Reversion Information
Project the return of a real estate investment
Because NPV is valuing cash flows, we need to calculate the Net Realizable Reversionary Value (cash that the investor expects to receive upon sale, exclusive of any debt repayment).
NOI to capitalize
Determines the NOI snapshot period at the disposal date or analysis end when a sale date is not speculated. This period will be adjusted and capitalized to calculate the reversionary value.
NOI capitalization period options:
- Forward 12 Months
- The total forecasted NOI in the year after the valuation date. This is most common.
- Trailing 12 Months
- The total forecasted NOI in the year leading up to the valuation date.
- Average 24 Months
- The one-year average NOI for 12 months before and after the valuation date.
Gross up occupancy
A common issue using the NOI snapshot without any adjustments is occupancy levels at the reversion date could be higher or lower than historical norms. Valuers often adjust the occupancy to historical levels using an occupancy adjustment.
Adding an occupancy gross up adjustment will adjust the NOI by the difference between the forcast occupancy and the percentage input.
NOI adjustments
Operational NOI adjustments are modifications made to the net operating income to provide a more accurate forecast of a property's typical financial performance. These adjustments can be both positive and negative, in the seller's or purchaser's favor.
The adjustments ensure that the reversionary value calculation is based on a realistic and sustainable income stream, rather than temporary or anomalous conditions. This is important because the NOI will be capitalized like a perpetuity. Perpetuities are based on the assumption that the income will continue far into the future.
Adjustment name
The name of the NOI adjustment as it will appear in reports that reflects its nature. Each adjustment must have a unique name.
Adjustment type
Determines if the adjustment should be an inflation adjusted amount or percentage of the net operating income snapshot.
- Amount
- A fixed, positive, inflation adjusted amount to be added (seller's favor) or subtracted (buyer's favor) from the NOI snapshot.
- Percentage
- A positive percentage to be applied to the NOI snapshot and added (seller's favor) or subtracted (buyer's favor) from the NOI snapshot.
Reversion capitalization rate
Also known as exit cap rate is the estimated capitalization rate at the time of reversion. The capitalization rate is a percentage that estimates an investor's potential return on investment. Rates reflect the risk of return and are effected by a variety of factors in the market.
Market rates can be found in market sales data and aggregated reports from appraisers. They can vary significantly between markets.
Value adjustments
Value adjustments account for factors beyond the property's operational performance, including market conditions, transaction-related expenses and seller-specific costs.
These 'below the line' adjustments refine the initial reversionary value to the actual amount a seller can expect to receive from the property sale.
Adjustment name
The type of adjustment corresponding order of application to the initial reversionary value to calculate the net realizable reversionary value.
Adjustment type
The type of adjustment corresponding order of application to the initial reversionary value to calculate the net realizable reversionary value.
Adjustment type options:
- Sale Price
- An adjustment that is added (seller's favor) or subtracted (purchaser's favor) from the initial reversionary value. These types of adjustments account for market conditions, property features not accounted for the Adjusted NOI or adjustments expected in negotiations, ex. Upcoming capital expenditures, deferred maintenance or excess land value. The application of sale price adjustments results in the adjusted reversionary value.
- Transaction Cost
- Cost adjustments including all the direct fees associated with completing a sale, ex. Brokerage fees, legal expenses and marketing spend. These costs are subtracted from the result of sale price adjustments. The application of transaction cost adjustments results in the net reversionary value.
- Vendor Cost
- Vendor costs are specific to the seller and would not necessarily be incurred by other buyers or sellers, ex. Management contract termination fees. Vendor costs are subtracted from the result of transaction cost adjustments. The application of vendor costs results in the net realizable reversionary value.
Adjustment description
A longer, optional description of the adjustment providing further identification or the source of information. Visible as a tooltip in some reports on the reporting row title.
Applied to
Determines the input type and value to apply the value adjustment. Adjustment types further down in the order of application will have more options to choose.
Applied to options:
- Amount
- A fixed, positive, inflation adjusted amount to be added (seller's favor) or subtracted (buyer's favor).
- Percentage of Initial Reversionary Value
- A positive percentage to be applied to the initial reversionary value and added (seller's favor) or subtracted (buyer's favor).
- Percentage of Adjusted Reversionary Value
- A positive percentage to be applied to the adjusted reversionary value and subtracted.
- Percentage of Net Reversionary Value
- A positive percentage to be applied to the net reversionary value and subtracted.