Recapitalization in the assessment of rental rates of buildings. Application of the capitalization method for calculating the annual rent. Types of adjustments in real estate valuation and the sequence of their application

The expression connecting the rental rate and net operating income is:

NOI = AC * (1 – Losses) – Costs

Where:
AC – Rental rate, rubles per year;
Losses – the share of rental income lost due to vacancies and non-payments;
Costs are the owner’s current costs for operating the rented premises.

Based on this ratio, practicing Appraisers, when determining the rental rate based on the amount of net operating income, often make the following mistake:

Mathematically, the feedback looks like this:

AC = (NOI + Costs)/(1 – Losses)

However, this formula contradicts the economic meaning of the parameters involved in this formula. In fact, when using the NOI formula, we take into account the amount of losses that actually reduce the actual amount of net operating income. This use of the formula is legal.

If we use the formula for the Rental Rate (RA), then dividing the sum of the required net flow and costs by the value “1 – Losses” economically means that rental rates grow in proportion to the growth of vacancies and non-payments, which clearly makes no economic sense. On the contrary, when faced with vacancies in the real rental market, the owner will be forced to reduce the rental rate, which will objectively lead either to a decrease in the market value of the asset or to a corresponding decrease in the market capitalization rate due to a decrease in the required level of profitability. There is no reason for rental rates to rise with increasing losses from vacancies and non-payments, so another relationship between the rental rate and the amount of net operating income is correct, namely:

AC = NOI + Costs

This connection in practice is expressed in the prevailing approach, according to which owners often include their costs in the rental rate. However, the contract often stipulates that costs are not included in the rental rate, but are presented to the tenant separately.

In accordance with this, the formula takes an even simpler form:

This formula looks unusual from the point of view of income analysis of the valuation object, where Appraisers are accustomed to taking into account both vacancies and costs. However, it is necessary to take into account that we are determining the minimum profitability required by the cost benchmark, and are not conducting an income analysis.

What is the point of estimating the minimum profitability?

It should be taken into account that the maximum profitability depends entirely on the market situation, which will be taken into account by us within the framework of the comparative approach, and on the decision of the owner, who is not bound by this assessment, in the sense that he can set the rental rate above the value determined by the Appraiser. The required return cannot be oriented towards the maximum; by its very definition it is oriented towards the minimum.

Income that can be received by the owner of a property. often difficult to determine. It is calculated based on the full rent received by the owner of the property. The cost of the property is determined by multiplying the capitalization rate by the annual rent. The capitalization rate is equal to the number of years of income to compensate for the cost of the property. So, for example, with an income of 40% per year, the capitalization rate will be 1/0.4 = 2.5; for 50% per year - respectively 1/0.5 = 2.0. For example, the annual rent for an office is 600 thousand rubles, then with the income expected by the office owner only in the form of rent at 24% per annum (equal to the refinancing rate), the cost of real estate () will be:

If the owner of the property plans to receive income from other sources (other than rent), they are also taken into account when determining the value of the property and then summed up. It is also possible to use the income method based on the assumption that the owner of the property always receives a constant amount of rent. In this sense, options for changing rents under the influence of market conditions are not considered, although they necessarily occur in real practice. However, these rent changes are an important aspect for the property owner because he wants to be protected from inflation and other unforeseen circumstances. The technique for calculating the value of a real estate property can be presented as follows:

Three types of income standards are determined: initial, current and future:

Income is determined taking into account risks;

Analyzes comparable sales of objects on the real estate market;

Rent capitalization is calculated using a specific income capitalization rate;

Income is discounted taking into account the market (average) capitalization rate to find the current value of the property.

