Does anybody know how they’re coming up with the values for the top layer? I’m not seeing the connection how they’re coming up with the discount factor and how they’re multiplying the top slice rent.
The top layer is the difference between the ERV in the current market and the lease contract, discounted by the given incremental rent cap rate (usually higher than the normal cap rate) to perpetuity. I thought the work they show on Ex. 19 in the book was a little confusing as well. But all you have to do for the top slice is:
Top slice rent = 50,000 (450,000-400,000)
PV to perpetuity at 6% = 50,000/0.06
= 833,333
This is the PV of the top slice after 5 yrs. For Ex. 19, there are 2 yrs remaining so you have to discount 833,333 back 2 yrs by the same cap rate of 6% to get the value at that point in time.
FV = 833,333
N = 2
I/Y = 6%
PV = 741,664
Top-slice value = 741,664