Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties

Argus Ten-Year Discounted Cash Flow Model

Our analysis so far is a comprehensive breakdown of the yearly income and expenses generated for a real estate project but, as previously indicated, it is a relatively static analysis. It fails to take into account what happens to the financial numbers over several years, which can have a profound effect on the project's yield.

A financial model reflecting changes over time is needed. “Argus” is a proprietary computer program for analyzing a real estate project that is designed to spread the leases over time.* The first step in generating an Argus 10-year projection is to input the lease data into the Argus model. Please refer to Exhibit A.2 in the companion website. The amount in parenthesis under the column entitled “Description of Operating Expense Reimbursement” represents the estimated base year expense for the applicable year. The Argus model is based upon contractual lease rates in place. Hence the starting point is to use the rent roll to determine gross income, which includes expense reimbursements and increases based upon contractual lease rate adjustments. Over time, changes occur in the economics of the contractual relationship. Over time, lease rents increase and these lease rate changes must be reflected in the model. Similarly, expenses are not fixed, but rather usually increase over time. An inflation assumption must be made to reflect operating expense costs during the period analyzed.

Additionally, leases mature as reflected ...