As an example, consider the following situation. The company occupies an office building with full ownership rights. The building was leased for 5 years with the possibility of revising the rent every year. The initial rent was 600 thousand rubles. in year. The bank's refinancing rate is 55%. This means that the owner has the right to expect an income (taking into account risks) of at least 55% per year. In this case, the cost of acquiring the property ( ) determined by the ratio of net rent ( ) to expected percentage of income

This is the simplest example. Here the rent value reflects its current level. In addition, the assumption is made that this value will remain in the future and the tenant will pay rent consistently and management costs will not change. Regular review of the rent every year allows you to maintain it at the desired level. The level of income, confirmed by analyzing market data (based on recent sales), can reflect the level of expectations of the property owner.

To eliminate possible errors, the appraiser must perform three operations:

1.Determine the gross value of the property(IN). For this purpose, the cost of the annual rent is first calculated ( ) based on an analysis of sales prices of similar objects and market conditions; then expenses (P), management cost (U), the amount of land rent, and investment rate of return as a percentage (P) are taken into account. Then:

2. Determine all development costs. Property development costs include:

· the cost of services of designers, architects, construction consultants and engineers (can be 10-15% of the construction cost, depending on the complexity of the building);

· costs of obtaining a construction permit and various approvals;

· costs for cleaning and preparing the site (accounted for based on actual data at the time of work);

· cost of construction (construction contract), cost of materials taking into account inflation (this expense item is fixed according to actual data in each reporting period);

· costs of creating a landscape (determined in the same way as the two previous types);

· other costs. It is customary to include additional costs of 5% in case of unforeseen expenses (for advertising, marketing and some others);

· fees for services that are included in the total cost of expenses; income and risks of the developer. Typically, the developer (owner) includes his income and a risk premium in the total cost. This amount may be a certain percentage of the capital cost of the completed development project or the total cost of the building. The level of profitability and risks are assessed based on a combination of competitive conditions in the land market, the complexity of the investment project in the reliability of the income received in the future, as well as the level of prestige of the project and confidence in its profitability.

3. Calculate the cost of a plot of land and profitability. The gross cost of land acquisition can be found by subtracting the gross cost of the property from the total cost of the real estate development project. The net value of a real estate property is determined by subtracting the costs of acquiring land from the resulting value. The result characterizes the minimum level of profitability of the project.

The main mistakes when valuing real estate using the income approach:

1. The market value of the lease is calculated according to regulatory methods (including those of state property management bodies).

2. There is no comparative analysis of the rental rate level. Analogues have not been identified, there are no sources.

3. The market rental rate is determined on the basis of existing lease agreements without analyzing compliance with market data.

4. They do not distinguish the type of rental rate according to analogues: gross, net, etc., as well as the presence of VAT.

5. Rental area is not allocated.

6. Concluded long-term lease agreements are not taken into account.

7. Inflation or incorrect methods of accounting for it are not taken into account.

8. Including depreciation charges and capital costs in operating expenses, not including land tax and property tax in operating expenses, which entails an unreasonable amount of operating expenses.

9. Calculations are carried out without taking into account the NEI.

10. The choice of the forecast period is not justified.

11. They forget about the cost of reversion.

12. There is no justification for capital costs in the OSE method.

13. There is no calculation of the capitalization ratio and discount rate.

14. The type of cash flow does not correspond to the discount rate (capitalization rate).

15. Use of direct capitalization in inappropriate cases.

16. Refusal to use the income approach for objects under construction.

17. Other parameters are used (rent rate, space underutilization ratio, repair and reconstruction costs, capitalization rate), and those that were used in the calculations in the section “Analysis of the best and most effective use.”

In the conditions of a dynamically developing market economy in the Russian Federation, as well as a lack of funds to purchase assets from entrepreneurs, the issue of assessing the rental of real estate and other property for doing business is relevant.

Approaches used to estimate rental costs

To determine the cost of rent in the real estate market, experts use the following approaches:

1.Comparative approach includes methods:

• Comparable market prices (comparative sales analysis);
• Subsequent implementation;
• Sales prices of secondary products.

