Getting to know C&I Property: Cash Flows.

Posted On Monday, 24 February 2003 02:00 Published by eProp Commercial Property News
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Know basics before signing on dotted line.

Jonathan SmithCommercial property is purchased on the basis of the cash stream which it can generate. Property investors should have a thorough understanding of the construction of a cash-flow stream and the principles of property finance that can be employed to exploit a cash-flow stream.

It is important to understand the following cash-flow stream concept in its simplest form:
Gross Income: All the income collectable from the tenants of a building, excluding utility recoveries.

Less: Operating Expenses: All the expenses associated with the ownership of a building.
Net Operating Income:                     The resultant cash value after operating expenses have been paid.

Less: Financing Costs:    Costs associated with having borrowed money from a financier in   order to purchase the building.

After-Debt Before-Tax Cash Flow: The resultant cash flow after both operating expenses and financing costs have been paid.

Less: Ordinary Taxation: The tax levied on taxable income. After-Tax Cash Flow: The resultant cash flow which may be distributed
to shareholders (subject to dividend taxation) or kept as retained earnings. Of particular importance is that the building's value is derived from
the Net Operating Income and the investor's equity value is derived from the After-Tax Cash Flow. A cash flow for year one of the investment period (the period during which the property investment is held) might resemble the following:
Gross Income: R3 107 000
Less: Operating Expenditure: R584 000
Net Operating Income: R2 523 000
Less: Financing Costs: R157 900
After-Debt Before-Tax Cash Flow: R2 365 100
Less: Ordinary Tax: R718 290
After-Tax Cash Flow: R1 646 810

Extensive energy and skill must be invested to derive each figure above. This cash flow will also increase in complexity as we progress
through the introduction of the principles related to finance structuring, gearing, taxation and equity valuation.

Last modified on Monday, 26 May 2014 13:44

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