Adjusted funds from operations or AFFO workout. Here we have a typical income statement for a REIT. In order to calculate the AFFO in this problem, we first have to calculate the funds from operations. So the first thing we're going to do is locate our net income to common shareholders, which is row 18. And this is after any NCI or non-controlling interest income.

The next thing we will do is to add back the depreciation and amortization, which is in row eight. We also see that we have some gains and losses on the sale of property, so we are going to add back the losses and subtract the gains.

And in order to do this correctly, we have to reverse the 44 in the first year so that it becomes a subtraction.

And these three items give us our total funds from operation. Now, in order to calculate adjusted funds from operations, we have to first bring down our FFO number, and then we have to take a look at our income statement again and see if there're any items that have to be adjusted. The first thing that we have to do is adjust for the loss on the early retirement of debt. So this is a loss. Now, this loss is actually showing as a positive in the income statement, and you have to be very careful because oftentimes, income statements will change back and forth between positive and negative presentation. Depends on how the section is broken down on the income statement. So in this case, we have an 11.1 loss that we're gonna need to add back, so we can link to it as such.

There's nothing else on the actual income statement that needs to be adjusted for. However, we are given some supplemental data and in that supplemental data, there are a number of things that we're going to need to adjust for. The first is the recurring CapEx. That is always going to be a deduction from our FFO, so I'll reverse the sign.

Copy those across.

The next piece of data in our supplemental section is the accrued rental income from straight line rents. Now, these are going to have to be subtracted because what these reflect are the accrual amounts that are over and above the economic reality of the lease. I'm going to subtract the accrued rental from straight line rents and that's going to be done by using a minus sign.

Now, I also have something called the amortization of lease commissions. So this has been included in the amortization expense. These are lease commissions that have been paid out to brokers to close the deal on a new lease and they are being amortized over the life of the lease. However, because originally the lease commission was paid up front as a cash outflow, we want to adjust our AFFO to reflect the reality that cash has been spent here. This nine was included in our amortization expense, which was added back. So we are now going to back out this 9.0.

Now we have one last item here, the amortization of financing fees. While this is another kind of amortization expense, we don't want to treat it like the lease commissions because the lease commissions were actually included in our amortization expense in the D&A line. Therefore, subtracting them out makes sense. They were added back. We subtract them out. The amortization of financing fees, which is a similar kind of expense, it was an expense that was paid upfront in cash and is being broken up each year over the life of the piece of debt that it is associated with. However, this amortization is generally included in the interest expense line, and since interest expense has already been deducted from our AFFO in the sense that it came out of net income, if we were to deduct it again, we would be double counting it. So we're actually always going to ignore this amortization of financing fees. Therefore, we can sum these up and we have our total AFFO in row 38.