When assessing a lease , As with real estate valuation in general, the comparable market price methodology is of paramount importance. When determining the rental price, experts use supply and demand prices. In real practice, it is difficult to obtain information about transaction prices. In addition, it should be noted that there are goals to minimize the lessor’s taxes, which entails low prices being reflected in contracts. Comparative sales analysis is applicable for, as well as for the evaluation of buildings for residential purposes. The possibility of using the comparable prices method allows you not to use other methods and approaches.

However, if it is necessary to calculate the rental cost of very large buildings for which there are no analogues, experts use the subsequent sales price method. The method is classified as a comparative approach because it is based on information about “retail” prices on the market, which are used to calculate the wholesale price on the market by adjusting for the profitability of the reseller in retail prices. The method is intended primarily for calculating the market value of goods for wholesale sales.

The benefit of the comparative approach is that it reflects the market's point of view. The disadvantage of the comparative approach is that it is limited in its application to many types of real estate.

2. Cost approach includes one method - the cost compensation method, consisting of several methods:

• Recapitalization;
• Economic depreciation;
• Gross rent multiplier.

The essence of the methods is that the lessor compensates for the costs incurred by him associated with the acquisition of property and its lease. The landlord must not only compensate for the costs, but also receive income.

The most common is the recapitalization method, which determines the rent as follows:

1. Calculation of the value of property for rent, according to the methods of valuation standards for property of this type;
2. Determination of capitalization ratio;
3. Determination of operating income (net) (product of property value by capitalization ratio);
4. Calculation of the lessor's costs (taxes, facility operation);
5. Calculation of gross income (the sum of operating costs and the landlord’s income);
6. Calculation of rent (sum of gross income and losses from non-payment).

Disadvantages of the cost compensation method:

• The method is beneficial only to the lessor;
• The method is applicable for property that provides permanent income;
• The method causes the need to be leased.

3. Income approach used when it is impossible to evaluate leases using comparative and cost approaches (for example, evaluation of oil wells).

The sequence of calculating rent using the income approach:

1. Determination of projected revenue from the tenant's activities;
2. Preparing a forecast for the tenant's costs;
3. Establishing rental profitability standards based on statistics on the activities of similar companies;
4. Calculation of the profitability of the tenant's work;
5. Calculation of the tenant's profit (income);
6. Calculation of rent (the difference between revenue and the amount of costs and profit of the tenant).

The use of the income approach to calculate the price of services and goods is not provided for by the Tax Code of the Russian Federation. Appraisers use the income approach only when it is impossible to use the comparative and cost approaches.

Thus, rental assessment is a complex, labor-intensive process; the reliability of the assessment results is determined by the qualifications of the appraiser.

When determining the capitalization ratio, both the profit received from the operation of the property and the reimbursement of fixed capital (recapitalization) spent on the acquisition of the property are taken into account.

There are three methods of recapitalization (recovery of the invested amount), i.e. determining the second component (Rof) of the capitalization ratio: the method of Ring, Inwood and Hoskold.

1. Straight-Line Capital Recovery, or the Ring method. According to Ring, the return of the principal amount of invested capital occurs annually in equal shares, the amount of which is equal to the amount of the initially invested capital.

The calculation is carried out according to the formula: RO = YON + YOF = YON + 1/n,

where YON is interest on capital (rate of return on investment, discount rate, interest rate); YOF is the rate of return on capital. n – number of years;

The recovery fund factor for a straight-line recapitalization is determined by dividing one by the number of periods. In the limiting case, when n→∞, RO = YO, i.e. The longer the earnings period, the smaller the recapitalization component. The economic model is an “aging” hotel.

2. Recapitalization during the formation of a compensation fund at the rate of return on investments (uniform annuity recapitalization according to Inwood). The recapitalization ratio, as a component of the capitalization ratio, is equal to the replacement fund factor (SFF) at the same interest rate as the investment. The calculation is made using the formula RO = YON + YOF = YON + SFF (n, YON = Yrisk).

