In a DCF, what is the reversion?
Correct Answer
B) The proceeds from selling the property at the holding period's end
Why this is correct: In a DCF, the 'reversion' is the 'proceeds from selling the property at the holding period's end,' typically estimated by capitalizing the subsequent year's NOI at a terminal cap rate and then discounting that value back to present. Why the other choices are wrong: 'The eventual return of the investor's original equity stake' describes equity reversion, but the term broadly refers to sale proceeds. 'The sum of all the discounted annual operating cash flows' is the present value of the income stream, not the reversion. 'The rollback of rents to market at each renewal' is a lease adjustment, not the reversion. Exam tip: The reversion often constitutes a large portion of total value in a DCF.
Why This Is the Correct Answer
Why this is correct: In a DCF, the 'reversion' is the 'proceeds from selling the property at the holding period's end,' typically estimated by capitalizing the subsequent year's NOI at a terminal cap rate and then discounting that value back to present. Why the other choices are wrong: 'The eventual return of the investor's original equity stake' describes equity reversion, but the term broadly refers to sale proceeds. 'The sum of all the discounted annual operating cash flows' is the present value of the income stream, not the reversion. 'The rollback of rents to market at each renewal' is a lease adjustment, not the reversion. Exam tip: The reversion often constitutes a large portion of total value in a DCF.
More income-approach Questions
In a percentage lease, rent is commonly structured as:
Escalation clauses and expense stops in a lease matter to the income analysis because they:
Potential gross income differs from effective gross income in that PGI assumes:
The reversion in a discounted cash flow model represents:
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Contract rent on a leased office is $30 per sq ft; market rent is $26. The $4 difference is called:
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An overall rate extracted from a sale whose NOI excluded reserves, applied to a subject NOI that includes them, will:
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