So when I am looking at, say 5% cap rate. Is it the cap rate assuming the property is fully leased?
I am new to commercial real estate. So when I am looking at, say 5% cap rate. Is it the cap rate assuming the property is fully leased? or it is the cap rate based on current leased percentage?
[{"id": "hjr1sqx", "text": "Actual cap rate will be based on current economic occupancy. \u201cPro forma\u201d cap rate can be based on property fully leased", "replies": [{"id": "hjr97wq", "text": "Thanks, that makes more sense.", "replies": [{"id": "hjrhu39", "text": "Sometimes the listing isn\u2019t clear and you have to dig. Or even better, do your own math for where it is now and where you think you can get it.", "replies": [{"id": "hjrkjcu", "text": "That's what I was thinking too.", "replies": [], "depth": 4}, {"id": "hjyg55q", "text": "&gt;do your own math for where **it** is now and where you think you can get **it**.\n\nu/lmaccaro  What is \"it\"?", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "hjrfx5w", "text": "How would you get a current economic occupancy cap rate?", "replies": [{"id": "hjrhdqv", "text": "Potential gross income less actual vacancy less current expenses divided by purchase price", "replies": [{"id": "hjridb7", "text": "Where are you getting the purchase price?  I think you are working backwards.  The formula is V=i/r", "replies": [{"id": "hjrtu9r", "text": "Purchase price is the price at which I would buy it or at which it is for sale. Its a variable you just input a value for.\n\nIn V=I/r the r is the cap rate. Therefore r= i/v once you rearange the formula to isolate r and solve for its value. My statement shows you how to get to current NOI aka \"i\". You take I and divide by purchase price/ value/ sales price and that gives you cap rate. Since the income figure \"i\" as I have described it takes into account actual vacancy, and actual expenses it  represents the economic income currently rather than what the property could look like theoretically were it fully leased up. \n\nYou have to be able to switch up the cap rate formula and approach it from any direction on the fly.", "replies": [{"id": "hjrwvmn", "text": "You are completely ignoring the fact that cap rates come from direct capitalization.  They are an income approach to VALUE.   You are just making up a value.\n\nThe V=i/r is the Value you are solving for and the i is the NOI that the property is capable of producing at market ant the r is the cap rate from similar properties that have closed.  If you buy at $2,000,000 and the NOI is $100,000 you just created a 5% cap rate.  I use direct capitalization and I value that $100,000 by the market cap rate that comes from comps that are say 10% so $1,000,000=$100,000/10%.  YOU over paid by $1,000,000 because you used cap rates incorrectly.\n\nNow you know Irv but you are calculating 5%=$100,000/the made up price of $2,000,000.  That is not wise investing.\n\nIn my example above I assumed NOI was at market.  If there is excess vacancy then the process is the same but you make below the line adjustments for the lost rents, lease up costs and a risk factor.  \n\nSo show me the math how you would value a property that has excess vacancy.", "replies": [{"id": "hjss9lr", "text": "Bruh. Value is what someone is willing to pay for a property. It isnt an inherent thing. Value is just as nebulous as \"the noi the property is capable of producing at market\". The value you get to is going to be different from the one I get to based on the different assumptions we make or all appraisals would come back at the number you expect.", "replies": [{"id": "hjt7o31", "text": "I showed you the math of how you overpaid $1,000,000 on one property  because you do not know how to use direct capitalization correctly.  Go on using your crystals to determine what you want to overpay because trust me the seller knows his value by using a valuation method and he has no problem taking ectra money from you.", "replies": [{"id": "hjtovh0", "text": "Where do market cap rates come from? Like how do comps happen? \n\nAre they static unchanging numbers handed down from god or are they dynamic statistics based on what other market participants have transacted at which are in turn based on what a buyer is willing to pay which itself changes based on future expectations and intended use for the subject property?", "replies": [{"id": "hjtpni3", "text": "Cap rate comps come from analyzed closed sales.  Just like a listing price for a house is not a comp until it is sold.  Each sale can change the market cap rate or reinforce it.  Of course a seller want to get a lower cap rate than market and the buyer wants to get a higher but it will only change if the market in general is moving one way or the other.\n\nhttps://f.tlcollect.com/fr2/212/47174/CapRateSurvey\\_Feb2012.pdf#:\\~:text=The%20CBRE%20Cap%20Rate%20Survey%20highlights%20a%20significant,basis%20point%20spread%20for%20assets%20in%20Suburban%20submarkets.", "replies": [{"id": "hjttnjd", "text": "So essentially cap rates are an artifact of what buyers are willing to pay no? \n\nAlso not sure when we moved from a cap rate to market cap rate but my point stands. At my value add shop we pay tighter cap rates than market because we intend to renovate and achieve a higher income. So our intended use changes the cap rate from what a simple buy and hold investor would pay. We may even expect a higher proforma income than seller represents given our experience in the market and operating style. \n\nYou would look at us and tell us we overpaid because the market cap rate is 100-200 bps wide of our purchase cap but we still walk out with a huge IRR if we hit our proforma numbers.", "replies": [{"id": "hjufi7t", "text": "&gt;Also not sure when we moved from a cap rate to market cap rate but my point stands. \n\nThey are the same.  Cap rates come from closed sales.  The participants in the market decide what the cap rate will be.  If other sellers are getting $20 for NOI (5% cap rate) then why would  i sell below market?", "replies": [], "depth": 12}, {"id": "hjugcne", "text": "&gt;So our intended use changes the cap rate from what a simple buy and hold investor would pay.\n\nIf you are changing the class or repositioning a property then sure the cap rate that you could sell at would be the market cap rate of that class of asset.  But YOU are not changing the cap ?rate.\n\nAnd why would you pay that much over market when you could just buy it at market?  I can see trying to get a property under contract before someone else with you skill sees it but not 1 or two percent cap rate lower!", "replies": [], "depth": 12}], "depth": 11}], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}, {"id": "hjtkm1b", "text": "That's one way but different location and condition if the building can influence its true cap rate. How can you find out the true cap rate of the building?", "replies": [{"id": "hjto6d2", "text": "TRUE cap rate!   Ha Ha  You pay $2,000,000 for $100,000 NOI for a 5% cap rate.  Yep, YOU created a 5% cap rate!  Now the market is laughing at you because they are all paying at the \"TRUE\" cap rate that they got from cap rate comps (10%)  !  So you are paying $20 for NOI and they are paying $10   \n\nDoesn't that make YOU angry?", "replies": [{"id": "hjux4wo", "text": "So how do you decide what cap rate you will use to calculate the value of the property? Do you just make up a cap rate that brings enough cash flow?", "replies": [{"id": "hjv48p2", "text": "You use cap rate comps from sold properties that are similar.  Most upper value buyers will have access to cap rate comps that detail all the assumptions that were used to calculate the cap rate.  They will determine NOI and list the amounts for all expenses and a good cap rate comp will show the deviation from the market for each expense category and make a notation of why the principals thought that was so.  Let's say one comp has 5% less electricity usage than the other.  There could be a notation that the property has a co-generator that produces their own electricity when the price peaks.  So they clean up the NOI so to speak and use the price that was paid for the NOI to calculate a cap rate for that sale.  You can't just use the price because you don't know if it includes excess land or immediately needed capex.  \n\n If a property is encumbered by long term leases then the cap rate will be based on the contract rents and will be a leased fee cap rate.  If the property is about to turnover to mostly market rents or is vacant them you would be calculating a fee simple cap rate. \n\n&amp;#x200B;\n\nNow most people on this forum will never have access to such detailed analysis so they will rely on cap rate surveys that will put them in the ballpark.  \n\nSimply, it is just a valuation metric that tells you what investors HAVE paid for NOI.  Much like a sales comp. Novice investors just get all real estaty about it because it is expressed as a percentage.  But if you tell me the cap rate I can accurately tell you what you paid for a dollar of NOI.  How simple is that?  If you can negotiate better or if the market is changing then you adjust from the market.", "replies": [], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "hjyfwzt", "text": "&gt;Actual cap rate will be based on current economic occupancy. \n\nu/SpongeyBoob\n\nCan you show that calculation and explain how it is used?", "replies": [], "depth": 2}], "depth": 1}, {"id": "hjr4m6r", "text": "Keep in mind that fully leased in most cases means stabilized at some level below 100%", "replies": [], "depth": 1}, {"id": "hjr6x1r", "text": "Could be either, it\u2019s usually further defined:\n- \u201cin-place\u201d cap rate\n- \u201cstabilized\u201d or \u201cpro forma\u201d cap rate", "replies": [{"id": "hjr7ymh", "text": "This is correct and there are additional uses of \u201cCap Rate\u201d such as an \u201cExit Cap\u201d.  Cap rates can mean a lot of things depending on the situation.", "replies": [{"id": "hkaj66x", "text": "I am taking a blue pill and my cap rate is off the charts!!!", "replies": [], "depth": 3}], "depth": 2}, {"id": "hjyfo9o", "text": "&gt;\u201cin-place\u201d cap rate\n\nu/JIMBOONlE  Can you explain how that works and what it is used for?", "replies": [{"id": "hjyhp9k", "text": "Sure, if you are buying a building for $100 that is currently producing $5 of NOI, your \u201cin-place\u201d cap rate is 5%.\n\nYou might have plans to upgrade the building and increase rents, or lease it up to a higher occupancy, or both. Let\u2019s say your plan is to get NOI up to $8, that means your \u201cpro forma\u201d cap rate is 8%, but in-place is still 5%.", "replies": [{"id": "hk5q8hn", "text": "Thank You! You explained this very well.", "replies": [], "depth": 4}, {"id": "hkbi2u0", "text": "&gt;Let\u2019s say your plan is to get NOI up to $8, that means your \u201cpro forma\u201d cap rate is 8%, but in-place is still 5%.\n\nYou NEVER want the cap rate to increase!  At 5% your NOI is worth $20  V=i/r  $20=$1/5%  At an 8% cap rate your NOI is only worth $12.50=$1/8%  You just lost about 50% of your value.  That is horrible.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hjrfq5q", "text": "There is no cap rate  on the property until you close your sale.  The cap rate you should be concerned about is from cap rate comps.  These will be based on stabilized sales.  So if the market for stabilized sales is buying at about 10% ($10) per dollar of NOI then you would pay based on the pro forma NOI and then from that value back out lost rents, lease up costs and a risk factor of getting the property stabilized.\n\nThere is no \"as is\" or \"in place\" cap rate.  Where would you get it?  Now I've seen novices divide in place NOI by and asking price but that pretty much means nothing.", "replies": [{"id": "hjrmhb9", "text": "\"Cap\" stands for \"capitalization\". It is the rate that you use to take NOI (Net Operating Income) and capitalize it into the value of the asset.\n\nThe \"as is\" or \"in place\" capitalization rate is the rate that you use to capitalize the \"as is\" or \"in place\" NOI into the \"as is\" or \"in place\" value of the asset.", "replies": [{"id": "hjrnelv", "text": "Again, WHERE are you getting this \"as is\" or \"in place\" capitalization rate?  The formula is r=i/V   All you have is the i and that is only the in place NOI.  BUT you are buying the in place NOI AND the ability to increase occupancy.   AND you need 2 of the inputs and you only have , well half of one!", "replies": [{"id": "hjrogik", "text": "It is set by the market based on market conditions for the asset class and the condition of the property (including occupancy, stabilization, etc.)", "replies": [{"id": "hjrpo90", "text": "&gt;It is set by the market based on market conditions for the asset class and the condition of the property (including occupancy, stabilization, etc.)\n\nSeriously?  So if I have a 50% occupied property I have to find a comp that was also 50% occupied?  It is hard enough to get reliable comps on stabilized properties and you want to limit comps because you think they have to match the occupancy of your property!  LOL  That is not how direct capitalization works.  See my first response to the OP where I explained the procedure.  I'll be happy to walk you through it so you can be a better investor.", "replies": [{"id": "hjrqldz", "text": "&gt; So if I have a 50% occupied property I have to find a comp that was also 50% occupied?\n\nNo, you figure out what the discount would be on the asset compared to a stabilized property. And you apply that discount. You can find cap rate based on NOI and asset value or you can find asset value based on NOI and cap rate.\n\nIf I go look at your first response to OP, you start off by saying this:\n\n&gt; There is no cap rate on the property until you close your sale.\n\nWhich makes no sense because if you have NOI and you have a price then you implicitly have a capitalization rate that relates the two.\n\n&gt; Now I've seen novices divide in place NOI by and asking price but that pretty much means nothing.\n\nThe capitalization rate for a listing \"pretty much means nothing\" because the seller may be completely out of touch with the market (either too high or too low), but whomever uses an income based approach to determining the asset price necessarily has a capitalization rate that they applied to the NOI that they calculated to arrive at that asset price.", "replies": [{"id": "hjrtqcq", "text": "Exactly, if you are trying to value a 50% occupied property using a cap rate from a market sale then you would have to get a cap rate comp that was 50% occupied or do it the correct way that I outlined above.    \n**But** now you are talking about a \"discount\".  Where are you getting this and how do you calculate it?\n\nNow you are stating that you have a NOI and a Price so you think you can calculate a cap rate but NOW we are back to how did you arrive at a price?  There is no price so there is no cap rate except the cap rate that similar properties are selling at.\n\nAnd the only cap rate to value a property that has excess vacancy is the market cap rate for a stabilized property against the pro forma NOI **(NOT THE IN PLACE NOI)**  So starting with proforma NOI of say $100,000 and market cap rate of 5% the property is worth $2,000,000=$100,000/5%  But you are buying a property that is on half occupied so you make below the line adjustments to the $2,000,000.   Say you think you can lease up in a year.  You lost $50,000 in rents, and it will cost you $20,000 to lease up and you negotiate a risk factor of $15,000.  $2,000,000-$85,000=$1,915,000 as your probable market value.  This is simplistic but it shows the basic way to use direct capitalization on a non performing property.\n\n&amp;#x200B;\n\nCan you show me your math and I can show you where you are off.", "replies": [{"id": "hjt2cq9", "text": "This is great, thanks!ii", "replies": [], "depth": 8}], "depth": 7}, {"id": "hjt6o0i", "text": "why would you discount the property if your already accounted for it in the cap?  Not that I would adjust the cap (no one does that, that would look super weird), but I don't even understand how your valuation would look or what its modeling.\n\nA proper valuation would be similar to this:\n\nProforma NOI (ie market rate/vacancy)/ market cap (ie at market rate occupancy/rate) = stabilized value\n\nCurrent Value = Stabilized value - rehab/lost rent costs/leasing/etc - entrepreneur incentive.\n\nThe actual stabilization costs are typically fairly well known.   You flex around entrepreneur incentive to essentially indicate how much risk is in the rehab plan (ie if you have multifamily, probably not a lot.  If you are taking down a giant vacant office building, probably a lot).  Its essentially the amount of profit you want to fix the property.", "replies": [{"id": "hjtlbhe", "text": "&gt; why would you discount the property if your already accounted for it in the cap?\n\nApplying a discount to the asset value is equivalent to accounting for it in the cap rate. So if stabilized cap rate is 4% on pro forma, and you adjust it up to 5, 6, 7 or whatever, that's applying a discount because it is not yet stabilized.", "replies": [{"id": "hjts2ib", "text": "That is backwards!  So now other investors think you bought at a 7 cap when in reality you bought at market (4% cap) and then made below the line adjustments to the sales price.", "replies": [{"id": "hjtvr20", "text": "If as is NOI is $30k/year, pro forma stabilized NOI is $70k/year, and the asset changes hands for $1M, what is the cap rate?", "replies": [{"id": "hjuee1g", "text": "That would be impossible to answer.  