The Inwood method is based on the following assumptions:

1. The annual income in YO does not affect the principal amount of the investment and can thus be spent by the owner.

2. Annual recapitalization amounts must be reinvested at YO per annum so that the principal amount of the investment remains unchanged.

Part of the total income stream is net income, i.e. return on investment. The other part of the income stream provides reimbursement or return of capital.

The amount of the recapitalization premium depends on the duration (term) of receiving the income stream n and the level of the interest rate YO. The longer the period of receipt of the income stream, the lower the coefficient. In the limit, as n tends to infinity, it turns to zero, and the capitalization rate degenerates into the rate of return on capital (RO = YO).

This recapitalization method can be used in Russian conditions for real estate properties that generate low but stable income.

3. Recapitalization when forming a compensation fund at a risk-free interest rate or the Hoskold method. In some cases, an investment is so profitable that it is considered unlikely that it will be reinvested at the same interest rate as the original investment (for example, a gold or oil field). For reinvested funds, it is possible to receive income at a lower, conditionally risk-free interest rate.

The calculation will look like this:

RO = YON + YOF = YON + SFF (n, YON = Yrisk-free).

The Hoskold method is often used in investment analysis.

________________

The capitalization ratios obtained by the three methods differ in size. The capitalization ratio reflects the degree of risk of investing in a particular property. Therefore, we can conclude that calculations for the recapitalization of riskier investments should be made using the Ring method, and less risky ones - using the Inwood method.

Partial recapitalization. Investments may lose part of their value by less than 100%. In this case, the recapitalization rate is only a fraction of the full rate, and some of the recapitalization is obtained from the proceeds of the resale of the property rather than entirely from current income.

It should be noted that the chosen recapitalization method, which is based on a change in the income structure, greatly affects the residual income and the value of the property as a whole. So, in all cases where a decrease (loss) in the capital value of an investment is expected, recapitalization must be provided from proceeds, since it cannot be obtained from the amount received from the sale of the asset.

Examples of such real estate assets (recapitalization using the Ring method): aging hotels; aging residential buildings, office and retail buildings.

Recapitalization using the Inwood method is necessary when it is planned to receive stable income over a sufficiently long period (long-term lease at a fixed net rate with the right to purchase the property (option) at the end of the lease term at a fixed price less than the cost of capital invested by the owner in the property , or self-absorbing mortgages).

Recapitalization according to Hoskold is used for a narrow segment of the real estate market, where investments bring excess profits.

3.5.3. Income approach

Income approach is based on the fact that the value of the property in which capital is invested must correspond to a current assessment of the quality and quantity of income that this property is capable of generating.

Capitalization of income is a process that determines the relationship between future income and the current value of an object.

The basic formula of the income approach (Fig. 3.5):

Or where

C (V) - property value;

BH (I) - expected income from the property being assessed. Income usually refers to the net operating income that a property is capable of generating over a period;

K (R) - rate of return or profit - is a coefficient or capitalization rate.

Capitalization rate- rate of return, reflecting the relationship between income and the value of the valuation object.

Capitalization rate- This is the ratio of the market value of property to the net income it generates.

Discount rate- the rate of compound interest, which is applied when recalculating at a certain point in time the value of cash flows arising from the use of property.

Rice. 3.5. Income capitalization model

Stages of the income approach:

1. Calculation of gross income from the use of an object based on an analysis of current rates and tariffs in the rental market for comparable objects.

2. The assessment of losses from incomplete occupancy (renting) and uncollected rental payments is made on the basis of an analysis of the market and the nature of its dynamics in relation to the real estate being valued. The amount calculated in this way is subtracted from the gross income, and the resulting figure is the actual gross income.

3. Calculation of costs associated with the subject of assessment:

Operational (maintenance) – costs of operating the facility;

Fixed – costs of servicing accounts payable (interest on loans, depreciation, taxes, etc.);

Reserves are the costs of purchasing (replacing) accessories for a property.

