$33,896
$2.51

10,654
19,669
$4,589
$34,913
$2.59

10,974
20,259
11,000
$4,727
$46,960
$3.48

0
$4,200
$31,950
$2.37
$98,599
$70,675

$123,762
$54,688

$

$104,995
$82,407

$

$108,326
$88,318

$123,355
$94,773

$258,150
313
3,913
2,191
12,908
1,565
7,825
3,913
17,215
7,043
15,650
7,825
80,361
$5.95
11,303
20,867
0
$4,869
$37,039
$2.74
$117,399
$140,751

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

4

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center, continued
Net operating income
$70,675
$54,688
The reversion of the property is estimated by applying a terminal cap rate of 11.00% of the last year's income less selling expenses.
Cash flows with reversion
Discounted @
Present value
Discounted @
Present value

Equity Analysis (Optional)
Mortgage amount based on a price of
Annual payments

$70,675
0.917431
$64,840
0.913242
$64,544

9.0%
9.5%

Sale Price
1,069,492
68,031

First Mortgage
0

Cash flow to equity
DSCR (with reserves)

-267,373

$82,407

$88,318

$54,688
0.841680
$46,030
0.834011
$45,611

$82,407
0.772183
$63,633
0.761654
$62,766

$88,318
0.708425
$62,567
0.695574
$61,432

68,031

Mort. Amnt
802,119
68,031

1
2,645
1.04

2
-13,342
0.80

$140,751

Reversion of property = $1,202,782
$1,297,555
0.649931
Value
$843,322
1,080,391
0.635228
Value
$824,243
1,058,594

Mort. Rate
7.00%
68,031
3

14,377
1.21

$94,773

Term
25
799,260
4

20,287
1.30

5
498,295
0.12

Balance 5th yr.
$731,229
pmt+pay off
IRR
14.44%

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

5

Table 24.2 Calculating Net Present Value
0.08
Year

Cash flow

Discount Rate

Present Value

0

-$550,000*

1.0000

-$550,000

1

$35,000

0.925926

$32,407

2

$40,000

0.857339

$34,294

3

$45,000

0.793832

$35,722

4

$50,000

0.735030

$36,751

5

$51,000

0.680583

$34,710

6

$56,000

0.630170

$35,289

7

$60,000

0.583490

$35,009

8

$61,000

0.540269

$32,956

9

$64,000

0.500249

$32,016

10

$65,000

0.463193

$30,108

11

$49,000

0.428883

$21,015

12

$54,000

0.397114

$21,444

13

$55,000

0.367698

$20,223

14

$60,000

0.340461

$20,428

14

$625,000

0.340461

$212,788

Net present value of the investment

†

$85,162

* Acqusition price
  Reversion

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

6

Table 24.3 Calculating Net Present Value
IRR = 0.0973208
Year

Cash flow

Discount Rate

Present Value

0

-$550,000

1.0000

-$550,000

1

$35,000

0.911311

$31,896

2

$40,000

0.830487

$33,219

3

$45,000

0.756831

$34,057

4

$50,000

0.689708

$34,485

5

$51,000

0.628539

$32,055

6

$56,000

0.572794

$32,076

7

$60,000

0.521993

$31,320

8

$61,000

0.475698

$29,018

9

$64,000

0.433508

$27,745

10

$65,000

0.395061

$25,679

11

$49,000

0.360023

$17,641

12

$54,000

0.328093

$17,717

13

$55,000

0.298994

$16,445

14

$60,000

0.272477

$16,349

14

$625,000

0.272477

$170,298

Net present value of the investment

$0

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

7

Table 24.4 Payback Period
Amount invested = $1,250,000
Year

Annual Cash Flows

Running Total

1

$142,589

2

$146,268

$142,589
$288,857

3

$150,042

$438,898

4

$153,913

$592,811

5

$157,884

$750,694

6

$161,957

$912,651

7

$166,135

$1,078,787

8

$170,422

$1,249,208

9

$174,819

$1,424,027

10

$179,329

$1,603,356

Payback period

Payback point

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

8

Table 24.5 Profitability Index
Discount rate = 8.00%
Purchase price = $1,250,000
Year

1

Cash flow

$89,000

x

0.9259259

=

$82,407

Year

2

Cash flow

$97,500

x

0.8573388

=

$83,591

Year

3

Cash flow

$103,300

x

0.7938322

=

$82,003

Year

4

Cash flow

$109,800

x

0.7350299

=

$80,706

Year

5

Cash flow

$114,000

x

0.6805832

=

$77,586

Year

6

Cash flow

$116,300

x

0.6301696

=

$73,289

Year

7

Cash flow

$118,650

x

0.5834904

=

$69,231

Year

8

Cash flow

$119,850

x

0.5402689

=

$64,751

Year

9

Cash flow

$121,350

x

0.500249

=

$60,705

Year

10

Cash flow

$123,850

x

0.4631935

=

$57,367

10

Reversion

x

0.4631935

=

$1,548,125

Sum of the present values of the CFs

$717,081
$1,448,718

Profitability index = $1,448,718/$1,250,000 = 1.16

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

9

Case Study: Analysis of an Office Building
Investment
Suite
100
Suite
101
Suite
112
Suite
114
Suite
205
Suite
210
Suite
215
Total
Other income & pass-throughs
Potential gross income
Estimated market (rollover) rate
Vacancy loss
Collection loss
Total V& C loss
Effect. gross income

Sq. Ft.
2,500
3,900
4,600
4,000
5,000
5,000
5,000
30,000

Leased
2,500
3,900
4,000
5,000
5,000
5,000
25,400

Rate
25.00
26.50
25.00
21.00
24.00
23.50
22.00
84.67%

Year 1
62,500
103,350
115,000
84,000
120,000
125,000
110,000

Year 2
62,500
103,350
115,000
100,000
120,000
125,000
110,000

Year 3
66,307
103,350
115,000
100,000
120,000
125,000
132,613

Year 4
66,307
103,350
115,000
100,000
120,000
125,000
132,613

$49,000
768,850
$25.00
-5%
-1%

$49,000
784,850
$25.75
-5%
-1%

$49,000
814,253
$26.52
-10%
-1%

$49,000
815,813
$27.32
-10%
-1%

$49,000
853,796
$28.14
-10%
-1%

-6%

-11%
$724,685

-11%
$726,073

-11%
$759,879

-6%
$722,719

$737,759

Year 5
66,307
103,350
115,000
100,000
140,689
140,689
132,613

Year 6/Resale
66,307
103,350
133,317
100,000
140,689
140,689
132,613
$49,000
873,767
$28.98
-5%
-1%
-6%
$821,341