What is the market cap rate?  Let's say it is 5%.  So the value of the property is V=i/r  So $1,400,000 stabilized market value.  So if he paid $1,000,000 to get a property capable of producing $70,000 in NOI then he made below the line adjustments for lost rents, lease up costs and a risk factor of about $400,000.\n\nNow some people want to say he bought at a 3% cap rate, 3%=$30,000/$1,000,000 but that begs the question of WHERE THE F\\*\\*K did the $1,000,000 price come from.  In the correct way the market value, market cap rate and the final purchase price is mathematically accounted for!", "replies": [], "depth": 11}], "depth": 10}], "depth": 9}, {"id": "hjuby5o", "text": "&gt; Applying a discount to the asset value is equivalent to accounting for it in the cap rate.\n\nYou sounded like you'd do both.  Anyhow, I think the problem you are missing is how to get those cap rate adjustments.  They largely aren't used because they are impossible to get without already projecting the actual costs which wouldn't typically scale well to NOI and return metrics.  \n\nFor example, say I have a building that all comps would say is a 6 cap but I know it needs a new roof.  What am I supposed to do find a new set of comps that all need a new roof?  How would you adjust the cap?  how much is that worth?  You can't answer that in a percent way without first figuring out the cost of the new roof and then you are going to have all kinds of other factors like SF, number of floors, etc that toss this all over.  There just are few if any reasons to ever adjust cap.  About the only one I can think of is looking at something like a walgreen or other national credit NNN over varying lease terms or something like that which is purely financial in nature and has little to do with the property.  \n\nI mean you can totally do what I said and back into an as is offering cap rate but it doesn't mean anything other than some other random metric.  \n\nIf you are looking at 3 stable propreties indicating say a 7 cap and are going back thinking \"well ours is half vacant and needs a new parking lot, roof, boiler.... hmmm maybe this 9 cap gets half a point for location, .25 for condition, and this 6 cap the same the other way\" you are not doing this right.  Use stable properties for cap and adjust the subject to them in terms of real dollars.  \n\nIf its more than something simple (ie stuff you can do in 12 months), use DCF so you can time line it.", "replies": [{"id": "hjug33z", "text": "I largely agree with you except here:\n\n&gt; I mean you can totally do what I said and back into an as is offering cap rate but it doesn't mean anything other than some other random metric. \n\nI wouldn't say it is necessary some other random metric. It can help quantify the work and risk involved in getting the property to stabilization. It can be useful for comparing value-add properties/opportunities to one another.", "replies": [], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "hjt5hus", "text": "this shouldn't be downvoted.  It is 100% correct and exactly how professionals look at non stabilized properties..", "replies": [], "depth": 2}], "depth": 1}, {"id": "hjs2k2l", "text": "I\u2019m going to be very blunt here, and may forego specifics. Cap rate  (capitalization rate) relates to how the business grows in terms of capital. Capital by definition are owned items, assets, and a few other perceived values from a company.", "replies": [], "depth": 1}, {"id": "hjsj5d6", "text": "There is either the in-place cap rate looking at actual current rents or the pro-forma cap rate looking at if the building were fully leased.", "replies": [{"id": "hjt9p9r", "text": "There is in place NOI but not in place cap rate.  You can divide the in place NOI by what you paid for it but what does that tell you or anyone else?  