class powerpoint2: cash flow modeling Flashcards
what does the income statement of the cash flow of a property look like?
Rental Income + Ancillary Income - operating expenses = NOI (Net Operating Income)
- Selling, general and administrative expenses
= earnings before interest, taxes, depreciation and amortization (EBITDA)
- interest and financing expenses
- depreciation and amortization
= earnings before taxes
- income taxes
=Net Income
Why is the NOI (net Operating Income) the most crucial component if the income statement?
it is used as an approximation of the cash flow generated by the property
are interest and financing expenses, and depreciation and amortization part of cash flow?
naaah
why are income taxes not part of what influences cash flow?
These do not reflect operations of a building, only the tax position of the owner
are expense recoveries part of rent?
yeee
what are major exclusions from the NOI (Net Operating income)?
debt service
depreciation
income taxes
capital expenditures
tenant improvements (most of the time)
Leasing commissions (really depends)
why is debt service not part of NOI?
Financing costs are specific to the owner/investor
not included in calculating NOI
why is depreciation not part of NOI?
Depreciation is not an actual cash outflow, but rather an accounting entry
why are income taxes not part of NOI?
income taxes are specific to the owner/investor
why are tenant improvements most of the time not part of NOI?
Tenant improvements include construction within a tenant’susable spaceto make the space viable for the tenant’s specific use
Tenants are paid for the improvements to make but if they it cost more than the cheque they are given, tant pis
Its more of an investment as an expense so not day to day operation expense
why leasing commissions sometimes not part of NOI?
Commissions are the fees paid to real estate agents/brokers involved in leasing the space
why capital expenditures not part of NOI?
Capital expenditures are expenses that occur irregularly for major repairs and replacements
expenses that occur from time to time
Ex: elevator repair, redoing the roof, etc
You have enhanced the value of your building
Not a day to day operating expense
do capital expenditures include minor repairs and maintenance?
naaah boy
those would be considered operating expenses
rent
periodic payment received from tenants for the use of real property
how is rent expressed in commercial leases?
usually expressed as a dollar amount per square foot per year
Usually expressed on annual basis, if you want to find per month divide by 12
how is rent expressed in commercial leases?
usually expressed as a dollar amount per square foot per year
Usually expressed on annual basis, if you want to find per month divide by 12
Example: a 5,000 square foot space has a rent of $30/sq. ft. The tenant will pay rent of $12,500 per month
(5,000 ∗$30)/(12 𝑚𝑜𝑛𝑡ℎ𝑠)
= $12,500
are commercial leases usually long term or short term?
long term
why will rent generally increase during the term of the lease by a set amount or some other adjustment factor like inflation (CPI)?
because leases are more long term
In the long term, you want to rent revenue to be adaptable to inflation
what is it that defines the total rent?
Base rent
Percentage rent
Expense recovery
Rent free period
where are all elements of the rent be documented?
in the lease
why is it important to read all leases?
Cant afford to make mistakes, especially for larger properties such as malls
percentage rent
a rental payment that is based on the sales or income earned by the tenant
percentage rent breakpoint
certain level of sales or income over which percentage rent will begin
why would landlords include percentage rent in a lease?
Protection against high inflation
To attract or keep tenants
