ASC Cash Flow Analysis 3 — Questions and Answers
Question 1: When Argus Enterprise calculates the 'Rollover Probability' for an expiring tenant, a lower probability of renewal results in:
- Higher projected base rent for the renewal term
- Increased downtime and leasing cost assumptions applied to the space (Correct answer)
- Lower vacancy loss in the cash flow
- Reduced tenant improvement allowance modeling
Correct answer: Increased downtime and leasing cost assumptions applied to the space
A lower renewal probability increases the likelihood Argus models the space as going vacant, triggering downtime, re-leasing costs, and TI allowances in the cash flow.
Question 2: In a DCF analysis within Argus, the 'Reversion Value' at the end of the hold period is typically calculated by:
- Multiplying Year 1 NOI by the going-in cap rate
- Dividing the terminal year NOI by the terminal capitalization rate (Correct answer)
- Summing all future cash flows beyond Year 10
- Applying GRM to the terminal year gross revenue
Correct answer: Dividing the terminal year NOI by the terminal capitalization rate
Reversion value is calculated by dividing the NOI of the year following the end of the hold period (terminal NOI) by the terminal cap rate.
Question 3: A cash flow model for a Class A office shows 'Free Rent' concessions reducing early-year income. How does Argus typically account for straight-line rent adjustments for GAAP reporting?
- Free rent periods are excluded from the Argus model entirely
- Argus averages base rent over the full lease term for GAAP straight-lining
- Argus only models cash rent received each period, ignoring GAAP adjustments (Correct answer)
- Free rent is capitalized and amortized over the lease term
Correct answer: Argus only models cash rent received each period, ignoring GAAP adjustments
Argus models actual cash flows — it deducts free rent in the months it occurs and does not perform GAAP straight-line rent adjustments, which are handled outside the model.
Question 4: Which metric does an analyst most commonly use to compare unleveraged property performance across markets when reviewing an Argus cash flow?
- Equity Multiple
- Net Present Value (NPV)
- Going-In Cap Rate (NOI / Purchase Price) (Correct answer)
- Internal Rate of Return on equity
Correct answer: Going-In Cap Rate (NOI / Purchase Price)
The going-in cap rate (Year 1 NOI divided by acquisition price) is the standard benchmark for comparing unleveraged income yield across properties and markets.
Question 5: In Argus, 'Contractual Rent Steps' for an existing tenant are best entered using which feature?
- Market Rent growth rate applied globally
- Lease-level rent schedule with specific step dates and amounts (Correct answer)
- CPI inflation index linked to the lease
- Operating expense gross-up adjustment
Correct answer: Lease-level rent schedule with specific step dates and amounts
Lease-level rent schedules allow analysts to enter specific dollar amounts or percentage increases at defined future dates, exactly replicating contractual step provisions.
Question 6: When a large anchor tenant vacates in Year 3 of an Argus model, the most significant near-term cash flow impact beyond lost rent is typically:
- Increased management fee income
- Co-tenancy clause rent reductions triggered by other tenants (Correct answer)
- Higher terminal cap rate assumed by the model
- Reduced real estate tax assessments
Correct answer: Co-tenancy clause rent reductions triggered by other tenants
Many retail leases contain co-tenancy clauses that allow inline tenants to pay reduced rent or terminate if an anchor leaves, compounding the revenue loss well beyond the anchor's own rent.
Question 7: In Argus Enterprise, the 'Inflation' or 'General Vacancy' tab applies a global vacancy factor that is separate from lease-specific vacancy. This factor is intended to capture:
- The probability that existing tenants default mid-lease
- Absorption timing uncertainty for speculative new supply
- Structural vacancy from unleased space between tenant rollovers at stabilization (Correct answer)
- The physical vacancy caused by construction downtime
Correct answer: Structural vacancy from unleased space between tenant rollovers at stabilization
General vacancy applies a portfolio-level haircut to stabilized occupancy, reflecting that even a fully leased building rarely achieves 100% economic occupancy at all times.
ASC Cash Flow Analysis 3
When Argus Enterprise calculates the 'Rollover Probability' for an expiring tenant, a lower probability of renewal results in: