Which statement correctly distinguishes net operating income (NOI) from funds from operations (FFO) in real estate cash flow analysis?

• A. FFO = NOI plus depreciation and amortization back, minus gains/losses on property dispositions.
• B. NOI = potential income minus operating expenses (excluding financing, taxes, depreciation).
• C. NOI = gross income minus all expenses including financing.
• D. FFO = NOI minus depreciation and amortization, plus gains/losses on dispositions.

Answer: (A)

NOI measures a property's operating performance after operating expenses, before financing, taxes, and non-cash items like depreciation. FFO aims to reflect cash flow from ongoing operations by removing the distortions of non-cash charges and the effects of property sales. Starting from NOI, you add back non-cash depreciation and amortization to convert to a cash-based measure, and you adjust for the gains or losses from property dispositions. That is why the statement stating FFO equals NOI plus depreciation and amortization, with disposition gains or losses accounted for (essentially removing their net effect) best captures the relationship between NOI and FFO.

Other options mix up these definitions: NOI is not based on potential income but actual operating income after expenses; NOI does not include financing costs or taxes; and FFO is not NOI minus depreciation—depreciation is added back to convert to a cash-based metric.