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

10

Case Study: Analysis of an Office Building
Investment, continued
Effect. gross income
Expense item

Year 1
$722,719

Year 2
$739,141

Year 3
$724,685

Year 4
$726,073

Year 5
$759,879

Year 6/Resale
$821,341

42,750
36,136
15,000
37,500
22,500
42,750
15,000
$211,636
$7.05

44,033
39,757
15,450
38,625
23,175
44,033
15,450
$217,722
$7.26

42,966
36,234
15,914
39,784
23,870
42,966
15,914
$217,648
$7.25

44,255
36,304
16,391
40,977
24,586
44,255
16,391
$223,159
$7.44

45,583
37,994
16,883
42,207
25,324
45,583
16,883
$230,456
$7.68

49,559
41,067
17,389
43,473
26,084
49,559
17,389
$244,520
$8.15

$92,000
$23,000

$60,000
$20,000
$25,000

$112,500
$39,784
$35,000

$150,000
$56,275
$42,000

$46,000

$115,000
$3.83
$326,636

$105,000
$3.50
$322,722

$187,284
$6.24
$404,932

$0
$0.00
$223,160

$248,275
$8.28
$478,731

$46,000
$1.53
$290,520

$396,083

$416,419

$319,753

$502,913

$281,147

$530,822

Rate of increase in expenses = 3%

All utilities
Management expense
Maintenance salary
Taxes, insurance & licenses
Maintenance (snow, trash, etc.)
Contract cleaning, etc.
Supplies (HVAC, janitorial, etc.)
Total expenses from operations
Operating expenses per sq. ft.
Build out and leasing expenses
New space build-out
Leasing commissions

$1.50
5.00%
$0.50
$1.25
$0.75
$1.50
$0.50

/Occ. sq. ft.
of EGI
/sq. ft.
/sq. ft.
/sq. ft.
/Occ. sq. ft.
/sq. ft.

$0

Capital replacements (HVA C, roof)
Total build-out reserves exp.
Build-out per sq. ft. GFA
Total all expenses
Income overall (I
O)

$0
$0
$0

$0
$0

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

11

Value Opinion – Case Study
Income overall (I

O

)

Year 1

Year 2

Year 3

Year 4

Year 5

$396,083

$416,419

$319,753

$502,913

$281,147

The reversion of the property is estimated via terminal cap rate of:
7% selling costs
Cash flows with reversion
Discounted @ 8.0%
Present value

$396,083
0.925926
$366,744

$416,419
0.857339
$357,012

Discounted @ 9.0%
Present value

0.917431
$363,379

0.814680
$350,490

9.00% of the last year's income less selling expenses
Reversion of property =
$5,485,157
$319,753
$502,913
$5,766,305
0.793832
0.735030
0.680583
$253,831
$369,656
$3,924,450

0.772183
$246,908

0.708425
$356,277

0.649931
$3,747,703

Year 6/Resale
$530,822

Value
$5,271,693
$175.72
Value
$5,064,758

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

12


Slide 10

Chapter 24

The Student Handbook to
THE APPRAISAL OF REAL ESTATE
Discounted Cash Flow Analysis
and Special Applications in Income
Capitalization
1



Applications of Discounted Cash Flow Analysis (DCF)
 Both DCF and direct capitalization require an estimate
of next year’s net income.
 Discounted cash flow requires more than one year’s
estimate.
 Several years’ estimates of income, vacancy,
collection losses, and expenses are required.

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

2

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center
Estimated market (rollover) rate average
Tenant
Suite #
Sq. Ft.
Tenant A
100
1,500
Tenant B
102
1,500
Tenant C
104
1,500
Tenant D
106
1,500
Tenant E
108
1,500
Tenant F
110
1,500
Tenant G
112
1,500
Tenant H
114
1,500
Tenant I
116
1,500
Building size
13,500
Other income =
Pass-through income
Potential gross income =
Vacancy loss (22.2%, decreasing 3.00% per year)
Collection loss
Total V & C loss
Effect. gross income

3.00%
Leased
1,500
1,500
0
1,500
1,500
1,500
0
1,500
1,500
10,500

Rate
11.00
11.25
0.00
11.50
11.00
MTM
0.00
10.00
8.00
77.8%

$14.00

$
$
$
$
$
$
$
$
$

Year 1
16,500
16,875
21,000
17,250
16,500
21,000
21,000
15,000
12,000
$9,000
$48,750
214,875
19.2%
2.0%
21.2%
$169,274

$14.42

$
$
$
$
$
$
$
$
$

Year 2
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000
$9,270
$51,188
218,213
16.2%
2.0%
18.2%
$178,450

$14.85

$
$
$
$
$
$
$
$
$

$15.30

Year 3
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000

Year 4
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000

$9,548
$53,747
221,050
13.2%
2.0%
15.2%
$187,401

$9,835
$56,434
224,024
10.2%
2.0%
12.2%
$196,643

$15.76
Year 5
16,500
23,636
21,000
23,636
16,500
21,630
21,000
15,000
12,000
$10,130
$59,256
240,287
7.2%
2.0%
9.2%
$218,127

$16.23
Resale Year 6
24,345
23,636
24,345
23,636
24,345
21,630
24,345
15,000
21,345
$10,433
$62,219
275,278
4.2%
2.0%
6.2%
$258,150

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

3

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center, continued
Effect. gross income
Expense items (rate of increase in expenses = 3.00%)
Administrative
$0.02
/sq. ft.
All utilities
$0.25
/sq. ft.
Outside services
$0.14
/sq. ft.
Management expense
5.0% EGI
Advertising, promotion
$0.10
/sq. ft.
Maintenance salary
$0.50
/sq. ft.
Insurance
$0.25
/sq. ft.
Taxes & licenses
$1.10
/sq. ft.
Maintenance (snow, trash, etc.)
$0.45
/sq. ft.
Contract cleaning
$1.00
/sq. ft.
Supplies (HVAC, janitorial, etc.)
$0.50
/sq. ft.
Total expenses from operations
Expenses per sq. ft.
Build-out and leasing expenses
Repainting/carpets/existing
1,500
sq. ft. @
$6.50
New space build-out
1,500
sq. ft. @
$12.00
Capital exp (roof, HVAC, etc.)
Leasing commissions
4% for five years
Total build-out, capital expense
Build-out per sq. ft. GFA
Total all expenses
Net operating income

