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Cornell Real Estate Review

Abstract

Users of discounted-cash flow models for estimating real estate investment values encounter the following problem: the unknown value being estimated depends on inputs to the model that rely on the unknown value. The models, therefore, produce biased estimates of investment value unless iterative or simultaneous solutions are found. The market value literature addresses this problem by invoking simultaneous solutions. Parallel approaches for estimating investment value are hampered by complications resulting from the need to incorporate income tax effects. As shown in this paper, serious estimation bias results from first-run solution models in modern real estate text books and commercially available computer programs. Closed-form solutions for a variety of investment value models are obtainable to remove the estimation bias.

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