Question #19
Reading: Reading 33 Real Estate Investments
PDF File: Reading 33 Real Estate Investments.pdf
Page: 9
Status: Incorrect
Correct Answer: B
Your Answer: C
Question
Which of the following is an expense normally deducted from accounting net earnings but not from FFO?
Answer Choices:
A. Property operating expenses
B. Depreciation expense
C. Property taxes
Explanation
Depreciation on real estate is excluded from FFO because most investors believe that real
estate maintains its value to a greater extent than does other types of long-term business
assets. Therefore, taking depreciation deductions, which reduce the value of the real
estate, does not represent economic reality. FFO is accounting net earnings excluding
depreciation charges on real estate, deferred tax charges, and gains or losses from sales
of property and debt restructuring. Property operating expenses and property taxes are
both normal rental expenses deducted to arrive at operating income.