A discounted cash flow (DCF) model translates an asset's projected cash flows into a present value using a chosen discount rate. For NYC commercial real estate it's the standard institutional underwriting tool, paired with comp-based cap rate analysis so the two methods check each other.
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 so the model runs through a full cycle.
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 discount rate grounded in the real economy rather than cost-of-capital arithmetic alone. It should reflect the return your LP committee will actually 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 Properties’ 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. The firm provides confidential broker opinion of value reports for owners weighing a sale. Email info@skylineprp.com for a confidential BOV.