NPV calculations - what is terminal value?


#1

If anyone is doing NPV calculations on parks - how do you set the terminal value or do you just run it 25 or 30 years?

I am used to doing this on oil/gas wells so I’m not sure how to apply to parks.


#2

To do a DCF calculation of real estate you would use a shorter time period than that, typically 5-10 years. While everything taught by MHU utilizes trailing NOI to calculate a value, a more academic way is to approach it would be to apply a terminal cap rate to the year 11 cashflow (read how an appraiser would handle it). A conservative model would using a higher “going-out” cap rate than the “going-in” rate. The theory behind that is, you are dealing with an older asset that has physically depreciated over the holding period. With the low historical cap rate we are seeing across all commercial real estate assets, it is not unreasonable to assume cap rates will be higher in 5-10 years. However, if you have a capital improvement plan that you will account for in the model, a lower terminal rate may be appropriate.


#3

An additional note, if you attend the Boot Camp, they give you a very solid DCF excel model. It is one of the best off the shelf models I have seen for any asset class.