4. Determination of the amount of net income from the sale of the object.

5. Calculation of capitalization ratio.

The income approach estimates the current value of real estate as the present value of future cash flows, i.e. reflects:
- the quality and quantity of income that a property can bring during its service life;
- risks specific to both the object being assessed and the region.

The income approach is used to determine:
- investment value, since a potential investor will not pay more for an object than the present value of future income from this object;
- market value.

Within the framework of the income approach, it is possible to use one of two methods:
- direct capitalization of income;
- discounted cash flows.

3.5.3.1. Income capitalization method

When using the income capitalization method, income for one time period is converted into the value of real estate, and when using the discounted cash flow method, income from its intended use for a number of forecast years, as well as proceeds from the resale of a property at the end of the forecast period, are converted.

The advantages and disadvantages of the method are determined according to the following criteria:

The ability to reflect the actual intentions of the potential
buyer (investor);

The type, quality and breadth of information on which the analysis is based;

Ability to take into account competitive fluctuations;

The ability to take into account the specific features of an object that influence
on its cost (location, size, potential profitability).

Income capitalization method used if:

Income streams are stable over a long period of time and represent a significant positive value;

Income streams are growing at a steady, moderate pace. The result obtained by this method consists of the cost of buildings, structures and the cost of the land plot, i.e. is the cost of the entire property. The basic calculation formula is as follows:

Or where

C - cost of the property (monetary units);

CC - capitalization ratio (%).

Thus, the income capitalization method is the determination of the value of real estate through the conversion of annual (or average annual) net operating income (NOI) into current value.

When applying this method, the following must be taken into account: limiting conditions:

Instability of income streams;

If the property is under reconstruction or under construction.

The main problems of this method

1. The method is not recommended for use when the property requires significant reconstruction or is in a state of unfinished construction, i.e. It is not possible to reach a level of stable income in the near future.

2. In Russian conditions, the main problem faced by the appraiser is the “information opacity” of the real estate market, primarily the lack of information on real transactions for the sale and rental of real estate, operating costs, and the lack of statistical information on load factor in each market segment in different regions . As a result, calculating the NRR and capitalization rate becomes a very complex task.

The main stages of the valuation procedure using the capitalization method:

1) determination of the expected annual (or average annual) income, as the income generated by the property under its best and most efficient use;

2) calculation of the capitalization rate;

3) determining the value of a property based on net operating income and capitalization ratio by dividing the NPV by the capitalization ratio.

Potential Gross Income (GPI)- income that can be received from real estate with 100% use of it without taking into account all losses and expenses. PPV depends on the area of ​​the property being assessed and the established rental rate and is calculated using the formula:

, Where

S - rentable area, m2;

cm - rental rate per 1 m2.

Actual Gross Income (DVD)- this is the potential gross income minus losses from underutilization of space and when collecting rent, with the addition of other income from the normal market use of the property:

DVD = PVD – Losses + Other income

Net operating income (NOI)- actual gross income minus operating expenses (OR) for the year (excluding depreciation):

CHOD = DVD – OR.

Operating expenses are expenses necessary to ensure the normal functioning of the property and the reproduction of actual gross income.

Calculation of capitalization ratio.

There are several methods for determining the capitalization rate:
taking into account the reimbursement of capital costs (adjusted for changes in the value of the asset);
linked investment method, or investment group technique;
direct capitalization method.

Determination of the capitalization ratio taking into account the reimbursement of capital costs.

The capitalization ratio consists of two parts:
1) the rate of return on investment (capital), which is the compensation that must be paid to the investor for the use of funds, taking into account the risk and other factors associated with specific investments;
2) capital return rates, i.e. repayment of the initial investment amount. Moreover, this element of the capitalization ratio applies only to the depreciable part of the assets.

The rate of return on capital is constructed using the cumulative construction method:
+ Risk-free rate of return +
+ Risk premiums +
+ Investments in real estate +
+ Premiums for low real estate liquidity +
+ Awards for investment management.

