Where would capital reserve go in a DCF model?
Hi everyone,
I am making a DCF model for a project, and it asks to consider capital reserves for each unit. I can PM you if you want more details and photos. But there isn't much online about capital reserves being used in a DCF model. Is anyone familiar with this? Thank you.
Could be wrong, but I thought it was after NOI and incorporated when calculating unlevered and levered returns. But, you do not include it when calculating sale proceeds.
I have seen CapEX as a whole included in DCFs from appraisals and also not included from appraisers.
After NOI, before debt service. Create a sweep account that you add to every month, then as the units turn you get hit with the capital expense and it gets offset by pulling from the sweep account. I just put the sweep below the model where I do debt service.
NOI
Capex Reserve
Capex
(Sweep Used)
CFO
This. Have the model add up the sweeps and then budget out capex needs. As capex and turnover occurs, you can draw down on the balance that's been accrued.
Building on the above comments - if you don't have a specific capex budget or additional W/C is being carried for major capex items, it doesn't mean you shouldn't have a capex reserve. My firm models capex reserve as an additional buffer on top of the capex budget for unexpected costs, as opposed to using it as a sweep account to offset.
EDIT: To your question about incorporating in a DCF - if this is an acquisition model and you're modeling returns, then follow the above. If you're just trying to get a value for the property then capital reserves may or may not be factored in depending on your company's practice. Some will discount adjusted NOI net of capital reserves (and even leasing costs at times), others will just discount base NOI (this is the more standard practice).
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