# capitalization rate

Also found in: Wikipedia.

## Capitalization rate

The interest rate used to calculate the present value of a number of future payments.

## Capitalization Rate

The net income an asset produces in a given year divided by its purchase price. The capitalization rate is used to help determine the rate of return, or how fast an asset pays for itself and begins to make a profit. For example, if an asset cost \$1,000,000 and it produces \$100,000 in a given year, the capitalization rate is 10% and it will take 10 years to pay for the asset with the money it produces. However, it is important to note that the capitalization rate may change from year to year. For example, the same asset could produce \$100,000 in year one but \$250,000 in year two. It is informally known as the cap rate.

## capitalization rate

The rate used to convert an income stream into a present value lump sum. For example, a capitalization rate of 10% and an income stream of \$2,000 annually provide a present value of \$2,000/0.1 , or \$20,000. The capitalization rate for a particular flow of income is a function of the rate of interest on Treasury bills (the risk-free rate) and the risk associated with the flow of income. A riskier investment has a higher capitalization rate and, therefore, a lower present value.

## capitalization rate

the 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.

## capitalization rate

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.

References in periodicals archive ?
These transactions will result in aggregate incremental annual rent of USD 252.5m, for an implied capitalization rate of 7.9%.
The contracted sale price reflects a 17.4x EBITDA multiple and a 5% net operating income capitalization rate based on the hotel's operating performance for 2018.
The sale price equates to \$1,136 per square foot, and a 3.6% capitalization rate. The property was sold for \$2,500,000 by Niko Berdzeni.
Also during 2Q17, the company acquired land parcels for and began construction of two build-to-suits in Spartanburg and Phoenix for a total estimated investment of USD 49.1m at a 7.6% expected capitalization rate upon delivery.
With a direct capitalization of income approach to valuation, an appraiser computes the property's net operating income (income less expenses or NOI) and divides it by the applicable capitalization rate (ratio between NOI of comparable properties and their sale prices).
Most studies suggest that the macroeconomic environment has an important effect on the stock market capitalization rate such as gross domestic product, exchange rates, interest rates, current account and money supply (Kurihara, 2006; Ologunde et al., 2006).
Alternatively, earnings can be converted to value by dividing them by a capitalization rate, which encompasses the required rate of return and the anticipated long-term growth rate.
The opposing CPA expert witness had calculated the S corporation's pretax earnings and applied a capitalization rate to it, using the capitalized earnings method.
A capitalization rate is the rate of return used to convert estimated 'normalized' discretionary cash flow into value, which assumes that the cash flows will continue into perpetuity.
The following test of the five-year rule of thumb involved the earnings capitalization method, requiring the division of earnings by a capitalization rate to determine value.
A net income multiple of 11.6 implies a capitalization rate of 8.6 percent (i.e., 1 divided by 11.6 equals 0.086).
Capitalization of earnings: This approach consists of capitalizing a single year or an average of several years' earnings or cash flow into perpetuity at a capitalization rate that reflects the risk and growth potential in the company.

Site: Follow: Share:
Open / Close