The reversion in a discounted cash flow model represents:
Correct Answer
D) The proceeds from selling the property at the horizon
Why this is correct: In a DCF model, the reversion is the estimated net sale proceeds at the end of the holding period, often derived by capitalizing the following year's income at a terminal cap rate. Why the other choices are wrong: "The return of the original equity investment at closing" describes equity payback, not reversion. "The lender's balloon payment due at loan maturity" refers to debt, not property sale proceeds. "The accumulated depreciation over the holding period" is an accounting concept, not a cash flow. Exam tip: Reversion captures future sale value; it's a critical component in DCF, so support the terminal cap rate robustly.
Why This Is the Correct Answer
Why this is correct: In a DCF model, the reversion is the estimated net sale proceeds at the end of the holding period, often derived by capitalizing the following year's income at a terminal cap rate. Why the other choices are wrong: "The return of the original equity investment at closing" describes equity payback, not reversion. "The lender's balloon payment due at loan maturity" refers to debt, not property sale proceeds. "The accumulated depreciation over the holding period" is an accounting concept, not a cash flow. Exam tip: Reversion captures future sale value; it's a critical component in DCF, so support the terminal cap rate robustly.
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:
In a DCF, what is the reversion?
Potential gross income differs from effective gross income in that PGI assumes:
Two identical buildings differ only in risk: one has a single tenant on a short lease, the other five tenants on staggered terms. How do their cap rates compare?
Contract rent on a leased office is $30 per sq ft; market rent is $26. The $4 difference is called:
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?
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An overall rate extracted from a sale whose NOI excluded reserves, applied to a subject NOI that includes them, will:
Replacement reserves cover which kind of expenditure?
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