Cash Flow Modeling: 48 Key Terms

By Devon Coombs, CPA, MBA · Teaching Professor of Finance, Santa Clara University · Reviewed August 2026

Cash flow modeling is the practice of projecting a property's income and expenses in a structured pro forma so that a deal can be evaluated before capital is committed. Its vocabulary includes measures of current performance such as as-is NOI and economic occupancy, growth and coverage metrics such as the compound annual growth rate and the debt coverage ratio, and methods such as driver-based forecasting. They form the core vocabulary of Week 4 of the free Real Estate Finance course, which covers modeling and the pro forma. A forecast is generally only as reliable as the definitions behind its line items.

These terms are taught in Week 4: How Do You Forecast Real Estate Cash Flows? Modeling & the Pro Forma of the free Real Estate Finance course; the full course glossary collects every chapter in one place.

absorption: The pace at which available space or units are leased in a market over a period. Lease-up, development, and renovation models must support how quickly space can be leased, not just the market rent.
accrued depreciation: In the cost approach, the loss in value of existing improvements: physical deterioration, functional obsolescence, and external obsolescence. Distinct from tax depreciation, which is a cost-recovery concept.
as-is NOI: What the property is producing today, based on the current rent roll, occupancy, expense structure, and condition. The starting point, closest to observable reality, though it may still need normalization.
asking rent: The quoted face rent, before concessions. It is not the same as executed effective rent, which adjusts for free rent, concessions, and tenant improvements; in soft markets the gap can be material.
budget: The fixed plan approved before a period begins, serving as both a target and a control tool. Once approved it usually does not change; performance is measured against it.
CAGR: Compound annual growth rate = (Ending ÷ Beginning)^(1/n) − 1, where n is the number of annual periods. It smooths volatility into a single constant growth rate, so it is best to review the individual years alongside it.
compound annual growth rate: CAGR, the constant annual rate that compounds a beginning value to an ending value over n periods: (Ending ÷ Beginning)^(1/n) − 1. From Year 1 to Year 5 there are four periods, not five.
DCR: Debt Coverage Ratio = NOI ÷ annual debt service, the lender’s primary cushion metric. A 1.39x DCR means $1.39 of NOI for every $1.00 of required principal and interest. (Used interchangeably with DSCR, though lender definitions vary.)
driver-based forecasting: Forecasting the component inputs (volume, price, occupancy, rent) rather than the outcome itself, so each number traces to a testable assumption and any miss can be diagnosed to a specific driver.
economic occupancy: The share of Gross Potential Rent a property actually collects: collected (in-place) rent ÷ GPR. It is lower than physical occupancy whenever there is loss to lease, concessions, or credit loss, because a unit can be physically occupied yet not paying full market rent.
equity dividend rate: First-year Cash Flow After Debt Service divided by equity invested, also called the cash-on-cash return. It measures current cash yield only, not total return, so it typically sits below the levered IRR.
external obsolescence: A form of accrued depreciation caused by factors outside the property: adverse location influences, market decline, or regulatory changes.
favorable leverage: When financing raises the equity return: the levered IRR exceeds the unlevered IRR because the property’s return outpaces the cost of debt. Leverage magnifies performance in both directions; it does not create underlying value.; Levered returns vs Unlevered returns
FCFE: Free Cash Flow to Equity: residual cash flow available to owners after debt-related cash flows. The closest real estate analog is Cash Flow After Debt Service.
FCFF: Free Cash Flow to the Firm: cash flow available to all capital providers after operations, taxes, and reinvestment. The closest real estate analog is Cash Flow Before Debt Service.
final adjusted sale price: A comparable’s price after all transactional and property adjustments have been applied, the basis that is then reconciled across comparables into the indicated value.
forecast: The current best estimate of what is expected to happen, updated as new information becomes available: a living estimate, distinct from the fixed budget and from actual results.
Free Cash Flow to Equity: A corporate-finance measure of residual cash available to common equity after debt holders are serviced; the real estate analog is Cash Flow After Debt Service.
Free Cash Flow to the Firm: A corporate-finance measure of cash available to both debt and equity providers after operating costs, taxes, and reinvestment; the real estate analog is Cash Flow Before Debt Service.
geographic information systems: GIS, meaning tools for managing, manipulating, and displaying location-specific data: mapping demographics, employment, trade areas, drive-time zones, competing properties, and flood zones.
GIS: Geographic information systems: a tool for mapping and analyzing location-specific data (demographics, trade areas, drive times, competing properties, flood zones), turning tract-level data into a visual picture of the market.
hold period: The number of years the investment is modeled before sale, commonly 5 to 10 years. It shapes how many lease rollovers are captured, whether refinancing is modeled, and how heavily return depends on the reversion.; IRR vs Equity multiple
