The Fund Workbook Contains No Real Estate Model
There is no property cash flow in this workbook.
Most of a property's value comes from an exit cap rate you chose. A five-year DCF with a 5% exit cap puts roughly three-quarters of value in the terminal, which is why the forward year and the sale costs have to be checked.
This series models a private equity fund, not property. The limits sheet says so: no real estate, no cap rates, no property cash flows.
This article is therefore about the method a property model needs and the checks that make it credible, the same pattern the other topics in this series apply to their own asset class.
The shape of a property DCF
Five years of net operating income, discounted; plus an exit value at the end of year five, also discounted. The construction is a standard DCF walkthrough with rent in place of revenue.
The exit value is almost always the largest term. A typical five-year hold with a 5% exit cap and a 3% growth rate produces an exit value worth roughly three-quarters of the total, and that share grows as the cap rate falls.
Exit value is computed as the forward NOI divided by the exit cap rate:
Note the forward year. Using the year-5 NOI instead of year 6 is the most common error in a property model, and it understates the exit by one year of growth, around 3% of the exit value. On a 75% terminal weight that is 2% of the property.
The checks that make it credible
Six, in the order a reviewer would run them.
NOI ties to the rent roll. Every line of the NOI (rent, recoveries, vacancy, operating expenses) traces to a rent roll or an expense assumption. A model that takes NOI as a single growth rate has no rent roll and cannot answer the next question.
The forward year is used. Exit value uses year 6 NOI, not year 5. This is a one-cell check and it is the most valuable one in the model.
The exit cap rate is stated, not implied. Compute the implied cap rate from the exit value and compare with the stated one. If they differ, the exit was built from a growth assumption and the cap rate is decoration.
Sale costs are deducted. Depending on jurisdiction, agent fees, legal and transfer taxes are typically 1–3% of gross value; this is a modeling assumption, not tax advice. A model that forgets them overstates the exit.
The discount rate matches the risk. A property DCF discounted at a rate below the exit cap rate puts even more weight on the exit, and the model should state why the required return sits below the cap rate.
The terminal value share is reported. If the exit is more than, say, 80% of the value, the DCF is a cap rate with a rounding error of forecast attached. It is the same threshold the equity valuation workbook applies.
Why the exit cap rate is the answer
A five-year DCF discounts five years of known cash flow and one guess. The guess dominates the output, and the discount rate mostly converts the guess into a present value.
Concentration is not a reason to avoid the method; it is a reason to report the sensitivity: a 25 basis point move in the exit cap rate on a 75%-terminal model moves value by roughly 4%, and a reader who is not told that will treat the output as precise.
What a property model needs beyond this
Debt. A levered property DCF has a loan, amortization, interest, DSCR covenants and a refinancing event. None of that is in a simple exit model, and all of it affects the equity return.
Leases. A rent roll with staggered expiries is the difference between a property model and an NOI growth assumption. Rollover risk lives there.
Capital expenditure. Maintenance capex, tenant improvements and leasing commissions are cash outflows that NOI does not capture.
The private equity workbook in this topic applies the same discipline to a different asset class: the waterfall article shows how distributions get split, and the multiple article covers the return measures a property fund would also report. The return arithmetic is in cap rate and leverage, and the fund mechanics around it are in the integration piece.
What Mica will not do is manufacture a property model it was not given; that is why this article is about the method rather than a measured result.