What is Unlevered Cash Flow?

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What is Unlevered Cash Flow?

Unlevered Cash Flow is the term that refers to the total cashflow of any property, business, or entity excluding all interest payments. Basically, it represents a company’s cash flow provided they were to have zero debts or financial obligations. While the majority of businesses have some amount of debt they accrue in order to help finance their endeavors, this term ignores this expense entirely. Many companies decide to fund their exploits differently, so they often have different amounts and timeframes to deal with their debt payoff. Since the Unlevered Cash Flow disregards these different amounts of debt related to how a company finances, it is a valuable comparative tool, especially for investors debating putting money into one project versus another. 

Because it does not incorporate the debts that one owes into the cash flow, this figure is an overestimation of the value of one’s company or a specific given property.

Unlevered Cash Flow vs. Levered Cash Flow

At Top Shelf Models, both our Monthly and our Annual Cash Flow tabs have two separate sections, one for the Unlevered Cash Flow and one for the Levered Cash Flow. As mentioned above, the Unlevered section entirely ignores all debt obligations that a company or a property incurs. The Levered section, on the other hand, incorporates all debt interest expenses and in turn, winds up with a more accurate estimation of the true amount of money that flows in and out through a given business or property. The Levered Cash Flow derives from the Unlevered Cash Flow as it is calculated simply by adding all previously unaccounted financing-related expenses from the Unlevered Cash Flow.

Unlevered Cash Flow in Real Estate

At Top Shelf Models, the Unlevered Cash Flow section of our models is one of the most important components of our models as they incorporate all assumptions outside of those pertaining to debt and provides real estate professionals with a valuable comparative figure that presents a relatively accurate valuation of the property.

The Unlevered Cash Flow calculation is a relatively easy one on paper, but its components themselves have a number of smaller components within each of them. The formula is as follows:

Earnings before interest, tax, depreciation, and amortization

- Capital expenditures

- Working capital

- Taxes                             

= Unlevered free cash flow

Conclusion

The Unlevered Cash Flow is a vitally important term to be familiar with in the world of real estate, as it is used as a comparative medium to evaluate the performance of different properties or companies that finance their projects using a variety of different methods. Its parameters are limited enough that investors should take into consideration this metric when making important investing decisions.

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About the Author

Brittany Martin is TSM’s Vice President who has developed real estate financial models for an extensive range of property types. She specializes in land, hotel, and storage models. Please reach out to her if you have any questions about Unlevered Cash Flow or if she can help you with your modeling needs.