Risk-free rate of return - interest rate on highly liquid assets, i.e. This is a rate that reflects “the actual market opportunities for investing the funds of firms and individuals without any risk of non-return.” The yield on OFZ and VEB is often taken as the risk-free rate.

In the assessment process, it is necessary to take into account that nominal and real risk-free rates can be both ruble and foreign currency. When recalculating the nominal rate into the real one and vice versa, it is advisable to use the formula of the American economist and mathematician I. Fisher, which he derived back in the 30s of the 20th century:

; Where

Rн – nominal rate;
Rр – real rate;
Jinf – inflation index (annual inflation rate).

When calculating the foreign exchange risk-free rate, it is advisable to make an adjustment using the Fisher formula taking into account the dollar inflation index, and when determining the ruble risk-free rate - the ruble inflation index.

Converting the ruble rate of return to the dollar rate or vice versa can be done using the following formulas:

Dr, Dv - ruble or foreign currency income rate;

Kurs – rate of exchange rate, %.

Calculation of the various components of the risk premium:

premium for low liquidity. When calculating this component, the impossibility of immediate return of investments made in the property is taken into account, and it can be taken at the level of dollar inflation for the typical exposure time of objects similar to the one being valued on the market;

risk premium investments in real estate. In this case, the possibility of accidental loss of the consumer value of the object is taken into account, and the premium can be accepted in the amount of insurance contributions in insurance companies of the highest category of reliability;

premium for investment management. The riskier and more complex the investment, the more competent management it requires. It is advisable to calculate the premium for investment management taking into account the coefficient of underload and losses when collecting rental payments.

Linked investment method, or investment group technique.

If a property is purchased using equity and borrowed capital, the capitalization ratio must meet the return requirements for both parts of the investment. The value of the ratio is determined by the related investment method, or investment group technique.

The capitalization ratio for borrowed capital is called the mortgage constant and is calculated using the following formula:

Rm – mortgage constant;
DO – annual payments;
K – mortgage loan amount.

The mortgage constant is determined by the table of six functions of compound interest: it is equal to the sum of the interest rate and the compensation fund factor or equal to the contribution factor per unit of depreciation.

The capitalization rate for equity is called the mortgage constant and is calculated using the following formula:

Rc – equity capitalization ratio;
PTCF – annual cash flow before taxes;
Ks is the amount of equity capital.

The overall capitalization ratio is determined as a weighted average:

M – mortgage debt ratio.

If a change in the value of an asset is predicted, then it becomes necessary to take into account the return of the principal amount of capital (the recapitalization process) in the capitalization ratio. The rate of return on capital is called the recapitalization ratio in some sources. To return the initial investment, part of the net operating income is set aside in a recovery fund with an interest rate of R - the interest rate for recapitalization.

There are three ways reimbursement of invested capital:
straight-line return of capital (Ring method);
return of capital according to the replacement fund and the rate of return on investment (Inwood method). It is sometimes called the annuity method;
return of capital based on the compensation fund and risk-free interest rate (Hoskold method).

Ring method.

This method is appropriate to use when it is expected that the principal amount will be repaid in equal installments. The annual rate of return on capital is calculated by dividing 100% of the asset's value by its remaining useful life, i.e. It is the reciprocal of the asset's service life. The rate of return is the annual share of the initial capital placed in the interest-free compensation fund:

n – remaining economic life;
Ry – rate of return on investment.

Example.

Investment terms:
term - 5 years;
R - rate of return on investment 12%;
the amount of capital invested in real estate is $10,000.

Solution. Ring's method. The annual straight-line rate of return on capital will be 20%, since in 5 years 100% of the asset will be written off (100: 5 = 20). In this case, the capitalization ratio will be 32% (12% + 20% = 32%).

Reimbursement of the principal amount of capital, taking into account the required rate of return on investment, is reflected in table. 3.4.