indicated value: The value for the subject produced by reconciling the comparables’ final adjusted sale prices using judgment about reliability, similarity, recency, and adjustment size, rather than by simple averaging.
levered cash flow: The equity investor’s cash flow stream: equity invested at close, Cash Flow After Debt Service each year, and sale proceeds net of loan payoff and prepayment penalties. Its IRR measures the equity return under the financing terms.; Levered returns vs Unlevered returns
levered IRR: The discount rate that sets the NPV of the levered (equity) cash flow stream to zero. It answers, “Is this a good equity investment under these financing terms?”; Levered returns vs Unlevered returns IRR vs Equity multiple
mark-to-market: Re-leasing in-place space at current market rent when a below-market lease expires, closing the loss-to-lease gap. Faster for short-lease assets (multifamily) than long-lease assets (office, retail), where contract rent is locked until rollover.
market conditions adjustment: The appraisal adjustment that corrects a comparable’s price for changes in the market between its sale date and the valuation date, the adjustment that accounts for the passage of time. A transactional adjustment applied before property adjustments.
market segmentation: Identifying the specific customer or tenant groups within a larger market whose needs, preferences, and behaviors differ, defining whose demand the property actually serves.
market-defining story: A short narrative that defines a property’s market (product, customer, demand sources, competition, and why the customer would choose it), written before data is gathered, to filter relevant evidence from noise.
net sale proceeds: Gross sale price less costs of sale (broker commissions, transfer taxes, legal fees). In the levered view, the loan payoff and any prepayment penalty are then subtracted to reach sale proceeds to equity.
normalization: Adjusting historical financials to reflect sustainable, recurring performance on the buyer’s cost basis: stripping one-time items, resetting owner-specific costs to market, and reclassifying CapEx miscoded as OpEx.
permanent variance: A variance in which the result did not occur as expected or the underlying assumption changed (e.g., an insurance premium resetting higher). The model should be updated for every future period.
physical deterioration: A form of accrued depreciation arising from wear, aging, and deferred maintenance of the improvements.
pro forma NOI: What the property may generate in the future if a specific business plan is executed (renovations, lease-up, higher rents). Powerful but the most assumption-dependent because the income has not yet been achieved.
proxy: Indirect evidence used to estimate an assumption when direct data is unavailable (e.g., nearby renovated units to estimate a renovation premium). Useful only if the analyst explains why it applies and what adjustment is needed.
psychographics: Segmentation based on lifestyle, values, attitudes, and spending behavior rather than demographics alone, a sophisticated, statistically intensive method that can sharpen the customer profile alongside observable evidence.
reproduction cost: In the cost approach, the cost to build an exact replica of the subject, including its outdated features. Contrast with replacement cost, which builds equal functional utility using current standards.
rolling forecast: A forecast that continually extends a fixed horizon forward (each completed period is dropped and a new future period is added), so assumptions stay current. Especially valuable in lease-up, repositioning, near debt maturity, or volatile markets.
scenario analysis: Changing several assumptions together to simulate a coherent future (bull, base, or bear) because variables such as rent growth, vacancy, and exit cap rate tend to move together in the real world.
sensitivity analysis: Changing one assumption at a time, holding the rest constant, to measure its isolated impact and rank single points of failure (e.g., how a 100-bp rate move affects DSCR).
stabilized NOI: What the property would generate under normal, sustainable market operations (market rent, normal vacancy, ordinary concessions, recurring expenses) without speculative rent growth or unproven business-plan improvements.
T-12: Trailing twelve months: the most recent twelve months of a property’s actual operating statements. A starting point that must be validated against the rent roll, general ledger, and other diligence before it is relied upon.
terminal cap rate: The cap rate applied to forward (year-after-sale) NOI to estimate the reversion at exit. Often modeled 25 to 50 basis points above the going-in cap rate; a higher terminal cap implies a lower exit value.; Cap rate vs Discount rate
timing variance: A variance in which the result occurred but in a different period than forecast (e.g., a December receipt arriving in January). Usually fix the calendar, not the model.
trailing twelve months: The T-12: the most recent twelve months of actual operating results. It reflects recent performance rather than a distant period or a seller’s forward claim, and is the freshest baseline for forecasting.
unlevered cash flow: The property’s cash flow stream ignoring all financing: total acquisition cost at Year 0, Cash Flow Before Debt Service each year, and net sale proceeds at exit. Its IRR measures the asset’s return independent of the loan.
unlevered IRR: The discount rate that sets the NPV of the unlevered (property) cash flow stream to zero. It answers, “Is this a good asset at this price?”; Levered returns vs Unlevered returns
variance analysis: Forecast-versus-actual analysis: Variance = Actual − Forecast. The feedback loop that classifies each difference (timing, permanent, operational, market) and updates the forward forecast.

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