Real estate CFAT

In Real estate , CFAT = NOI - interest - Tax, why not add back depreciattion?

So confused about the comparable firm method and comparable transaction method? what is the difference?

Please add some comments.


Why add depreciattion when it’s non cash? You add it to CFO because you already subtracted it from NI (after tax effect). So, here you don’t add it, but you factor it into your taxes.

lets say your dep: 100. if you have taxes of 40%, you’d have reduced your ni by 100, and reduces your taxes by $40.

So effectively your cash has increased by $40 because in absence of 100 of dep, your taxes would have been $40 higher.

when you compute NOI - interest - Tax, remember the “tax” part already contains this $40 additional cash you’ve been able to save. so if it contains why would you add depreciation? Its has not increase to cash. Depreciation only offers TD cash. and your “TAX” component has that inbuilt.

I guess one more way to look at it that.

NOI is not NI. NOI is more like the Sales of companies.

most of the cash flow , if start with NI , depreciation is added back, but not in this case. So confused.

Because you are not starting with NI… this has nothing to do with NI.

Don’t let it confuse you - Net Operating Income doesn’t have depreciation in it, it would be more like EBITDA, except from a real estate perspective. A form of rental income - costs of running the building.

As the above pointed out, its only used for calculation of taxes. Depreciation is usually given separate, or the ability to calculate it, but is not included in NOI.

CFAT = NOI - Debt Service Payment - Taxes. Calc taxes first (only the interest portion of the Debt Service Payment is tax deductible, but the entire payment is a negative cash flow)

Hi, Regarding your initial qn abt guideline public company method vs guideline transaction method. Pls see page 550, vol 4 of our curriculum. “GPCM uses a multiple tt could be associated with trades of any size. GTM uses a multiple tt specifically relate to sales of entire companies.”

Hi, While doing the EOCs I saw another reference to comparable company approach and comparable transaction approach, this time in Corp Fin vol 3 pg 291. I think qn 10 and 11 will help in understanding the differences. (and they are different from GPCM and GTM in the previous post. sorry for the confusion.) Both uses price-to ratios. Comparable company approach is the use of comparable companies. Takeover premium estimated by analyst. Comparable transaction approach is the use of recent takeover transactions for comparable companies to make direct estimates of the targets takeover value. Takeover premium implicitly recognized in this approach.

Your CFAT equation is wrong it’s NOI - service cost - taxes

Debt service = interest rate to pay your mortgage dealer.

Service cost is inside ur NOI.

NOI = rent income - service cost - other crap that you need to get your rent (except interest and taxes)

NOI is kinda like gross profit service cost kinda like administration expense/cogs

I struggled with this one as well but figured that FCFE and ATCF are exactly the same. Example:

Annual rental income; 60,000, cash expenses: 20,000. therefore NOI (equivalent EBITDA) is 40,000

Say property worth 500k, with 400k of that improvement value(house) and 100k land value.

Depretiation say 20 years, tax 30%

Mortgage: 70% financed with bank, interest rate 8%, monthly repayments 20y term: therefore Monthly repayments: 2928 (this is 27,732 principal and 7398 interest year 1)

Calculation: FCFE: NOI-tax +depr*tax=34,000 minus CAPEX(=0) minus NWC (=0) - 19412(interest (1-t))-7398(debt repay)=7190

ATCF: Calculate tax first: NOI -depr- interest=-7732 (so actually loss and therefore tax credit of 2319.

ATCF= 40,000(NOI) +2319 (tax credit)-35130 (total mortgage repayment year1)=7189

Difference less than $1 due to rounding. Apologies for neg. tax example but no time to recalcultate everything on positive income example. Hope this helps. I did spend 2 days trying to figure this out a month ago. Two identical concepts!!! as they should be!

They might be the same but if you throw in other stuff, they may not, like net borrowing, also recapture premium!

You are incorrect, see the thread 3 down

Not incorrect, just incomplete. Debt service is the entire payment, not just the interest. Debt service cost and service cost are two different concepts with very different meanings.

Yup debt service has debt repaymenr. I forgot about in my equation.

Dirk do you meant CFAT and FCFE.

I don’t get how this concept is difficult. It’s just how much cash you have in your hand at the end of the day. You get rent. You pay cash to keep your property in working condinition. Pay your property tax. Pay your rental income tax. Then pay back your mortgage for the year.

A lot more intuitive and real life than accounting net income