Given the following information, calculate the funds from operation (FFO). All figures are annual:

Net accounting income, excluding gains/losses from sales of property: $1,300,000

Losses from infrequent and unusual events: $40,000

Amortization of tenant improvements: $120,000

Amortization of leasing expenses: $65,000

Depreciation (real property): $1,240,000

Question

Given the following information, calculate the funds from operation (FFO). All figures are annual:

Net accounting income, excluding gains/losses from sales of property: $1,300,000

Losses from infrequent and unusual events: $40,000

Amortization of tenant improvements: $120,000

Amortization of leasing expenses: $65,000

Depreciation (real property): $1,240,000

BlackTom AI · Accepted Answer

FFO for REITs is computed by starting with net accounting income (excluding gains/losses on property sales), then removing nonrecurring/infrequent items and adding back real-estate related noncash charges (depreciation and relevant amortization).

1) Relevant knowledge points and concepts
- Funds From Operations (FFO) adjusts GAAP net income to reflect recurring cash-generating performance of real property operations. 
- Adjustments typically: exclude gains/losses from property sales (already excluded here), adjust for infrequent/unusual items (remove their effect), and add back noncash real-estate depreciation and amortization related to tenant improvements and leasing costs.

2) Step-by-step reasoning and computation
- Start with the given net accounting income (already excludes property-sale gains/losses): $1,300,000.
- Remove the effect of losses from infrequent and unusual events (these are nonrecurring and should be excluded from ongoing operating performance): - $40,000.
- Add back depreciation related to real property (noncash): + $1,240,000.
- Add amortization of tenant improvements (noncash operating adjustment): + $120,000.
- Add amortization of leasing expenses (noncash operating adjustment): + $65,000.

3) Intermediate calculation steps
- Beginning net income: 1,300,000
- After removing infrequent/unusual loss: 1,300,000 - 40,000 = 1,260,000
- Add depreciation: 1,260,000 + 1,240,000 = 2,500,000
- Add tenant improvement amortization: 2,500,000 + 120,000 = 2,620,000
- Add leasing expense amortization: 2,620,000 + 65,000 = 2,685,000

4) Why this answer is correct
- The calculation isolates recurring operating cash flow by excluding the $40,000 nonrecurring loss and adding back all real-property-related noncash charges (depreciation and amortizations). That yields the normalized FFO reflecting core property operations.

5) Why other multiple-choice options are incorrect
- $2,765,000 would result if the $40,000 loss were erroneously added instead of excluded.
- $2,725,000 reflects ignoring the $40,000 adjustment (neither adding nor subtracting it).
- $45,000 is not consistent with adding back large depreciation/amortization and is clearly incorrect.

6) Conclusion
The correct FFO, after excluding the $40,000 infrequent loss and adding back depreciation and amortizations, is $2,685,000, matching the provided answer.

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