Table 3.4

Return of invested capital using the Ring method (USD)

	Balance of investment at the beginning of the period	Reimbursement of investment	Return on invested capital (12%)	Total income

The return of capital occurs in equal parts over the entire life of the property.

Inwood method used if the capital return is reinvested at the rate of return on the investment. In this case, the rate of return as a component of the capitalization ratio is equal to the replacement fund factor at the same interest rate as for investments:

Where SFF- compensation fund factor;

Y=R(rate of return on investment).

Reimbursement of invested capital using this method is presented in table. 3.5.

Example.

Investment terms:

Duration - 5 years;

Return on investment - 12%.

Solution. The capitalization rate is calculated as the sum of the investment return rate of 0.12 and the compensation fund factor (for 12%, 5 years) of 0.1574097. The capitalization rate is 0.2774097, if taken from the column “Contribution for depreciation” (12%, 5 years).

Table 3.5

Recovery of invested capital using the Inwood method

	Balance of principal amount at the beginning of the year, dollars.	Total amount of compensation	Including
			% on capital	compensation principal amount

Hoskold method. Used when the rate of return on the initial investment is somewhat high, making reinvestment at the same rate unlikely. For reinvested funds, it is assumed that income will be received at a risk-free rate:

where Yb is the risk-free interest rate.

Example. The investment project provides for an annual 12% return on investment (capital) for 5 years. Return on investment amounts can be safely reinvested at a rate of 6%.

Solution. If the rate of return on capital is 0.1773964, which is the recovery factor for 6% over 5 years, then the capitalization rate is 0.2973964 (0.12 + 0.1773964).

If it is predicted that the investment will lose only part of its value, then the capitalization ratio is calculated slightly differently, since capital is repaid through the resale of real estate, and partly through current income.

Advantages the income capitalization method is that this method directly reflects market conditions, since when it is applied, usually a large number of real estate transactions are analyzed from the point of view of the relationship between income and value, and also when calculating capitalized income, a hypothetical income statement is drawn up, the basic principle of which is the assumption of the market level of real estate exploitation.

Flaws The income capitalization method is that:
its application is difficult when there is no information about market transactions;
The method is not recommended for use if the object is unfinished, has not reached the level of stable income, or has been seriously damaged as a result of force majeure and requires serious reconstruction.

3.5.3.2. Discounted Cash Flow Method

The discounted cash flow (DCF) method is more complex, detailed and allows you to evaluate an object in case of receiving unstable cash flows from it, modeling the characteristic features of their receipt. The DCF method is used when:
it is expected that future cash flows will differ significantly from current ones;
there is data to justify the size of future cash flows from real estate;
income and expense flows are seasonal;
the property being assessed is a large multifunctional commercial facility;
the property is under construction or has just been built and is being put into operation (or put into operation).

The DCF method estimates the value of real estate based on the present value of income, consisting of projected cash flows and residual value.

To calculate DCF, the following data is required:
duration of the forecast period;
forecast values ​​of cash flows, including reversion;
discount rate.

Calculation algorithm for the DCF method.

1. Determination of the forecast period. In international assessment practice, the average forecast period is 5-10 years; for Russia, the typical value will be a period of 3-5 years. This is a realistic period for which a reasonable forecast can be made.

2. Forecasting cash flow values.

When valuing real estate using the DCF method, several types of income from the property are calculated:
1) potential gross income;
2) actual gross income;
3) net operating income;
4) cash flow before taxes;
5) cash flow after taxes.

In practice, Russian appraisers discount income instead of cash flows:
CHOD (indicating that the property is accepted as not burdened with debt obligations),
net cash flow less operating costs, land tax and reconstruction,
taxable income.