$169,274

$178,450

$187,401

$196,643

$218,127

270
3,375
1,890
8,464
1,350
6,750
3,375
14,850
6,075
13,500
6,750
66,649
$4.94

278
3,476
1,947
8,923
1,391
6,953
3,476
15,296
6,257
13,905
6,953
68,854
$5.10

286
3,581
2,005
9,371
1,432
7,161
3,581
15,754
6,445
14,322
7,161
71,099
$5.27

295
3,688
2,065
9,833
1,475
7,376
3,688
16,227
6,638
14,752
7,376
73,413
$5.44

304
3,799
2,127
10,906
1,519
7,597
3,799
16,714
6,837
15,194
7,597
76,394
$5.66

9,750
18,000

10,043
18,540
22,000
$4,326
$54,909
$4.07

10,344
19,096
$4,456
$33,896
$2.51

10,654
19,669
$4,589
$34,913
$2.59

10,974
20,259
11,000
$4,727
$46,960
$3.48

0
$4,200
$31,950
$2.37
$98,599
$70,675

$123,762
$54,688

$

$104,995
$82,407

$

$108,326
$88,318

$123,355
$94,773

$258,150
313
3,913
2,191
12,908
1,565
7,825
3,913
17,215
7,043
15,650
7,825
80,361
$5.95
11,303
20,867
0
$4,869
$37,039
$2.74
$117,399
$140,751

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

4

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center, continued
Net operating income
$70,675
$54,688
The reversion of the property is estimated by applying a terminal cap rate of 11.00% of the last year's income less selling expenses.
Cash flows with reversion
Discounted @
Present value
Discounted @
Present value

Equity Analysis (Optional)
Mortgage amount based on a price of
Annual payments

$70,675
0.917431
$64,840
0.913242
$64,544

9.0%
9.5%

Sale Price
1,069,492
68,031

First Mortgage
0

Cash flow to equity
DSCR (with reserves)

-267,373

$82,407

$88,318

$54,688
0.841680
$46,030
0.834011
$45,611

$82,407
0.772183
$63,633
0.761654
$62,766

$88,318
0.708425
$62,567
0.695574
$61,432

68,031

Mort. Amnt
802,119
68,031

1
2,645
1.04

2
-13,342
0.80

$140,751

Reversion of property = $1,202,782
$1,297,555
0.649931
Value
$843,322
1,080,391
0.635228
Value
$824,243
1,058,594

Mort. Rate
7.00%
68,031
3

14,377
1.21

$94,773

Term
25
799,260
4

20,287
1.30

5
498,295
0.12

Balance 5th yr.
$731,229
pmt+pay off
IRR
14.44%

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

5

Table 24.2 Calculating Net Present Value
0.08
Year

Cash flow

Discount Rate

Present Value

0

-$550,000*

1.0000

-$550,000

1

$35,000

0.925926

$32,407

2

$40,000

0.857339

$34,294

3

$45,000

0.793832

$35,722

4

$50,000

0.735030

$36,751

5

$51,000

0.680583

$34,710

6

$56,000

0.630170

$35,289

7

$60,000

0.583490

$35,009

8

$61,000

0.540269

$32,956

9

$64,000

0.500249

$32,016

10

$65,000

0.463193

$30,108

11

$49,000

0.428883

$21,015

12

$54,000

0.397114

$21,444

13

$55,000

0.367698

$20,223

14

$60,000

0.340461

$20,428

14

$625,000

0.340461

$212,788

Net present value of the investment

†

$85,162

* Acqusition price
  Reversion

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

6

Table 24.3 Calculating Net Present Value
IRR = 0.0973208
Year

Cash flow

Discount Rate

Present Value

0

-$550,000

1.0000

-$550,000

1

$35,000

0.911311

$31,896

2

$40,000

0.830487

$33,219

3

$45,000

0.756831

$34,057

4

$50,000

0.689708

$34,485

5

$51,000

0.628539

$32,055

6

$56,000

0.572794

$32,076

7

$60,000

0.521993

$31,320

8

$61,000

0.475698

$29,018

9

$64,000

0.433508

$27,745

10

$65,000

0.395061

$25,679

11

$49,000

0.360023

$17,641

12

$54,000

0.328093

$17,717

13

$55,000

0.298994

$16,445

14

$60,000

0.272477

$16,349

14

$625,000

0.272477

$170,298

Net present value of the investment

$0

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

7

Table 24.4 Payback Period
Amount invested = $1,250,000
Year

Annual Cash Flows

Running Total

1

$142,589

2

$146,268

$142,589
$288,857

3

$150,042

$438,898

4

$153,913

$592,811

5

$157,884

$750,694

6

$161,957

$912,651

7

$166,135

$1,078,787

8

$170,422

$1,249,208

9

$174,819

$1,424,027

10

$179,329

$1,603,356

Payback period

Payback point

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

8

Table 24.5 Profitability Index
Discount rate = 8.00%
Purchase price = $1,250,000
Year

1

Cash flow

$89,000

x

0.9259259

=

$82,407

Year

2

Cash flow

$97,500

x

0.8573388

=

$83,591

Year

3

Cash flow

$103,300

x

0.7938322

=

$82,003

Year

4

Cash flow

$109,800

x

0.7350299

=

$80,706

Year

5

Cash flow

$114,000

x

0.6805832

=

$77,586

Year

6

Cash flow

$116,300

x

0.6301696

=

$73,289

Year

7

Cash flow

$118,650

x

0.5834904

=

$69,231

Year

8

Cash flow

$119,850

x

0.5402689

=

$64,751

Year

9

Cash flow

$121,350

x

0.500249

=

$60,705

Year

10

Cash flow

$123,850

x

0.4631935

=

$57,367

10

Reversion

x

0.4631935

=

$1,548,125

Sum of the present values of the CFs

$717,081
$1,448,718

Profitability index = $1,448,718/$1,250,000 = 1.16

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

9

Case Study: Analysis of an Office Building
Investment
Suite
100
Suite
101
Suite
112
Suite
114
Suite
205
Suite
210
Suite
215
Total
Other income & pass-throughs
Potential gross income
Estimated market (rollover) rate
Vacancy loss
Collection loss
Total V& C loss
Effect. gross income

Sq. Ft.
2,500
3,900
4,600
4,000
5,000
5,000
5,000
30,000

Leased
2,500
3,900
4,000
5,000
5,000
5,000
25,400

Rate
25.00
26.50
25.00
21.00
24.00
23.50
22.00
84.67%

Year 1
62,500
103,350
115,000
84,000
120,000
125,000
110,000

Year 2
62,500
103,350
115,000
100,000
120,000
125,000
110,000

Year 3
66,307
103,350
115,000
100,000
120,000
125,000
132,613

Year 4
66,307
103,350
115,000
100,000
120,000
125,000
132,613

$49,000
768,850
$25.00
-5%
-1%

$49,000
784,850
$25.75
-5%
-1%

$49,000
814,253
$26.52
-10%
-1%

$49,000
815,813
$27.32
-10%
-1%

$49,000
853,796
$28.14
-10%
-1%

-6%

-11%
$724,685

-11%
$726,073

-11%
$759,879

-6%
$722,719

$737,759

Year 5
66,307
103,350
115,000
100,000
140,689
140,689
132,613

Year 6/Resale
66,307
103,350
133,317
100,000
140,689
140,689
132,613
$49,000
873,767
$28.98
-5%
-1%
-6%
$821,341

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

10

Case Study: Analysis of an Office Building
Investment, continued
Effect. gross income
Expense item

Year 1
$722,719

Year 2
$739,141

Year 3
$724,685

Year 4
$726,073

Year 5
$759,879

Year 6/Resale
$821,341

42,750
36,136
15,000
37,500
22,500
42,750
15,000
$211,636
$7.05

44,033
39,757
15,450
38,625
23,175
44,033
15,450
$217,722
$7.26

42,966
36,234
15,914
39,784
23,870
42,966
15,914
$217,648
$7.25

44,255
36,304
16,391
40,977
24,586
44,255
16,391
$223,159
$7.44

45,583
37,994
16,883
42,207
25,324
45,583
16,883
$230,456
$7.68

49,559
41,067
17,389
43,473
26,084
49,559
17,389
$244,520
$8.15

$92,000
$23,000

$60,000
$20,000
$25,000

$112,500
$39,784
$35,000

$150,000
$56,275
$42,000

$46,000

$115,000
$3.83
$326,636

$105,000
$3.50
$322,722

$187,284
$6.24
$404,932

$0
$0.00
$223,160

$248,275
$8.28
$478,731

$46,000
$1.53
$290,520

$396,083

$416,419

$319,753

$502,913

$281,147

$530,822

Rate of increase in expenses = 3%

All utilities
Management expense
Maintenance salary
Taxes, insurance & licenses
Maintenance (snow, trash, etc.)
Contract cleaning, etc.
Supplies (HVAC, janitorial, etc.)
Total expenses from operations
Operating expenses per sq. ft.
Build out and leasing expenses
New space build-out
Leasing commissions

$1.50
5.00%
$0.50
$1.25
$0.75
$1.50
$0.50

/Occ. sq. ft.
of EGI
/sq. ft.
/sq. ft.
/sq. ft.
/Occ. sq. ft.
/sq. ft.

$0

Capital replacements (HVA C, roof)
Total build-out reserves exp.
Build-out per sq. ft. GFA
Total all expenses
Income overall (I
O)

$0
$0
$0

$0
$0

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

11

Value Opinion – Case Study
Income overall (I

O

)

Year 1

Year 2

Year 3

Year 4

Year 5

$396,083

$416,419

$319,753

$502,913

$281,147

The reversion of the property is estimated via terminal cap rate of:
7% selling costs
Cash flows with reversion
Discounted @ 8.0%
Present value

$396,083
0.925926
$366,744

$416,419
0.857339
$357,012

Discounted @ 9.0%
Present value

0.917431
$363,379

0.814680
$350,490

9.00% of the last year's income less selling expenses
Reversion of property =
$5,485,157
$319,753
$502,913
$5,766,305
0.793832
0.735030
0.680583
$253,831
$369,656
$3,924,450

0.772183
$246,908

0.708425
$356,277

0.649931
$3,747,703

Year 6/Resale
$530,822

Value
$5,271,693
$175.72
Value
$5,064,758

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

12


Slide 11

Chapter 24

The Student Handbook to
THE APPRAISAL OF REAL ESTATE
Discounted Cash Flow Analysis
and Special Applications in Income
Capitalization
1



Applications of Discounted Cash Flow Analysis (DCF)
 Both DCF and direct capitalization require an estimate
of next year’s net income.
 Discounted cash flow requires more than one year’s
estimate.
 Several years’ estimates of income, vacancy,
collection losses, and expenses are required.

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

2

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center
Estimated market (rollover) rate average
Tenant
Suite #
Sq. Ft.
Tenant A
100
1,500
Tenant B
102
1,500
Tenant C
104
1,500
Tenant D
106
1,500
Tenant E
108
1,500
Tenant F
110
1,500
Tenant G
112
1,500
Tenant H
114
1,500
Tenant I
116
1,500
Building size
13,500
Other income =
Pass-through income
Potential gross income =
Vacancy loss (22.2%, decreasing 3.00% per year)
Collection loss
Total V & C loss
Effect. gross income

3.00%
Leased
1,500
1,500
0
1,500
1,500
1,500
0
1,500
1,500
10,500

Rate
11.00
11.25
0.00
11.50
11.00
MTM
0.00
10.00
8.00
77.8%

$14.00

$
$
$
$
$
$
$
$
$

Year 1
16,500
16,875
21,000
17,250
16,500
21,000
21,000
15,000
12,000
$9,000
$48,750
214,875
19.2%
2.0%
21.2%
$169,274

$14.42

$
$
$
$
$
$
$
$
$

Year 2
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000
$9,270
$51,188
218,213
16.2%
2.0%
18.2%
$178,450

$14.85

$
$
$
$
$
$
$
$
$

$15.30

Year 3
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000

Year 4
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000

$9,548
$53,747
221,050
13.2%
2.0%
15.2%
$187,401

$9,835
$56,434
224,024
10.2%
2.0%
12.2%
$196,643

$15.76
Year 5
16,500
23,636
21,000
23,636
16,500
21,630
21,000
15,000
12,000
$10,130
$59,256
240,287
7.2%
2.0%
9.2%
$218,127

