Net Asset Valuation Model Part Two, the Operating Assets. The first thing that we're going to do is value the operating assets using the capitalized income approach. So we have, for this company, we have their established communities and then we have their other business segments. The established communities are broken down by region and once we break them down by region we can then apply a cap rate based on that region. Obviously, it's very difficult, if not impossible and time consuming to use cap rates to value each of the individual buildings, but using geographic area is one popular approach. Now, these cap rates I got online from a large commercial brokerage company that publishes. In terms of where you can get cap rates from, they are proprietary, but there are many sources online that do publish cap rates. So the first thing we need to do for these established communities is find the forward year one NOI. I'm going to do that by going to my calculations and if I scroll down, I have my Net Operating Income broken down by geography. So I'm gonna link Southern California year one and then copy that down. Now, I have something here called Other established. If I go to calculations, I don't see that as one of the geographic breakouts, but if I go to the top, you'll see that Other Stabilized Communities has a Revenue category and it also has a Property Expense category. So if I net the two, I get my NOI. So these are the nominal NOIs. Now, what I need to do is take into consideration the fact that the valuation really wouldn't be accurate if I didn't apply some sort of replacement reserve deduction. And by that I mean a maintenance CapEx assumption. So I have a Replacement Reserve Assumption here, which I've also named as a cell, Reserve Rate, and I'm going to apply that to the forward NOI. Now, I need to flip this to a negative because it's going to be a deduction and then I can copy it down. I don't need to anchor because the name cell automatically anchors it. And so my Economic NOI is simply the net of those two. I can now apply my Cap Rate by dividing the NOI by the Cap Rate.

And I get the total value or market value of the established assets. Now, for the other business segments there are two approaches. One is that since these are not assets with established revenue streams, the Cap Rate should not be applied to them. And in another version of the model we took the acquired properties and simply applied an adjustment factor. There's another school of thought that does apply a cap rate to these kinds of properties and valuation. So for this model, we are going to use that approach. In terms of where to find the acquired property NOI, we have this information on our calculations and if we take our revenue and net our expenses, we will get our NOI.

Copy that down, and we can also copy the formula for the Replacement Reserve Deduction.

Net the two to get our Economic Forward NOI, and then similarly, divide the Economic Forward NOI by the Cap Rate.

We now have the total value of the established assets as well as the total value of the other business segments. Keeping in mind, of course that our disposals are going to be a negative because they're being disposed of and will not have value going forward.