The fundamental math is similar to the methods used for financial valuation, securities analysis, or bond pricing.
The CAP rate may be determined in one of several ways, including market extraction, band-of-investments, or a built-up method.
However, if the passing rent differs from the Estimated Rental Value (ERV), then either the Term & Reversion, Layer or Equivalent Yield methods will be employed.
[citation needed] In the Short-cut DCF, the passing rent, which is constant (in nominal or real terms) for the duration of the rent period, is discounted at an appropriate rate of return (possibly derived by reference to the risk-free rate of return obtained on government bonds, to which is added an allowance for risk and an allowance for the illiquidity of property assets).
The reversion is discounted at the market-derived All Risks Yield (ARY), which correctly implies growth in the reversionary income stream.
The crux of the Crosby-Wood model, and that which sets it apart from the customary DCF, is that the growth factor is derived by means of formula, as a function of the rate of return and the All Risks Yield.
(This simple subtraction only works when rent is reviewed annually - in all other situations the growth factor is derived by use of the Crosby formula.)