In the commercial real estate sector, several economic factors influence the performance and evaluation of companies and projects. One of the most critical indicators for assessing investment risks is EBITDA, which stands for "Earnings Before Interest, Taxes, Depreciation, and Amortization." This financial indicator helps determine the profitability of a business or company by calculating its profit margin, excluding additional costs from operating expenses.

In the real estate industry, EBITDA evaluates investments in commercial assets such as office buildings, shopping centers, and industrial parks. It allows investors and property owners to understand how much income an asset generates before considering financial interests, tax costs, and the proportional value of an asset's wear and tear. Moreover, this indicator is useful for determining a company's ability to meet its financial obligations. The higher the EBITDA in relation to total income, the greater the operational efficiency and the capacity to invest in new projects or reduce debts.

It is essential to highlight that EBITDA's purpose is to evaluate a business's or company's ability to generate profits, considering its productive activity. However, it does not reflect the actual liquidity of the business or company. Thus, EBITDA is one of many factors to consider when analyzing the commercial real estate sector. Other aspects, such as financing costs, vacancy rate, location, market conditions, and property quality, also play a crucial role in the comprehensive evaluation of an investment or company's profitability and risk.

How is EBITDA calculated?

To calculate EBITDA, we follow four steps. First, we calculate the net result of our business or company by subtracting operating costs (inputs, salaries, essential services, etc.) and non-operating costs (taxes, debts, interests, asset depreciation, among others) from operating revenues.

Second, we calculate the operating result, which equals the net result without considering the cost of tax liabilities (taxes) and financial responsibilities (debt and interests).

Third, we calculate depreciation and amortization costs, which are non-monetary provisions for capital losses due to income reductions or asset devaluations —for example, property's or businesses' deterioration potential costs and tenant debts due to overdue rents or lack of payment.

Fourth, we add the depreciation and amortization costs to the operating result, and the outcome will be EBITDA.

These four operations can be summarized as follows: EBITDA = Operating Revenues - Operating Expenses + Depreciation + Amortization, where a) Operating Revenues represent the total income generated by the business operations; b) Operating Expenses are the total expenses directly related to the core operations of the business (excluding interests and taxes); c) Depreciation is a non-monetary expense representing tangible assets value reduction over time; and d) Amortization is a non-monetary expense representing intangible assets value reduction over time.

Example:

Let's assume we have a property with the following revenues and expenses: 1) Operating revenues (rentals): $500,000; 2) Operating expenses (maintenance and repairs): -$200,000; 3) Other Operating Expenses (salaries, transportation, etc.): -$100,000; 4) Provision for tenant default (with interests): -$20,000; 5) Depreciation expenses (of the property): -$50,000; 6) Paid interests (mortgage loan): -$30,000; 7) Paid taxes: -$50,000.

Step one: We calculate the net result by subtracting all (operating and non-operating) costs from the operating revenues. The calculation will be: Net Result = Operating Revenues - Total Costs. Substituting values, we get: $500,000 - ($200,000 + $100,000 + $20,000 + $50,000 + $30,000 + $50,000) = $500,000 - $450,000 = $50,000. This means our net result is $50,000.

Step two: We calculate the operating result, which is the same as the net result, without considering interests and paid taxes. The calculation will be: Operating Result = Net Result - (Interests + Taxes). Substituting values, we get: $50,000 - (-$30,000 + (-$50,000)) = $50,000 - (- $30,000 -$50,000) = $50,000 - (- $80,000) = $50,000 + $80,000 = $130,000. This implies our operating result is $130,000.

Step three: We calculate the depreciation and amortization costs, including non-monetary costs for tangible assets (in our example, the potential and relative property deterioration) and intangible assets (in our example, potential overdue rents or tenant debts) value losses. Substituting values, we get: -$20,000 -$50,000 = -$70,000. This means that depreciation and amortization costs amount to $70,000.

Step four: We calculate the operating result without considering the depreciation and amortization costs. The calculation will be: EBITDA = Operating Result - (Depreciation + Amortization). Substituting values, we get: $130,000 - (-$70,000) = $130,000 + $70,000 = $200,000. Consequently, our business EBITDA is $200,000.

Now you know how to calculate EBITDA! To learn more concepts and calculations, explore SiiLA REsource or contact us at contacto@siila.com.mx.