$16.23
Resale Year 6
24,345
23,636
24,345
23,636
24,345
21,630
24,345
15,000
21,345
$10,433
$62,219
275,278
4.2%
2.0%
6.2%
$258,150

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

3

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center, continued
Effect. gross income
Expense items (rate of increase in expenses = 3.00%)
Administrative
$0.02
/sq. ft.
All utilities
$0.25
/sq. ft.
Outside services
$0.14
/sq. ft.
Management expense
5.0% EGI
Advertising, promotion
$0.10
/sq. ft.
Maintenance salary
$0.50
/sq. ft.
Insurance
$0.25
/sq. ft.
Taxes & licenses
$1.10
/sq. ft.
Maintenance (snow, trash, etc.)
$0.45
/sq. ft.
Contract cleaning
$1.00
/sq. ft.
Supplies (HVAC, janitorial, etc.)
$0.50
/sq. ft.
Total expenses from operations
Expenses per sq. ft.
Build-out and leasing expenses
Repainting/carpets/existing
1,500
sq. ft. @
$6.50
New space build-out
1,500
sq. ft. @
$12.00
Capital exp (roof, HVAC, etc.)
Leasing commissions
4% for five years
Total build-out, capital expense
Build-out per sq. ft. GFA
Total all expenses
Net operating income

$169,274

$178,450

$187,401

$196,643

$218,127

270
3,375
1,890
8,464
1,350
6,750
3,375
14,850
6,075
13,500
6,750
66,649
$4.94

278
3,476
1,947
8,923
1,391
6,953
3,476
15,296
6,257
13,905
6,953
68,854
$5.10

286
3,581
2,005
9,371
1,432
7,161
3,581
15,754
6,445
14,322
7,161
71,099
$5.27

295
3,688
2,065
9,833
1,475
7,376
3,688
16,227
6,638
14,752
7,376
73,413
$5.44

304
3,799
2,127
10,906
1,519
7,597
3,799
16,714
6,837
15,194
7,597
76,394
$5.66

9,750
18,000

10,043
18,540
22,000
$4,326
$54,909
$4.07

10,344
19,096
$4,456
$33,896
$2.51

10,654
19,669
$4,589
$34,913
$2.59

10,974
20,259
11,000
$4,727
$46,960
$3.48

0
$4,200
$31,950
$2.37
$98,599
$70,675

$123,762
$54,688

$

$104,995
$82,407

$

$108,326
$88,318

$123,355
$94,773

$258,150
313
3,913
2,191
12,908
1,565
7,825
3,913
17,215
7,043
15,650
7,825
80,361
$5.95
11,303
20,867
0
$4,869
$37,039
$2.74
$117,399
$140,751

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

4

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center, continued
Net operating income
$70,675
$54,688
The reversion of the property is estimated by applying a terminal cap rate of 11.00% of the last year's income less selling expenses.
Cash flows with reversion
Discounted @
Present value
Discounted @
Present value

Equity Analysis (Optional)
Mortgage amount based on a price of
Annual payments

$70,675
0.917431
$64,840
0.913242
$64,544

9.0%
9.5%

Sale Price
1,069,492
68,031

First Mortgage
0

Cash flow to equity
DSCR (with reserves)

-267,373

$82,407

$88,318

$54,688
0.841680
$46,030
0.834011
$45,611

$82,407
0.772183
$63,633
0.761654
$62,766

$88,318
0.708425
$62,567
0.695574
$61,432

68,031

Mort. Amnt
802,119
68,031

1
2,645
1.04

2
-13,342
0.80

$140,751

Reversion of property = $1,202,782
$1,297,555
0.649931
Value
$843,322
1,080,391
0.635228
Value
$824,243
1,058,594

Mort. Rate
7.00%
68,031
3

14,377
1.21

$94,773

Term
25
799,260
4

20,287
1.30

5
498,295
0.12

Balance 5th yr.
$731,229
pmt+pay off
IRR
14.44%

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

5

Table 24.2 Calculating Net Present Value
0.08
Year

Cash flow

Discount Rate

Present Value

0

-$550,000*

1.0000

-$550,000

1

$35,000

0.925926

$32,407

2

$40,000

0.857339

$34,294

3

$45,000

0.793832

$35,722

4

$50,000

0.735030

$36,751

5

$51,000

0.680583

$34,710

6

$56,000

0.630170

$35,289

7

$60,000

0.583490

$35,009

8

$61,000

0.540269

$32,956

9

$64,000

0.500249

$32,016

10

$65,000

0.463193

$30,108

11

$49,000

0.428883

$21,015

12

$54,000

0.397114

$21,444

13

$55,000

0.367698

$20,223

14

$60,000

0.340461

$20,428

14

$625,000

0.340461

$212,788

Net present value of the investment

†

$85,162

* Acqusition price
  Reversion

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

6

Table 24.3 Calculating Net Present Value
IRR = 0.0973208
Year

Cash flow

Discount Rate

Present Value

0

-$550,000

1.0000

-$550,000

1

$35,000

0.911311

$31,896

2

$40,000

0.830487

$33,219

3

$45,000

0.756831

$34,057

4

$50,000

0.689708

$34,485

5

$51,000

0.628539

$32,055

6

$56,000

0.572794

$32,076

7

$60,000

0.521993

$31,320

8

$61,000

0.475698

$29,018

9

$64,000

0.433508

$27,745

10

$65,000

0.395061

$25,679

11

$49,000

0.360023

$17,641

12

$54,000

0.328093

$17,717

13

$55,000

0.298994

$16,445

14

$60,000

0.272477

$16,349

14

$625,000

0.272477

$170,298

Net present value of the investment

$0

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

7

Table 24.4 Payback Period
Amount invested = $1,250,000
Year

Annual Cash Flows

Running Total

1

$142,589

2

$146,268

$142,589
$288,857

3

$150,042

$438,898

4

$153,913

$592,811

5

$157,884

$750,694

6

$161,957

$912,651

7

$166,135

$1,078,787

8

$170,422

$1,249,208

9

$174,819

$1,424,027

10

$179,329

$1,603,356

Payback period

Payback point

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

8

Table 24.5 Profitability Index
Discount rate = 8.00%
Purchase price = $1,250,000
Year

