As previously discussed, Real estate generates cash flow, which is the cash remaining after all expenses are paid.
Cash Flow Before Tax (CFBT) is calculated by adding or subtracting various items from Net Operating Income (NOI). As a reminder, Net Operating Income (NOI) is the total of all income from the annual operation of the property after deducting operating expenses. Net Operating Income (NOI) is calculated by subtracting Total Operating Expenses from Gross Operating Income (GOI).
Examples of adjustments to NOI used to calculate CFBT include:
Debt Service: The total annual debt payment that includes principal and interest.
Capital Expenditures: Additions or improvements aimed to prolong a property’s life. These do not include regular repairs and maintenance required to operate the property.
Asset Management Fee: Annual fee paid to the sponsor in real estate syndication or co-ownership deals for investment oversight.
Loan Proceeds: Future financing separate from the original debt service.
Interest Earned
Leasing Costs
Cash Flow After Tax (CFAT) is simply calculated by subtracting Income Tax Liability from Cash Flow Before Tax (CFBT). Income Tax Liability is determined by multiplying Taxable Income, which will be explained in a later post, by the Tax Rate.
