Cash Flow After Tax (CFAT) and Equity Reversion After Taxes (ERAT)

Cash Flow After Tax (CFAT) = NOI - Debt service - Income tax payable

• Borrowed money face value = $40,000,000 * 80% = $32,000,000
• Interest rate = 7%
• Interest payment per year for interest only loan = $32,000,000 * 7% = $2,240,000
• Depreciation per year = $1,250,000
• Annual growth rate of NOI = 5%

Cash Flow After Tax (CFAT)

Tax
Year	1	2	3	4	5
NOI	$4,200,000	(*6) $4,410,000	(*11) $4,630,500	(*16) $4,862,025	(*21) $5,105,126.25
Depreciation	$1,250,000	$1,250,000	$1,250,000	$1,250,000	$1,250,000
Interest expense	(*1) $2,240,000	$2,240,000	$2,240,000	$2,240,000	$2,240,000
Taxable income	(*2) $710,000	(*7) $920,000	(*12)  $1,140,500	(*17) $1,372,025	(*22) $1,615,126.25
Tax rate (*26)	0.40	0.40	0.40	0.40	0.40
Income tax payable	(*3) $284,000	(*8) $368,000	(*13) $456,200	(*18) $548,810	(*23) $646,050.5
CFAT
NOI	$4,200,000	(*6) $4,410,000	(*11) $4,630,500	(*16) $4,862,025	(*21) $5,105,126.25
Debt service	$2,240,000	$2,240,000	$2,240,000	$2,240,000	$2,240,000
Pretax cash flow	(*4) $1,960,000	(*9) $2,170,000	(*14) $2,390,500	(*19) $2,622,025	(*24)  $2,865,126.25
Income tax payable	(*3) $284,000	(*8) $368,000	(*13) $456,200	(*18) $548,810	(*23) $646,050.5
Cash flow after tax	(*5) $1,676,000	(*10) $1,802,000	(*15) $1,934,300	(*20) $2,073,215	(*25) $2,219,075.75

NOI: Net operating income

(*1) $32,000,000 * 7% = $2,240,000
(*2) $4,200,000 - $1,250,000 - $2,240,000 = $710,000
(*3) $710,000 * 0.40 = $284,000
(*4) $4,200,000 - $2,240,000 = $1,960,000
(*5) $1,960,000 - $284,000 = $1,676,000

(*6) $4,200,000 * (1+5%)^1 = $4,410,000
(*7) $4,410,000 - $1,250,000 - $2,240,000 = $920,000
(*8) $920,000 * 0.40 = $368,000
(*9) $4,410,000 - $2,240,000 = $2,170,000
(*10) $2,170,000 - $368,000 = $1,802,000

(*11) $4,200,000 * (1+5%)^2 = $4,630,500
(*12) $4,630,500 - $1,250,000 - $2,240,000 = $1,140,500
(*13) $1,140,500 * 0.40 = $456,200
(*14) $4,630,500 - $2,240,000 = $2,390,500
(*15) $2,390,500 - $456,200 = $1,934,300

(*16) $4,200,000 * (1+5%)^3 = $4,862,025
(*17) $4,862,025 - $1,250,000 - $2,240,000 = $1,372,025
(*18) $1,372,025 * 0.40 = $548,810
(*19) $4,862,025 - $2,240,000 = $2,622,025
(*20) $2,622,025 - $548,810 = $2,073,215

(*21) $4,200,000 * (1+5%)^4 = $5,105,126.25
(*22) $5,105,126.25 - $1,250,000 - $2,240,000 = $1,615,126.25
(*23) $1,615,126.25 * 0.40 = $646,050.5
(*24) $5,105,126.25 - $2,240,000 = $2,865,126.25
(*25) $2,865,126.25 - $646,050.5 = $2,219,075.75

(*26) Tax rate on ordinary income

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Equity reversion after taxes (ERAT) = net selling price - mortgage balance - taxes

Selling price (net of expense) = 45,000,000*(1-7%) = 41,850,000
Mortgage balance outstanding = 40,000,000*80% = 32,000,000
Capital gains tax = 15%
Tax on recaptured depreciation = 28%
Tax rate on ordinary income = 40%

Equity reversion after taxes (ERAT)
= net selling price - mortgage balance - taxes
= 41,850,000 - 32,000,000 - (1,250,000*5*28% + (41,850,000-40,000,000)*15%)
= 41,850,000 - 32,000,000 - (1,750,000 + 277,500)
= 7,822,500