1

Cash flow

$89,000

x

0.9259259

=

$82,407

Year

2

Cash flow

$97,500

x

0.8573388

=

$83,591

Year

3

Cash flow

$103,300

x

0.7938322

=

$82,003

Year

4

Cash flow

$109,800

x

0.7350299

=

$80,706

Year

5

Cash flow

$114,000

x

0.6805832

=

$77,586

Year

6

Cash flow

$116,300

x

0.6301696

=

$73,289

Year

7

Cash flow

$118,650

x

0.5834904

=

$69,231

Year

8

Cash flow

$119,850

x

0.5402689

=

$64,751

Year

9

Cash flow

$121,350

x

0.500249

=

$60,705

Year

10

Cash flow

$123,850

x

0.4631935

=

$57,367

10

Reversion

x

0.4631935

=

$1,548,125

Sum of the present values of the CFs

$717,081
$1,448,718

Profitability index = $1,448,718/$1,250,000 = 1.16

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

9

Case Study: Analysis of an Office Building
Investment
Suite
100
Suite
101
Suite
112
Suite
114
Suite
205
Suite
210
Suite
215
Total
Other income & pass-throughs
Potential gross income
Estimated market (rollover) rate
Vacancy loss
Collection loss
Total V& C loss
Effect. gross income

Sq. Ft.
2,500
3,900
4,600
4,000
5,000
5,000
5,000
30,000

Leased
2,500
3,900
4,000
5,000
5,000
5,000
25,400

Rate
25.00
26.50
25.00
21.00
24.00
23.50
22.00
84.67%

Year 1
62,500
103,350
115,000
84,000
120,000
125,000
110,000

Year 2
62,500
103,350
115,000
100,000
120,000
125,000
110,000

Year 3
66,307
103,350
115,000
100,000
120,000
125,000
132,613

Year 4
66,307
103,350
115,000
100,000
120,000
125,000
132,613

$49,000
768,850
$25.00
-5%
-1%

$49,000
784,850
$25.75
-5%
-1%

$49,000
814,253
$26.52
-10%
-1%

$49,000
815,813
$27.32
-10%
-1%

$49,000
853,796
$28.14
-10%
-1%

-6%

-11%
$724,685

-11%
$726,073

-11%
$759,879

-6%
$722,719

$737,759

Year 5
66,307
103,350
115,000
100,000
140,689
140,689
132,613

Year 6/Resale
66,307
103,350
133,317
100,000
140,689
140,689
132,613
$49,000
873,767
$28.98
-5%
-1%
-6%
$821,341

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

10

Case Study: Analysis of an Office Building
Investment, continued
Effect. gross income
Expense item

Year 1
$722,719

Year 2
$739,141

Year 3
$724,685

Year 4
$726,073

Year 5
$759,879

Year 6/Resale
$821,341

42,750
36,136
15,000
37,500
22,500
42,750
15,000
$211,636
$7.05

44,033
39,757
15,450
38,625
23,175
44,033
15,450
$217,722
$7.26

42,966
36,234
15,914
39,784
23,870
42,966
15,914
$217,648
$7.25

44,255
36,304
16,391
40,977
24,586
44,255
16,391
$223,159
$7.44

45,583
37,994
16,883
42,207
25,324
45,583
16,883
$230,456
$7.68

49,559
41,067
17,389
43,473
26,084
49,559
17,389
$244,520
$8.15

$92,000
$23,000

$60,000
$20,000
$25,000

$112,500
$39,784
$35,000

$150,000
$56,275
$42,000

$46,000

$115,000
$3.83
$326,636

$105,000
$3.50
$322,722

$187,284
$6.24
$404,932

$0
$0.00
$223,160

$248,275
$8.28
$478,731

$46,000
$1.53
$290,520

$396,083

$416,419

$319,753

$502,913

$281,147

$530,822

Rate of increase in expenses = 3%

All utilities
Management expense
Maintenance salary
Taxes, insurance & licenses
Maintenance (snow, trash, etc.)
Contract cleaning, etc.
Supplies (HVAC, janitorial, etc.)
Total expenses from operations
Operating expenses per sq. ft.
Build out and leasing expenses
New space build-out
Leasing commissions

$1.50
5.00%
$0.50
$1.25
$0.75
$1.50
$0.50

/Occ. sq. ft.
of EGI
/sq. ft.
/sq. ft.
/sq. ft.
/Occ. sq. ft.
/sq. ft.

$0

Capital replacements (HVA C, roof)
Total build-out reserves exp.
Build-out per sq. ft. GFA
Total all expenses
Income overall (I
O)

$0
$0
$0

$0
$0

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

11

Value Opinion – Case Study
Income overall (I

O

)

Year 1

Year 2

Year 3

Year 4

Year 5

$396,083

$416,419

$319,753

$502,913

$281,147

The reversion of the property is estimated via terminal cap rate of:
7% selling costs
Cash flows with reversion
Discounted @ 8.0%
Present value

$396,083
0.925926
$366,744

$416,419
0.857339
$357,012

Discounted @ 9.0%
Present value

0.917431
$363,379

0.814680
$350,490

9.00% of the last year's income less selling expenses
Reversion of property =
$5,485,157
$319,753
$502,913
$5,766,305
0.793832
0.735030
0.680583
$253,831
$369,656
$3,924,450

0.772183
$246,908

0.708425
$356,277

0.649931
$3,747,703

Year 6/Resale
$530,822

Value
$5,271,693
$175.72
Value
$5,064,758

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

12


Slide 12

Chapter 24

The Student Handbook to
THE APPRAISAL OF REAL ESTATE
Discounted Cash Flow Analysis
and Special Applications in Income
Capitalization
1



Applications of Discounted Cash Flow Analysis (DCF)
 Both DCF and direct capitalization require an estimate
of next year’s net income.
 Discounted cash flow requires more than one year’s
estimate.
 Several years’ estimates of income, vacancy,
collection losses, and expenses are required.

