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A reversionary value is assumed in most DCF analyses for commercial real estate.
Exceptions to this are transaction (that is, selling) costs associated with a residual or reversionary value as part of a discounted cash flow analysis, which should still be factored into the analysis.
209) He also objected to the use of reversionary value as a measure of damages, noting that "[t]he value of the building at the commencement and conclusion of the lease term is not relevant to the terms and conditions of the lease contract.
00% Year 1 Year 2 Year 3 Year 4 Year 5 Annual Cash Flow $100,000 $100,000 $100,000 $100,000 $100,000 Reversionary Value $1,000,000 $100,000 $100,000 $100,000 $100,000 $1,100,000 Present Value $927,904 Step 2: Change Capitalization Rate from 10 percent to 12 percent and Discount Rate from 12 percent to 20 percent Discount Rate: 20.
Application of the assumptions presented resulted in estimated year 1 net operating income of $213,784 and a reversionary value for the subject property at the end of year 10 of $3,050,961.
The probability of lease renewal may add reversionary value.
The tables also may have laid the cornerstone for the future development of computer-generated discounted cash flow (DCF) programs using concepts of rising and falling rents, changes in expenses, and forecasts of reversionary value (value at the end of a holding period).
By using a 10-year zero-growth DCF model and discounting both the yearly income streams of $1,000,000 and the reversionary value of the property at the rate of 10%, the indicated value of the property is $10,000,000.
The inclusion of these items in the NOI calculation can impact the implied going-in rate and the reversionary value.
Sale costs are deducted in these value conclusions to reflect the net return in the reversionary value.
Therefore, banks will most likely have no reversionary value from a terminal income capitalization perspective.
2) The reversionary value is calculated using a 10% going-out capitalization rate on the 11th year's income.