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:
Potential gross income differs from effective gross income in that PGI assumes:
The reversion in a discounted cash flow model represents:
Building A (new, credit tenant, 20-year lease) and Building B (older, month-to-month tenants) sell the same week. Their cap rates should differ how?
An overall rate extracted from a sale whose NOI excluded reserves, applied to a subject NOI that includes them, will:
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An appraiser is analyzing a mixed-use property with retail and office components. The retail segment has a potential gross income of $180,000 with a market vacancy of 8%. The office segment has a potential gross income of $120,000 with a market vacancy of 12%. What is the overall effective gross income for the property?
The mortgage constant represents:
Applying a GRM of 164 to a subject renting at $2,650 monthly indicates a value of:
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