ASC Evaluation Details and Structure 2 — Questions and Answers
Question 1: In ARGUS DCF analysis, what does the 'reversion value' represent?
- The total rental income collected over the holding period
- The estimated sale proceeds at the end of the holding period (Correct answer)
- The accumulated depreciation on the property
- The present value of all future lease renewals
Correct answer: The estimated sale proceeds at the end of the holding period
The reversion value (also called terminal or residual value) is the estimated net sale proceeds received when the property is sold at the end of the analysis holding period.
Question 2: How is the terminal cap rate used differently from the going-in cap rate in ARGUS?
- Terminal cap rate sets initial purchase price; going-in cap rate sets the sale price
- Going-in cap rate values the property at acquisition; terminal cap rate estimates the reversion value at the end of the holding period (Correct answer)
- They are interchangeable and produce identical outputs
- Terminal cap rate applies only to retail properties; going-in applies to office
Correct answer: Going-in cap rate values the property at acquisition; terminal cap rate estimates the reversion value at the end of the holding period
The going-in cap rate determines the entry valuation, while the terminal cap rate is applied to the final year NOI (or year-after NOI) to estimate the property's sale price at the end of the holding period.
Question 3: Which ARGUS input most directly controls the length of the discounted cash flow projection?
- Discount rate
- Holding period (analysis period) (Correct answer)
- Lease term of the anchor tenant
- Loan amortization schedule
Correct answer: Holding period (analysis period)
The holding period (analysis period) defines how many years of cash flows ARGUS projects before calculating the reversion value.
Question 4: When ARGUS calculates IRR, what two components of return does it combine?
- NOI yield and expense growth
- Periodic cash flows during the holding period and the net reversion proceeds at sale (Correct answer)
- Gross potential rent and effective gross income
- Debt service coverage and loan-to-value ratio
Correct answer: Periodic cash flows during the holding period and the net reversion proceeds at sale
IRR in ARGUS reflects the time-weighted return from both the annual cash flows received during the hold and the net sale proceeds (reversion) at the end.
Question 5: In ARGUS, the going-in cap rate is applied to which cash flow metric to derive property value?
- Effective Gross Income (EGI)
- Net Operating Income (NOI) (Correct answer)
- Cash flow before debt service (unlevered cash flow)
- Gross Potential Rent (GPR)
Correct answer: Net Operating Income (NOI)
Value = NOI ÷ Cap Rate; ARGUS applies the going-in cap rate to the stabilized or Year 1 NOI to derive the implied property value at acquisition.
Question 6: What happens to the discount rate in ARGUS if a property is considered to have higher investment risk?
- The discount rate decreases to reflect lower required returns
- The discount rate increases to reflect a higher required return for the added risk (Correct answer)
- The discount rate is locked and cannot be changed by the analyst
- Risk has no effect on the discount rate; it only affects the cap rate
Correct answer: The discount rate increases to reflect a higher required return for the added risk
Higher perceived risk requires investors to demand a higher return, so a higher discount rate is applied, which reduces the present value of future cash flows.
Question 7: In a standard ARGUS evaluation, which year's NOI is typically capitalized to estimate the terminal (reversion) value?
- Year 1 NOI of the analysis period
- The NOI of the year immediately following the end of the holding period (Correct answer)
- Average NOI across all projection years
- NOI from the first stabilized year of the property
Correct answer: The NOI of the year immediately following the end of the holding period
ARGUS conventionally capitalizes the NOI of the year just after the holding period ends (often called 'Year n+1') to reflect what a future buyer would underwrite.
ASC Evaluation Details and Structure 2
In ARGUS DCF analysis, what does the 'reversion value' represent?