REIT Operating Model, part four. Asset disposals. Asset disposals are a critical component in the management of a REIT. They're referred to as recycling. It is often referred to as recycling and it is a key factor in the generating of growth in REITs. Older assets, non-performing assets are recycled or sold to make room for new developments or new asset acquisitions. In a traditional corporate, we tend to not model asset disposals very much. We treat them as a one-off item and we sort of ignore them in the forecast. However, in a REIT, they tend to be a much more critical component of the forecast. So let's take a look at the disposal section, which is again down the bottom of our calculations page. And let's see what our assumptions are. We have asset dispositions in row 52 and that is a dollar amount. We also have an assumption for the gain or loss as a percentage of the asset proceeds. And lastly, we have a cap rate, which is going to help us determine the NOI on those assets that will be going away. So we're gonna have to do some calculating here to get the numbers that we need. The gain or loss on the asset proceeds is going to be equal to the assumption times the asset sale price.

The book value of the dispositions is going to be equal to the asset disposition sale price, less any gain. And what that means is that the book value of these assets were 100,000. We sold them for 125,000, thereby producing a gain of 25,000. And that's our sanity check on our formula. Now, to calculate the annual incremental NOI reduction, this is the NOI that will be going away as a result of selling these assets, we're going to use the cap rate, but again, the way cap rate works is that it's the forward NOI based on the market value of the assets. So the market value of the assets here is gonna be the selling price of the assets. So what we're gonna have to do here is take the assets from the previous year and apply the cap rate as well from the previous year. And that gives us the incremental annual NOI reduction and we can copy that across. And now what we need to do is actually again, back into the revenue amount. This is the revenue reduction or the revenues that will be going away. And for that, we're going to take the NOI reduction and divide it by the NOI margin. So we are effectively, again, grossing up using the NOI margin. So we now have the NOI reduction and we have the revenue reduction. We can go ahead and fill in the top of our model. The lost revenue from the disposed properties is going to be equal to the incremental annual revenue reduction in row 162. We just have have to remember to make that a negative 'cause these are revenues that are going away.

To calculate the expenses from disposed properties, which are going away, we're going to take the lost revenue from disposed properties and we're going to net the NOI. But because we're starting with the negative here, we're actually gonna flip our sign and we're gonna add it. So it's plus the NOI, which is the 21,167.3.

And that gives us the expense, which is going away of 12,974. So the net of these two is 21,167.3 and that is the amount of NOI that we will be losing as a result of the asset sales.

And we've now completed our revenue and expenses section for the model.