Nothing!", "replies": [], "depth": 2}], "depth": 1}, {"id": "hjsmi8f", "text": "Cap rate is the most fudge-able number. Ask the buyer, seller and broker and you\u2019ll get 3 different answers.", "replies": [{"id": "hjt1c6q", "text": "This is an interesting perspective. Could you elaborate more? I came across some article saying that low cap rate means low risks, but why would anyone buy a property that generation very little cadh flow? Is it because they rely on increasing rent afterward to drive up price? just like residential property?", "replies": [{"id": "hjt29q5", "text": "Generally, Sellers will argue for lower cap (more stable, higher sale price), buyers will argue the inverse (to get a better \u201cdeal\u201d). Most decent brokers know beforehand what the cap rate range falls between and so do the principals, tbh. \n\nYou\u2019d buy a lower cap rate (thus less return on your money) based on risk appetite and/or the cost of borrowing money. Example, pension funds and mutual funds want STABILITY and are placing billions. Therefore, they get cheaper interest rates if they borrow, and can afford to pay lower cap rates than a individual investor who has to pay higher interest rates for the same deal.", "replies": [{"id": "hjt5qtb", "text": "Very insightful, thanks for explaining!", "replies": [], "depth": 4}, {"id": "hjt9b67", "text": "Cap rates do not measure \"returns\", they measure VALUE.  A 10 cap means investors paid $10 per possible dollar of NOI.  A 5 cap means investors paid $20.  Investors do not pay TWICE as much for HALF the \"return\".  You use a cap rate to get the probable market value.  THEN you can use the different RETURN calculations to determine returns.\n\nCap rates do not measure risk.  Cap rates can be indicative of risk but do not measure it.  Low cap rates come from bidding a property cap rate down.  If you go too far then the BIG RISK is overpaying.  So a low cap rate can be very risky but the cap rate does NOT measure it.", "replies": [{"id": "hjtta7y", "text": "I know exactly how cap rates work.", "replies": [{"id": "hjtyw8h", "text": "That guy is so confidently incorrect. Is risk not a part of value? Why are hotel cap rates wider than multifamily for the same income? Is there some greater risk embedded in hotel operation than multifamily given the discretionary nature of lodging demand and micro leasing term of hotel rooms? Nah", "replies": [{"id": "hju3aps", "text": "Just adding the /s for those who need it.\n\nCarry on good CRE citizen", "replies": [], "depth": 7}, {"id": "hjuaac7", "text": "Perceived risk by the market participants!  But again a cap rate does not measure risk but can be indicative of risk.  Last I looked Class A office in Philly was selling at a 7% cap rate and in SF at a 4%.  Are you claiming that Philly has almost twice the risk as SF?", "replies": [{"id": "hjub7ek", "text": "Yes. Clearly that is what investors are saying. But since you dont beleive me I would like to sell you some buildings in philly and buy whatever you have in san fran.", "replies": [{"id": "hjubvrt", "text": "I don't buy in low demand areas.  I only buy when the demand is lower in a high demand area.", "replies": [{"id": "hjudqm5", "text": "Why dont you buy in low demand areas?", "replies": [{"id": "hjuv8ac", "text": "1. I can afford the high demand areas.\n2. They are generally easier to manage.\n3. Generally they are more profitable.", "replies": [], "depth": 11}], "depth": 10}], "depth": 9}, {"id": "hjugmgs", "text": "&gt;Yes. Clearly that is what investors are saying. \n\nSo then you are saying the 3% difference is all a measure of RISK?", "replies": [{"id": "hjupxq5", "text": "Yes. All things equal if you value the same $income today at different price points then you are implicitly saying that you beleive there is a greater risk of vacancy in the future or lower demand, or swiftly growing expenses or a less dynamic economy. Tally up all those risks and it gives you a delta.", "replies": [{"id": "hjur3tk", "text": "&gt;you are implicitly saying that you beleive there is a greater risk of vacancy in the future or lower demand, or swiftly growing expenses or a less dynamic economy. \n\nOr more likely the difference in NOI value is that Philly rents are closer to $20 a sf and sf is getting $80.  So it would take about 4 times more sf to get the same NOI.  Now since direct capitalization does not include capex then more of the Philly NOI is going to capex!  Think of all the capex that is based on sf!  \n\nSo if the 3% is risk HOW do you account for the greater capex in Philly?", "replies": [{"id": "hjurkid", "text": "If rents are lower in philly do you think that might be because demand is lower relative to supply?", "replies": [{"id": "hjusb3h", "text": "Not really.  The vacancy rate would be more impacted by supply and demand.  