Valuation Methods

Valuation Methods

The canonical skill for property valuation. Any command that needs to value a property MUST invoke this skill.

Trigger Conditions

Activated when any command needs:

• Direct capitalization value (NOI / cap rate)
• DCF valuation (present value of projected cash flows + reversion)
• Sales comparison cross-check (per-SF, per-unit benchmarks)
• Value reconciliation across approaches

Business Context

Valuation underpins acquisitions (what to bid), hold-sell decisions (current value vs. forward returns), and quarterly portfolio reporting (NAV). This skill ensures consistent methodology across all contexts.

Source Hierarchy

1. Appraised value (if available -- institutional gold standard)
2. Income approach using verified NOI (from underwriting-standards)
3. Sales comps (from market-analysis)
4. Broker opinion of value (third-party, use as sanity check)

Workflow

Direct Capitalization

1. Obtain stabilized NOI (from underwriting or user)
2. Select cap rate: market-derived (from comps), user-provided, or range
3. Value = NOI / Cap Rate
4. Express as per-SF and per-unit for cross-check

DCF Valuation

1. Obtain projected cash flows (from underwriting-standards pro forma)
2. Select discount rate (user-provided or derived from risk profile)
3. Calculate terminal value: forward NOI / exit cap rate
4. PV of cash flows + PV of terminal value = DCF Value
5. All PV calculations via scripts/returns.py:calculate_npv()

Sales Comparison

1. Gather comparable sales (from market-analysis or user)
2. Extract price/SF, price/unit, implied cap rate from each comp
3. Adjust for property differences (age, quality, location, occupancy)
4. Derive indicated value range

Reconciliation

1. Present all approaches with values
2. Weight based on data quality and reliability
3. Produce reconciled value range (low / target / high)
4. State which approach is most reliable and why

Output Structure

• Valuation summary with all three approaches
• Cap rate support (source and rationale)
• Per-SF and per-unit cross-checks
• Sensitivity table: value at different cap rates (+/- 50bps)

QA Checks

• Cap rate is within market range for property type and quality
• DCF discount rate > cap rate (risk premium exists)
• Exit cap rate >= going-in cap rate (unless strong appreciation thesis stated)
• Per-SF/per-unit values are within market range
• All PV/NPV calculations via validated code

Edge Cases

• Land valuation: Income approach doesn't apply. Use comparable sales and residual land value.
• Value-add / unstabilized: Use DCF with explicit lease-up assumptions, not direct cap on current NOI.
• Negative leverage: Flag when cap rate < borrowing cost.

Standards References

• NCREIF quarterly valuation methodology
• Appraisal Institute income approach standards