Part I.

1.  Cash Flow (15 minutes)

A. The Annual Property Operating Data (APOD) sheet only takes into account one year of income and expenses

B. Consider cash flow after debt service

C. Working with a Cash Flow Analysis Worksheet

D. Discussing the concept of Internal Rate of Return for multiple years of rental income

E. Discussing the concept of compounding and discounting

2. Cash Flow Worksheet (20 minutes)

Potential Annual Rental Income

- Vacancy

- Credit Losses

= Effective Annual Rental Income

+ Other Income

= Gross Operating Income

- Operating Expenses

Net Operating Income

Non-Operating Expenses

A.    Interest and Principal on Debt

B.     Depreciation

C.     Capital Expenditures

D.    Income taxes

E.     Reserves for Replacement

F.      Leasing Commissions

3. Cash Flow Before Taxes (10 minutes)

Net Operating Income

- Leasing Commissions

- Funded Reserves

Cash Flow Before Taxes

4. Estimating Taxable Income (10 minutes)

• Caveat: A licensee should recommend that an accountant is required for any definitive answer
• Taxable Income             \$ __________
• Income Tax Liability      % __________
= Income Tax Due

5.  Cash Flow Before Taxes (15 minutes)

• Estimated Income Tax Due
=   Estimated Cash Flow After Taxes

For Example:

Potential Income                                  \$ 345,677
- Vacancy: 12%                                    -  41,481
- Credit Loss                                          -   5,600
Effective Rental Income                         \$ 298,596

Effective Rental Income                         \$ 298,596
+ Vending & Parking receipts                +    8,889
Gross Operating Income                       \$ 307,485
- Annual Operating Expenses                  155,644
Net Operating Income                           \$ 151,841

Formula

Taxable Income:

Net Operating Income

• Mortgage Interest
• Cost Recovery
• Loan Fees
• Leasing Commissions

Taxable Income

Part II.

1.      The Value of Money (5 minutes)

• Definition: A dollar received today has greater value than a dollar to be received in the future

2.      Compounding (5 minutes)

• Compounding assumes that the interest earned is reinvested
• You reinvest to earn additional interest over the life of the investment
• In short, interest earned on interest

3.      Discounting (5 minutes)

• The process of determining the present value of money to be received in the future
• Either received from a lump sum and/or periodic payments
• Reflects the loss of earnings over the time you had to wait to receive your money
• In short, inflation is “eating” at the value of your money

4.      Discounted Cash Flow Approaches (10 minutes)

• Define Internal Rate of Return (IRR)
• Define Net Present Value (NPV)

5.      Internal Rate of Return (IRR) (25 minutes)

• The percentage rate earned on each dollar invested for each period that it is invested
• That discount rate, when applied to future cash flows, exactly equals the Present Value of the future cash flows

View examples and class assignments