1. Income Tax Considerations Converting to after tax cash flows

2. Non-Cash Expenses Depreciation  Non cash expense based on original purchase price of a hard asset  Depreciated over time (useful life of the asset)  Generates non cash losses for investors to offset income on tax returns  After tax cash flow will reflect actual amount of taxes paid or tax savings after depreciation and amortization of assets

3. Depreciation Calculation Straight Line over useful life of the asset  Buildings use 27.5 years  Divide building price or development price by 27.5 Land does not depreciate

4. Example of Depreciation Depreciation Calculation Year123 Beginning Balance $ 1,800,000 $ 1,734,545 $ 1,669,091 Less: Annual Depreciation $ 65,455 Ending Balance $ 1,734,545 $ 1,669,091 $ 1,603,636 Assume $2.3M purchase price in previous example is divided $500K Land and 1.8 M Building.

5. An Example of Book Value Net Book Value Land $ 500,000 Building $ 1,800,000 Accumulated Depreciation $ 65,455 $ 130,909 Net book value Building $ 1,734,545 $ 1,669,091 Total Asset book value $ 2,234,545 $ 2,169,091 At the end of year two the property may be worth more than 2.1 M market value but the book value remains at purchase price less depreciation.

6. Non-Cash Expenses Amortization  Some soft costs may be capitalized and amortized over a period of time rather than expensed all at once Accrued Expenses  Expensed in this year but not paid until a future date  Interest on soft loans Popular with tax credit deals

7. Tax Implications Total NOI minus interest expense and non cash expenses equals taxable income Start withNOI Less:Interest Depreciation Amortization Equals Taxable Income X Tax Rate Equals Income Tax Due

8. Example Tax Calculation TAX CALCULATION 123 NOI $ - $ 229,900 $ 229,517 Less Depreciation $ 65,455 Less Interest Expense $ 128,800 $ 123,674 $ 118,190 Net Taxable Income $ (194,255) $ 40,771 $ 45,872 Income Taxes $ 54,391 $ (11,416) $ (12,844) Assuming a 28% Tax Rate

9. Back to Cash Flow Using taxes calculated adjust cash flow statement for taxes paid or deductions gained. Start with NOI LessDebt Service LessTaxes paid (if gains) Or plusTaxes saved (if losses) EqualsAfter Tax Cash Flow Should be discounted at the after tax discount rate.

10. After Tax Cash Flow 12 Gross Rental Income 1,000,000 1,030,000 Vacancy 300,000 72,100 Net Rental Income 700,000 957,900 Operating Expenses 700,000 728,000 NOI - 229,900 Less Taxes Paid 54,391 (11,416) Less Debt Service (202,022) Purchase Price Net Cash Flow From Sale Total After Tax Cash Flow (147,631) 16,462

11. Other Cash Flow Considerations Capital Expenditures  Outflows of cash for capitalized items Will not hit expenses Capitalized and depreciated over time Adds to depreciation expense but cash outflow in one year