Reversion Sales Price (Property Tax)

[Anonymous]

Spencer,

When calculating a projected reversion sales price in the year 10, the model uses the NOI of the year 11 and the terminal cap rate. When the property tax in the year 11 may be directly related to the sales price, how do you model it?

Thanks,

Kyle Chuang

[Spencer Burton]

It is common practice in the industry to use either the trailing 12 month (e.g. year 10) or forward-looking 12 month (e.g. year 11) net operating income for calculating reversion value. However, it is also quite common to then make adjustments to that NOI (i.e. the reversion NOI or reversion pro forma) to account for exactly what you’re describing.

So to your example. In many places, a property tax reassessment is triggered upon a sale. And so it becomes important to put some thought into the property tax amount used in the reversion pro forma.

So how do I model that? I set the reversion pro forma cells as inputs, and manually make adjustments to each line item as necessary. Because the property tax calc is circular, I hard code an approximate property tax amount based on what I estimate the assessed value will be at reversion.

Thanks for the question!

[Anonymous]

Spencer,

In practice, do you also use iterative calculation or goal seek to calculate the new property tax based on the estimated reversion sales value so the model will be more dynamic than the hard coded one?

Thanks,

Kyle

[Spencer Burton]

You could. I don’t, but not because it’s a bad idea! I honestly hadn’t ever considered it.

Thinking out loud. The same suggestion could be made about calculating property tax in a Direct Cap pro forma. But my process for building the pro forma usually involves manually thinking about and entering a property tax value. So making that input dynamic hasn’t really come up. But it would be an interesting thing to try!

Just as an FYI. You’ll find this out in later courses, but I avoid Excel’s Iterative Calculation option at all cost. This is for two reasons. One, Excel only iterates a certain number of times and then stops iterating. If you have enough circular formulas and the model is sufficiently complex, you can’t be sure Excel iterated enough times to provide an appropriate answer. So if you’ve ever seen an Excel model with Iterative Calc turned on, and after every cell update the outputs changes, that’s because it’s not getting to an answer.

And two. Iterative Calculation slows the Workbook down. Especially if the Workbook is complex. I’m a stickler for efficiently written models that run quickly. Nothing is worse than working in a Workbook that thinks after every cell change.

I show you the solutions I use to avoid turning on Iterative Calculation later in the Accelerator.

[Author]

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