It is necessary to take into account that it is the cash flow that needs to be discounted, since:
cash flows are not as volatile as profits;
the concept of “cash flow” correlates the inflow and outflow of funds, taking into account such monetary items as “capital investments” and “debt obligations”, which are not included in the calculation of profit;
the profit indicator correlates income received in a certain period with expenses incurred in the same period, regardless of actual receipts or expenditures of funds;
cash flow is an indicator of the results achieved both for the owner himself and for external parties and counterparties - clients, creditors, suppliers, etc., since it reflects the constant availability of certain funds in the owner’s accounts.

Features of calculating cash flow when using the DCF method.

1. Property tax (real estate tax), consisting of land tax and property tax, must be deducted from actual gross income as part of operating expenses.

2. Economic and tax depreciation is not a real cash payment, so taking depreciation into account when forecasting income is unnecessary.

4. Loan servicing payments (interest payments and debt repayments) must be deducted from net operating income if the investment value of the property is assessed (for a specific investor). When assessing the market value of a property, it is not necessary to deduct loan servicing payments.

5. Business expenses of the property owner must be deducted from the actual gross income if they are directed
to maintain the necessary characteristics of the object.

Thus, dcash flow (CF) for real estate calculated as follows:
1. DV is equal to the amount of PV minus losses from vacancy and collection of rent and other income;
2. NAV is equal to DV minus OR and business expenses of the real estate owner related to real estate;
3. DP before taxes is equal to the amount of NPV minus capital investments and expenses for servicing the loan and loan growth.
4. DP is equal to DP before taxes minus payments for income tax of the property owner.

The next important stage is calculating the cost of reversion. The cost of reversion can be predicted using:
1) assigning a sales price based on an analysis of the current state of the market, monitoring the cost of similar objects and assumptions regarding the future state of the object;
2) making assumptions regarding changes in the value of real estate during the ownership period;
3) capitalization of income for the year following the year of the end of the forecast period, using an independently calculated capitalization rate.

Determining the discount rate.“A discount rate is a factor used to calculate the present value of a sum of money received or paid in the future.”

The discount rate should reflect the risk-return relationship, as well as the various types of risk inherent in the property (capitalization rate).

Since it is quite difficult to identify a non-inflationary component for real estate, it is more convenient for the appraiser to use a nominal discount rate, since in this case, forecasts of cash flows and changes in property value already include inflation expectations.

The results of calculating the present value of future cash flows in nominal and real terms are the same. Cash flows and the discount rate must correspond to each other and be calculated in the same way.

In Western practice, the following methods are used to calculate the discount rate:
1) cumulative construction method;
2) a method for comparing alternative investments;
3) isolation method;
4) monitoring method.

Cumulative construction method is based on the premise that the discount rate is a function of risk and is calculated as the sum of all risks inherent in each specific property.

Discount rate = Risk-free rate + Risk premium.

The risk premium is calculated by summing up the risk values ​​inherent in a given property.

Selection method- the discount rate, as a compound interest rate, is calculated based on data on completed transactions with similar objects on the real estate market.

The usual algorithm for calculating the discount rate using the allocation method is as follows:
modeling for each analogue object over a certain period of time according to the scenario of the best and most effective use of income and expense streams;
calculation of the rate of return on investment for an object;
process the results obtained by any acceptable statistical or expert method in order to bring the characteristics of the analysis to the object being assessed.

Monitoring method is based on regular market monitoring, tracking the main economic indicators of real estate investment based on transaction data. Such information needs to be compiled across different market segments and published regularly. Such data serves as a guide for the appraiser and allows for a qualitative comparison of the obtained calculated indicators with the market average, checking the validity of various types of assumptions.

Calculation of the value of a property using the DCF method is carried out using the formula:

; Where

PV – current value;
Ci – cash flow of period t;
It is the discount rate for cash flow of period t;
M – residual value.

The residual value, or reversion value, must be discounted (by the factor of the last forecast year) and added to the sum of the present values ​​of the cash flows.

Thus, the value of the property is = Present value of projected cash flows + Present value of residual value (reversion).

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