I would bet that both SF and Philly Class A office experience about a 5% V/C rate.", "replies": [], "depth": 13}], "depth": 12}], "depth": 11}], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "hjt52za", "text": "&gt;  I came across some article saying that low cap rate means low risks, but why would anyone buy a property that generation very little cadh flow?\n\nCap rate is a measure of risk.  Risk matters, and people are ok accepting lower income for lower risk.  There is a reason people buy fortune 50 companies for retirement and not penny stocks.  \n\n&gt; Is it because they rely on increasing rent afterward to drive up price?\n\nMaybe, maybe not.  The appreciation of the property is a component of the cap rate, so its generally already accounted for.  I wouldn't assume thought a lower cap implies future rent gains.  It could or it could not.", "replies": [], "depth": 3}, {"id": "hjt9gha", "text": "Would you rather own a non-flag hotel in bumblefuck for a 10 cap or an Amazon warehouse for a 3 cap? One is as risky as you can get and the other is almost guaranteed income for the life of the lease. Depends on your goals.\n\nMy point on cap rate was that a broker might quote a t12 cap rate. Buyer might quote a stabilized cap rate. How are you doing post sale adjusted taxes in your cap rate? What if it\u2019s only 85% occupied but expected to be 100% in 3 months? All these things are fudge able to compute a cap rate.", "replies": [], "depth": 3}, {"id": "hjtyfck", "text": "At a base level, a cap rate is just your NOI/Value. Cap rates should be correlated with implied risk. Suppose you have two multifamily properties with the same in-place NOI, one student housing being a 30min walk from a crummy school and one a mid-rise in a submarket w/ low vacancy and abnormally low turnover. Let's also say they have similar growth prospects in terms of future rent growth - which would you purchase, assuming the sale price is equivalent?\n\n&amp;#x200B;\n\nThe answer is likely the mid-rise because there is lower risk there. So to make them equivalent in terms of your purchase decision, either you'll require the Student housing to have a higher in-place NOI or the purchase price to be lower, both will raise the cap rate on that property. So, you see higher risk properties will demand a higher cap rate, all else equal.\n\n&amp;#x200B;\n\nGetting a bit more into the weeds, a cap rate has a few components, in theory, your risk-free rate, a risk-premia, expectations of long-term inflation, and growth above and beyond long-term inflation (or below) \\[Formula being r-g\\]. At a 5% cap rate, and $100 in-place NOI, you've got a $2,000 building. (100/.05). What does that 5% imply though, is it low because there is high implied growth in rents, perhaps because they're below market or maybe it is because while there's no future growth expected, the asset class is extremely safe so your risk-premia figure is very low?\n\n&amp;#x200B;\n\nNow put yourself in the shoes of an appraiser, buyer, seller, broker, etc. Do you think each of them will come up with the same expectations of future growth, inflation, inherent risk in the property? No of course not - like the above poster said, this number is very easy to fudge.", "replies": [], "depth": 3}], "depth": 2}, {"id": "hjt8cfc", "text": "And that is why cap rate comps should come from professional third party companies that analyzed closed sales and interview all parties to the sales.  Buyers and sellers should NOT be trying to calculate cap rates.  How could they?  They need to develop their skills of calculating NOI !!!Brokers at best would be able to explain why the different cap rate comps sold in comparison to the properties that you are looking at.", "replies": [{"id": "hjt9p8m", "text": "Nothing like that exists. We have our own database where we put a cap rate in and then add any pertinent notes (like current occupancy, post sale adjusted taxes, financing)", "replies": [{"id": "hjtbpa1", "text": "Um, you've never heard of Price Waterhouse Cooper?  How about Ernst and Young.  Geez, anyone can call your local Assessors Office and ask for a commercial appraiser and ask how they get cap rate comps.  The larger offices will have people in office that derive cap rates from the sales in their county.  GEEZ!\n\nNow can you explain where you get the cap rate that you put in your database and how it is calculated.?  