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.
(205) In arriving at damages for the breach of the lease contract, the board factored in the "reversionary value
" of the building, or "the equity Omni would have owned at the end of the lease." (206)
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
. For valuation purposes, reserves are commonly considered an operating expense to the property and are deducted "above the line" as an operating expense.
Sale costs are deducted in these value conclusions to reflect the net return in the reversionary value
. The matrix is provided to determine what discount rate and capitalization rate the projected purchase price is reflecting.
Therefore, banks will most likely have no reversionary value
from a terminal income capitalization perspective.
It is also assumed that the space will be relet immediately at the then-current market rents, which are growing at a compounded rate of 4% per year.(2) The reversionary value
is calculated using a 10% going-out capitalization rate on the 11th year's income.
The attorney-appraiser team decision was that the appropriate valuation of the properties assessed lay in what an investor would pay for the present worth of the proposed income stream before debt service and depreciation charges plus net reversionary value
over a given reasonable projection period.