The discount rate is used to convert the anticipated future cash flows to a present value. It reflects the risks and timing of the cash flows and can consist of equity or a blend of equity and debt position requirements. Further, the discount rate may or may not include the developer's profit, which is often expressed separately as a percent of sales and deducted from the cash flow as a line item expense. The example below shows the components for a blended discount rate and assumes the Developer's Profit has already been deducted from the cash flow as a line item expense. Lender Rate X LTV If Developer's Profit was not previously deducted, it would be appropriate to increase the discount rate to reflect this component. |
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