CAPITALIZATION RATE

Direct Capitalization Rate (CAP Rate)

What is a CAP Rate ?

"Direct capitalization is a method used to convert a
single year's estimate of income into a value"

The Direct Capitalization Rate (CAP Rate) is defined as follows:

Value = Net Operating Income (1)
               Overall Capitalization Rate 

For Example:

$500,000 =$68,600 (Net Operating Income)
                                         .1372

The CAP Rate in the above example is 13.72% (.1372 X 100 = 13.72)

Other derivatives of the formula are as follows:

Net Operating Income = Overall Capitalization Rate X Value

Overall Capitalization Rate = Net Operating Income
                                                                   Value

(1). The formula for calculating Net Operating Income is as follows:

Potential gross income (all figures are on an annual basis)

    Scheduled rent                            $xxxx
     Other income                              $xxxx

Total potential gross income                                  $xxxx
Vacancy and collection loss                                       -xxx

Effective gross income                                             $xxxx

Operating expenses

    Fixed                                               $xx
    Variable                                         $xx
    Replacement allowance            $xx

Total operating expenses                                      -$xxxx

NET OPERATING INCOME                                    $XXXX

---

Need answers on a particular commercial loan you are working on? We encourage you to run your "Commercial Loan Scenario Request" by us and we will respond with our best-case scenario from over 600 Capital Sources. On the rare occasion that we have not been able to place a commercial loan package ourselves, we have always been able to help point the customer to the right source.