These questions are going to be basic to almost everyone but I am blanking on this for some reason.
1) If you have a 10 year hold period you model out the cash flows to year 11 and then base your terminal value on the expected 11th year cash flow correct?
2) When walking through a case study you determine your acquisition cost on whatever the asset's cumulative income is initially? So if it's a retail strip center with 3 tenants putting out roughly $500,000 of income for the first year, that's the NOI you use for valuation?
Thanks for the patience and explanation.
1) If you have a 10 year hold period you model out the cash flows to year 11 and then base your terminal value on the expected 11th year cash flow correct?
yes
2) When walking through a case study you determine your acquisition cost on whatever the asset's cumulative income is initially? So if it's a retail strip center with 3 tenants putting out roughly $500,000 of income for the first year, that's the NOI you use for valuation?
NOI is not the same thing as cumulative income.
GSI Less Rental Adjustments Plus Other Income = EGI Less OP EX = NOI
Assuming you meant $500,000 is the NOI for Year One, there’s a few ways to value acquisitions.
I’d personally take a conservative approach and Cap the T12 NOI while adjusting for new taxes and management fees.
Please clarify your question and perhaps I can answer in more detail.
why do you cap the t12 while adjusting for new taxes/mgmt fees vs capping the f12?
IRR would be the following:
Time 1 = 12/31/2019 /// Value 1 = -outflow/cost of acquisition Time 2 = 12/31/2020 /// Value 2 = NOI, as defined above, from 1/1/2020 to 12/31/2020..i.e. 365 days Time 3-->10 = 12/31/2021 - 12/31/2030 /// Value 3-->10 = same as above...all through final year Time 10(b) = 12/31/2030 /// Value 11 = asset sale price...If broken out monthly, add this (net sales price) to the last month's NOI. If it is an annual schedule, then just add on top of the gross yr 11 NOI.
If it's an annual schedule than IRR excel function is fine...anything other than that or not equal years apart use the XIRR...in fact I would always just use XIRR to be safe...
REGARDING WHAT THAT PRICE SHOULD BE and how it should be calculated...that is up for discussion and opinion...but the most conservative approach is to take the trailing 12 NOI and cap it as mentioned in the comment prior. You can take an in-place NOI...you can do a combination of the two, as how a loan would typically "Test" your NOI for debt covenants which is some combination of a Trailing 3month on revenues but a trailing 6-12 month on expenses. Or to be aggressive, which oddly enough is the most TYPICAL way a property is valued, is to take the forward 12 month NOI and cap it. But for the IRR calculation, this "forward" NOI isnt a part of the cash flows at all...it's merely there to provide the NOI for the formula.
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