Analyzing Ownership Efficiency

It is common knowledge that a multi-period net present value or internal rate of return analysis offers little insight beyond simple capitalization rate if the model assumes monotonic growth. "Monotonic growth" is the usually misguided assumption that net income will increase by a fixed percentage each year throughout a fixed holding period.

Property in the hands of different owners performs differently. Some owners are more aggressive, more "hands on" or simply devote more time to actively managing their real assets. Growth projections specifically tailored to these different types of owners produce very different outcomes. It is also true that jurisdictions offering fewer restrictions on ownership leave the creative property owner free to add entrepreneurial effort resulting in the optimization of his property.

A growth function that accommodates the above realities is the modified logistic growth curve. In such a projection the project undergoes an early "turn-around" period followed by a period of lower, stabilized growth. The graph to the left models two different owners (or two opportunities in different locations, one burdened by fewer restrictions than the other). The difference in the first two years reflects the realities of the ownership or the regulatory environment. The astute investor should consider a wide array of growth curves designed to capture the dynamics of the particular combination of ownership style, property and location.