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

2

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center
Estimated market (rollover) rate average
Tenant
Suite #
Sq. Ft.
Tenant A
100
1,500
Tenant B
102
1,500
Tenant C
104
1,500
Tenant D
106
1,500
Tenant E
108
1,500
Tenant F
110
1,500
Tenant G
112
1,500
Tenant H
114
1,500
Tenant I
116
1,500
Building size
13,500
Other income =
Pass-through income
Potential gross income =
Vacancy loss (22.2%, decreasing 3.00% per year)
Collection loss
Total V & C loss
Effect. gross income

3.00%
Leased
1,500
1,500
0
1,500
1,500
1,500
0
1,500
1,500
10,500

Rate
11.00
11.25
0.00
11.50
11.00
MTM
0.00
10.00
8.00
77.8%

$14.00

$
$
$
$
$
$
$
$
$

Year 1
16,500
16,875
21,000
17,250
16,500
21,000
21,000
15,000
12,000
$9,000
$48,750
214,875
19.2%
2.0%
21.2%
$169,274

$14.42

$
$
$
$
$
$
$
$
$

Year 2
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000
$9,270
$51,188
218,213
16.2%
2.0%
18.2%
$178,450

$14.85

$
$
$
$
$
$
$
$
$

$15.30

Year 3
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000

Year 4
16,500
16,875
21,000
17,250
16,500
21,630
21,000
15,000
12,000

$9,548
$53,747
221,050
13.2%
2.0%
15.2%
$187,401

$9,835
$56,434
224,024
10.2%
2.0%
12.2%
$196,643

$15.76
Year 5
16,500
23,636
21,000
23,636
16,500
21,630
21,000
15,000
12,000
$10,130
$59,256
240,287
7.2%
2.0%
9.2%
$218,127

$16.23
Resale Year 6
24,345
23,636
24,345
23,636
24,345
21,630
24,345
15,000
21,345
$10,433
$62,219
275,278
4.2%
2.0%
6.2%
$258,150

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

3

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center, continued
Effect. gross income
Expense items (rate of increase in expenses = 3.00%)
Administrative
$0.02
/sq. ft.
All utilities
$0.25
/sq. ft.
Outside services
$0.14
/sq. ft.
Management expense
5.0% EGI
Advertising, promotion
$0.10
/sq. ft.
Maintenance salary
$0.50
/sq. ft.
Insurance
$0.25
/sq. ft.
Taxes & licenses
$1.10
/sq. ft.
Maintenance (snow, trash, etc.)
$0.45
/sq. ft.
Contract cleaning
$1.00
/sq. ft.
Supplies (HVAC, janitorial, etc.)
$0.50
/sq. ft.
Total expenses from operations
Expenses per sq. ft.
Build-out and leasing expenses
Repainting/carpets/existing
1,500
sq. ft. @
$6.50
New space build-out
1,500
sq. ft. @
$12.00
Capital exp (roof, HVAC, etc.)
Leasing commissions
4% for five years
Total build-out, capital expense
Build-out per sq. ft. GFA
Total all expenses
Net operating income

$169,274

$178,450

$187,401

$196,643

$218,127

270
3,375
1,890
8,464
1,350
6,750
3,375
14,850
6,075
13,500
6,750
66,649
$4.94

278
3,476
1,947
8,923
1,391
6,953
3,476
15,296
6,257
13,905
6,953
68,854
$5.10

286
3,581
2,005
9,371
1,432
7,161
3,581
15,754
6,445
14,322
7,161
71,099
$5.27

295
3,688
2,065
9,833
1,475
7,376
3,688
16,227
6,638
14,752
7,376
73,413
$5.44

304
3,799
2,127
10,906
1,519
7,597
3,799
16,714
6,837
15,194
7,597
76,394
$5.66

9,750
18,000

10,043
18,540
22,000
$4,326
$54,909
$4.07

10,344
19,096
$4,456
$33,896
$2.51

10,654
19,669
$4,589
$34,913
$2.59

10,974
20,259
11,000
$4,727
$46,960
$3.48

0
$4,200
$31,950
$2.37
$98,599
$70,675

$123,762
$54,688

$

$104,995
$82,407

$

$108,326
$88,318

$123,355
$94,773

$258,150
313
3,913
2,191
12,908
1,565
7,825
3,913
17,215
7,043
15,650
7,825
80,361
$5.95
11,303
20,867
0
$4,869
$37,039
$2.74
$117,399
$140,751

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

4

Table 24.1 Discounted Cash Flow Analysis of a
Small Retail Center, continued
Net operating income
$70,675
$54,688
The reversion of the property is estimated by applying a terminal cap rate of 11.00% of the last year's income less selling expenses.
Cash flows with reversion
Discounted @
Present value
Discounted @
Present value

Equity Analysis (Optional)
Mortgage amount based on a price of
Annual payments

$70,675
0.917431
$64,840
0.913242
$64,544

9.0%
9.5%

Sale Price
1,069,492
68,031

First Mortgage
0

Cash flow to equity
DSCR (with reserves)

-267,373

$82,407

$88,318

$54,688
0.841680
$46,030
0.834011
$45,611

$82,407
0.772183
$63,633
0.761654
$62,766

$88,318
0.708425
$62,567
0.695574
$61,432

68,031

Mort. Amnt
802,119
68,031

1
2,645
1.04

2
-13,342
0.80

$140,751

Reversion of property = $1,202,782
$1,297,555
0.649931
Value
$843,322
1,080,391
0.635228
Value
$824,243
1,058,594

Mort. Rate
7.00%
68,031
3

14,377
1.21

$94,773

Term
25
799,260
4

20,287
1.30

5
498,295
0.12

Balance 5th yr.
$731,229
pmt+pay off
IRR
14.44%

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

5

Table 24.2 Calculating Net Present Value
0.08
Year

Cash flow

Discount Rate

Present Value

0

-$550,000*

1.0000

-$550,000

1

$35,000

0.925926

$32,407

2

$40,000

0.857339

$34,294

3

$45,000

0.793832

$35,722

4

$50,000

0.735030

$36,751

5

$51,000

0.680583

$34,710

6

$56,000

0.630170

$35,289

7

$60,000

0.583490

$35,009

8

$61,000

0.540269

$32,956

9

$64,000

0.500249

$32,016

10

$65,000

0.463193

$30,108

11

$49,000

0.428883

$21,015

12

$54,000

0.397114

$21,444

13

$55,000

0.367698

$20,223

14

$60,000

0.340461

$20,428

14

$625,000

0.340461

$212,788

Net present value of the investment

†

$85,162

* Acqusition price
  Reversion

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

6

Table 24.3 Calculating Net Present Value
IRR = 0.0973208
Year

Cash flow

Discount Rate

Present Value

0

-$550,000

1.0000

-$550,000

1

$35,000

0.911311

$31,896

2

$40,000

0.830487

$33,219

3

$45,000

0.756831

$34,057

4

$50,000

0.689708

$34,485

5

$51,000

0.628539

$32,055

6

$56,000

0.572794

$32,076

7

$60,000

0.521993

$31,320

8

$61,000

0.475698

$29,018

9

$64,000

0.433508

$27,745

10

$65,000

0.395061

$25,679

11

$49,000

0.360023

$17,641

12

$54,000

0.328093

$17,717

13

$55,000

0.298994

$16,445

14

$60,000

0.272477

$16,349

14

$625,000

0.272477

$170,298

Net present value of the investment

$0

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

7

Table 24.4 Payback Period
Amount invested = $1,250,000
Year

Annual Cash Flows

Running Total

1

$142,589

2

$146,268

$142,589
$288,857

3

$150,042

$438,898

4

$153,913

$592,811

5

$157,884

$750,694

6

$161,957

$912,651

7

$166,135

$1,078,787

8

$170,422

$1,249,208

9

$174,819

$1,424,027

10

$179,329

$1,603,356

Payback period

Payback point

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

8

Table 24.5 Profitability Index
Discount rate = 8.00%
Purchase price = $1,250,000
Year

1

Cash flow

$89,000

x

0.9259259

=

$82,407

Year

2

Cash flow

$97,500

x

0.8573388

=

$83,591

Year

3

Cash flow

$103,300

x

0.7938322

=

$82,003

Year

4

Cash flow

$109,800

x

0.7350299

=

$80,706

Year

5

Cash flow

$114,000

x

0.6805832

=

$77,586

Year

6

Cash flow

$116,300

x

0.6301696

=

$73,289

Year

7

Cash flow

$118,650

x

0.5834904

=

$69,231

Year

8

Cash flow

$119,850

x

0.5402689

=

$64,751

Year

9

Cash flow

$121,350

x

0.500249

=

$60,705

Year

10

Cash flow

$123,850

x

0.4631935

=

$57,367

10

Reversion

x

0.4631935

=

$1,548,125

Sum of the present values of the CFs

$717,081
$1,448,718

Profitability index = $1,448,718/$1,250,000 = 1.16

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

9

Case Study: Analysis of an Office Building
Investment
Suite
100
Suite
101
Suite
112
Suite
114
Suite
205
Suite
210
Suite
215
Total
Other income & pass-throughs
Potential gross income
Estimated market (rollover) rate
Vacancy loss
Collection loss
Total V& C loss
Effect. gross income

Sq. Ft.
2,500
3,900
4,600
4,000
5,000
5,000
5,000
30,000

Leased
2,500
3,900
4,000
5,000
5,000
5,000
25,400

Rate
25.00
26.50
25.00
21.00
24.00
23.50
22.00
84.67%

Year 1
62,500
103,350
115,000
84,000
120,000
125,000
110,000

Year 2
62,500
103,350
115,000
100,000
120,000
125,000
110,000

Year 3
66,307
103,350
115,000
100,000
120,000
125,000
132,613

Year 4
66,307
103,350
115,000
100,000
120,000
125,000
132,613

$49,000
768,850
$25.00
-5%
-1%

$49,000
784,850
$25.75
-5%
-1%

$49,000
814,253
$26.52
-10%
-1%

$49,000
815,813
$27.32
-10%
-1%

$49,000
853,796
$28.14
-10%
-1%

-6%

-11%
$724,685

-11%
$726,073

-11%
$759,879

-6%
$722,719

$737,759

Year 5
66,307
103,350
115,000
100,000
140,689
140,689
132,613

Year 6/Resale
66,307
103,350
133,317
100,000
140,689
140,689
132,613
$49,000
873,767
$28.98
-5%
-1%
-6%
$821,341

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

10

Case Study: Analysis of an Office Building
Investment, continued
Effect. gross income
Expense item

Year 1
$722,719

Year 2
$739,141

Year 3
$724,685

Year 4
$726,073

Year 5
$759,879

Year 6/Resale
$821,341

42,750
36,136
15,000
37,500
22,500
42,750
15,000
$211,636
$7.05

44,033
39,757
15,450
38,625
23,175
44,033
15,450
$217,722
$7.26

42,966
36,234
15,914
39,784
23,870
42,966
15,914
$217,648
$7.25

44,255
36,304
16,391
40,977
24,586
44,255
16,391
$223,159
$7.44

45,583
37,994
16,883
42,207
25,324
45,583
16,883
$230,456
$7.68

49,559
41,067
17,389
43,473
26,084
49,559
17,389
$244,520
$8.15

$92,000
$23,000

$60,000
$20,000
$25,000

$112,500
$39,784
$35,000

$150,000
$56,275
$42,000

$46,000

$115,000
$3.83
$326,636

$105,000
$3.50
$322,722

$187,284
$6.24
$404,932

$0
$0.00
$223,160

$248,275
$8.28
$478,731

$46,000
$1.53
$290,520

$396,083

$416,419

$319,753

$502,913

$281,147

$530,822

Rate of increase in expenses = 3%

All utilities
Management expense
Maintenance salary
Taxes, insurance & licenses
Maintenance (snow, trash, etc.)
Contract cleaning, etc.
Supplies (HVAC, janitorial, etc.)
Total expenses from operations
Operating expenses per sq. ft.
Build out and leasing expenses
New space build-out
Leasing commissions

$1.50
5.00%
$0.50
$1.25
$0.75
$1.50
$0.50

/Occ. sq. ft.
of EGI
/sq. ft.
/sq. ft.
/sq. ft.
/Occ. sq. ft.
/sq. ft.

$0

Capital replacements (HVA C, roof)
Total build-out reserves exp.
Build-out per sq. ft. GFA
Total all expenses
Income overall (I
O)

$0
$0
$0

$0
$0

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

11

Value Opinion – Case Study
Income overall (I

O

)

Year 1

Year 2

Year 3

Year 4

Year 5

$396,083

$416,419

$319,753

$502,913

$281,147

The reversion of the property is estimated via terminal cap rate of:
7% selling costs
Cash flows with reversion
Discounted @ 8.0%
Present value

$396,083
0.925926
$366,744

$416,419
0.857339
$357,012

Discounted @ 9.0%
Present value

0.917431
$363,379

0.814680
$350,490

9.00% of the last year's income less selling expenses
Reversion of property =
$5,485,157
$319,753
$502,913
$5,766,305
0.793832
0.735030
0.680583
$253,831
$369,656
$3,924,450

0.772183
$246,908

0.708425
$356,277

0.649931
$3,747,703

Year 6/Resale
$530,822

Value
$5,271,693
$175.72
Value
$5,064,758

Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24

12