A discounted cash flow (DCF) model translates an asset's projected cash flows into a present value via a chosen discount rate. For NYC commercial real estate it's the standard institutional underwriting tool — paired with comp-based cap rate analysis as the two-method triangulation.
Cash Flow Projection
The DCF starts with year-by-year NOI projection. For a stabilized NYC multifamily asset: rent growth (3-4% in free-market, 1-2% in rent-stabilized), vacancy reserve (3-5%), OpEx growth (3-4%), capex reserve. For a value-add deal: lease-up through stabilization year, then steady-state. For a conversion: zero NOI through construction, then post-CO residential cash flow with 467-m abatement schedule. Project at least 10 years to capture cycle dynamics.
Exit Cap Assumption
The exit (year-10) cap rate assumption typically governs 40-60% of the DCF's present value. Set it conservatively — typically 25-75 bps wider than the going-in cap, reflecting the natural cap-rate widening as a building ages and your buyer's required risk premium. For deeply value-add or conversion deals, the exit cap should equal the stabilized cap rate for similar assets — not the cap rate of the original "Class C office" the seller bought.
Discount Rate Selection
The discount rate is the IRR target your equity needs to clear. For core NYC commercial real estate: 7-9%. Core-plus: 9-11%. Value-add: 12-15%. Opportunistic (conversion, ground-up): 16-22%. Use a real-economy discount rate (not just cost-of-capital arithmetic) — it should reflect the actual return your LP committee will approve.
Triangulating DCF and Cap Rate
A defensible bid reconciles the DCF-derived value, the comp-derived value (year-1 NOI ÷ submarket cap rate), and the replacement cost. The three numbers should converge within ±10%; if they don't, one of your inputs is wrong. NYC institutional buyers run all three and use the convergence as the negotiating range.
- Always build a sensitivity table — discount rate × exit cap × rent growth × cap rate compression / expansion.
- For 467-m conversions, the DCF must explicitly model the year-by-year abatement schedule — the value is timing-sensitive.
- Skyline's broker opinion of value (BOV) reports include the three-method triangulation for every Manhattan commercial asset.
- Don't torture the inputs to hit a number — the bid that doesn't pencil is the bid you shouldn't make.
Robert Khodadadian and Skyline Properties have built underwriting models on hundreds of NYC commercial real estate transactions across $976M+ of closed deals. The firm provides confidential broker opinion of value reports for owners weighing a sale. Email info@skylineprp.com for a confidential BOV.