capitalization rate(redirected from Cap Rates)
capitalization ratethe rate at which the STOCK MARKET capitalizes the current earnings of a company. It is calculated by dividing a company's earnings per ordinary share by the current market price per ordinary share in order to arrive at the EARNINGS YIELD.
Usually called a cap rate,it is a number used in order to estimate the value of an income-producing property.There are no cap rate tables,no firm standards,and no universal formulas for arriving at one.Cap rates change frequently,depending on market demand for particular types of properties, lender appetite for particular types of loans, and prevailing interest rates. Most commercial real estate brokers,appraisers,and lenders know a range of cap rates for different types of properties.One divides the annual net operating income by the cap rate to arrive at a value.Highquality multi-tenant medical offices might sell for cap rates of 7 percent, and rundown apartment buildings with high turnover might sell for a cap rate of 13 percent.If both of them had gross rents of $300,000 per year with operating expenses of $60,000, then each would have a net operating income (NOI) of $240,000. By dividing the cap rate into the NOI, the medical offices would have a value of $240,000 0.07, or $3,428,571.Using the same formula for the apartments,but the higher cap rate, $240,000 0.13 gives a value of $1,846,153. It seems counterintuitive at first, but the higher the cap rate,the lower the value.