This financial model is designed for the simplest assessment of the market value of real estate, generating income. As you know, the valuation of commercial real estate in the framework of the income approach is carried out using two main methods: the method of capitalization of income and the method of discounted cash flows. Under certain conditions, the results obtained using both methods may be identical, but in practice it is very rare. The method of discounted cash flows, used for the valuation of commercial real estate, is a more universal method than the method of capitalization of income, as it allows to predict and take into account the uneven income from the operation of real estate in the forecast period.
The use of this DCF model for appraisal of real estate is a very simple procedure. All you need to do is enter the forecast data in the cells, painted in yellow. Unpainted cells cannot be changed because they contain calculation formulas and references. In this model, the forecast period is five years, and the sixth year is the terminal year in which the commercial property will be sold. Due to the fact that the purpose of this financial model is to assess the market value, not the investment value, the model does not take into account cash flows associated with the repayment of the loan and the payment of interest on the loan.
Methodology sources regarding the valuation of commercial real estate:
- Jack P. Friedman, N. Ordway. Income property appraisal and analysis. – Translation from English – M.: Delo, 1997.
- A. Damodaran. Investment valuation: tools and techniques for determining the value of any asset. Second Edition. – Translation from English – M.: Alpina Business Books, 2008.
Vadim Sobkin (www.economist-mate.com)