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LearnCommercial Real Estate Finance → Lesson 4 of 11

DCF: modeling the hold

A discounted cash flow model projects each year of the hold: revenues (contractual rents, escalations, rollover to market with downtime and TI/LC), expenses (grown honestly, taxes reassessed on value where applicable), capital items in their years, producing annual cash flows; then a terminal value = year-N+1 NOI ÷ exit cap; everything discounted at the required return.

The model is only as honest as its levers: market rent growth, downtime months, renewal probability, TI/LC by deal type, exit cap (commonly set at or above today's for conservatism), and the discount rate. Sensitivity tables on the two or three levers that matter are not decoration — they are the analysis.

DCF's gift is forcing explicitness: every assumption sits in a cell someone can argue with. That is precisely what makes it better than a one-number method for transitional assets, and precisely why "the model says" is never an answer — the assumptions say.

Key takeaways

Lesson quiz 4 questions

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