Before Tax Cash Flow

Before-tax cash flow (BTCF) is one profit measure used in real estate. It is an owner-specific amount that can be viewed different ways. For example, if a project involves 40 partners, each person will evaluate BTCF differently, depending upon his or her investment objectives.

BTCF can be derived by subtracting debt service (mortgage and interest payments) from NOI.

NOI – ADS = BTCF

Some points to keep in mind about BTCF:

• Unlike earlier uses of the term cash flow to mean money simply as income or outlay, BTCF is an indicator of financial health.
• BTCF shows that the property successfully meets its major obligations (operating expenses, debt service).
• The BTCF figure is the owner’s income before taxes are considered. The owner can then decide whether to reallocate part of the cash flow to the property.

In many instances, increasing cash flow will be one of the real estate manager’s goals. Because ADS is not likely to be altered easily, real estate managers are better off monitoring and controlling operating expenses, minimizing vacancy and collection loss, and carefully budgeting reserves for replacement and capital to meet the owners’ financial goals and show management effectiveness.