Full Definition
Discounted Cash Flow analysis projects a property's cash flows (annual NOI plus terminal sale proceeds) over a hold period and discounts them back to present value using a discount rate (target IRR). The resulting Net Present Value indicates whether the deal meets return thresholds. DCF is the primary underwriting method for institutional CRE.
Related Terms
IRR (Internal Rate of Return)
The annualized rate of return over an investment's hold period, accounting for timing of all cash flows including sale proceeds.
Cap Rate (Capitalization Rate)
The ratio of a property's Net Operating Income to its purchase price, expressed as a percentage. The primary metric for comparing commercial real estate investments.
Reversion Value
The estimated sale value of a property at the end of an investor's hold period or at the end of a ground lease term.