What does a leveraged discounted cash flow (DCF) analysis take into account?

A leveraged discounted cash flow (DCF) analysis specifically incorporates debt service requirements into the valuation of a property or investment. This analysis is crucial for understanding how much of the cash flow generated by the property is available to equity holders after accounting for the obligations to debt holders.

When performing a leveraged DCF analysis, one starts by forecasting the property's future cash flows. However, it goes a step further by considering how those cash flows will be affected by the costs and repayment schedules associated with any debt that has been utilized to finance the acquisition or development of the property. This means that the analysis reflects the true financial performance of the investment from an equity investor's perspective, as it reveals the cash flows left over after fulfilling debt service responsibilities.

While projected rent increases, overall market trends, and tax implications may influence the cash flows themselves, they are not the primary focus of a leveraged DCF analysis. Instead, it is specifically the debt service component that distinguishes this analysis as it relates to investments made with leverage. Thus, recognizing debt service requirements allows investors to understand better the financial dynamics of their investment relative to its capital structure.