I'm betting that you can't&gt;", "replies": [{"id": "hjtdc8b", "text": "&gt; Um, you've never heard of Price Waterhouse Cooper? How about Ernst and Young. Geez, **anyone can call your local Assessors Office** and ask for a commercial appraiser and ask how they get cap rate comps.\n\nLOL. You are clearly an expert. This makes no sense. Does the county have a full RR? Full T12? Buyer's pro forma? Any information on new leases that might be signed? Do they understand about the shitty assumable financing that's way out of market?\n\nThe majority of the sales (recaps) we work on never hit the market. PWC, EY, whoever you want to name have zero clue about it. My little firm will probably do $3B+ and most never see the light of day. Appraisers from the major firms (CBRE, Colliers, Apprise, Cushman) call us for sales comps.\n\nSo how do I do it? Well, for probably 50%+ of the business that happens in our niche, we are somehow involved. Either the sale or financing. Or maybe we BOV'd the asset for the seller and they went with someone else. We know what the NOI should be so all we need is a PP and maybe a few details to plug holes to compute a cap rate. Then the other 50% of the sales I call up my friend at the company who was involved (bank, equity, seller, buyer) and ask what they think the cap rate was. Chances are I have some information on the deal even if I wasn't involved (sales OM, financing OM, etc). And then I use what I mentioned to derive a cap rate.\n\nI'll give you a perfect scenario of a buyer fudging a cap rate. Let's say someone was buying an asset and it only had 3 years left on the tax abatement. They quoted the cap rate using the abated taxes. Well sure, then it's a 5.5% cap. But if you discount back full taxes and NPV the tax savings, it's a 4.25% cap. I personally would use the 4.25% cap rate as that's the true cap rate and I would note the tax abatement.\n\nAnything else I can teach you about today?", "replies": [{"id": "hjtoz0m", "text": "&gt;LOL. You are clearly an expert. This makes no sense. Does the county have a full RR? Full T12? Buyer's pro forma?\n\nYep and the law is on their side\n\nhttps://codes.findlaw.com/ca/revenue-and-taxation-code/rtc-sect-441.html", "replies": [{"id": "hjtpln6", "text": "That's California. How about Texas where it's a non-disclosure state?\n\nI can tell you having done deals in hundreds of taxing jurisdictions, most do not get information from the owner.", "replies": [{"id": "hjuaylp", "text": "&gt;That's California. How about Texas where it's a non-disclosure state?\n\nGeez.  [https://apartmentloanstore.com/dallas-fort-worth/texas/cap-rate#:\\~:text=Cap%20Rates%20as%20of%2010%2F27%2F2021%20Commercial%20Property%20Cap,%20%206.16%20%209%20more%20rows%20](https://apartmentloanstore.com/dallas-fort-worth/texas/cap-rate#:~:text=Cap%20Rates%20as%20of%2010%2F27%2F2021%20Commercial%20Property%20Cap,%20%206.16%20%209%20more%20rows%20)\n\nIt is to the benefit of the participants of CRE to have factual information.  Even in a non disclosure state it is a \"I'll show you mine if you show me yours\".  That information is generally shared with a professional third party.", "replies": [{"id": "hjubycw", "text": "UMMM.. How does that link prove that all assessors in Texas get all information about every property?\n\nI'm not sure what you do (if you're even in commercial real estate), but you clearly don't know how things work outside of your little world.", "replies": [{"id": "hjvbk0f", "text": "&gt;How does that link prove that all assessors in Texas get all information about every property?\n\nI didn't say it did.  I clearly stated that the participants were sharing info with a third party even if they were not reuired to publicly disclose. But call a Texas Assessor and ask then how they determine the sales price.  LOL", "replies": [{"id": "hjvcdyk", "text": "I have talked to assessors in Texas having closed probably 25+ deals in the state. Almost every deal we close has strict confidentiality around price and terms as they don\u2019t want the assessor to know. Also, as stated previously, what is recorded is not always the sales price as sometimes there is an allocation to intangibles that can be 5%~20%. So again, unless you were involved in the transaction, you wouldn\u2019t know. Costar wouldn\u2019t have it and neither would some generic list of cap rates.\n\nI\u2019ll go even one further for you. We sold a multi deal where tenants signed 2 leases. One for rent and one as an \u2018amenity fee.\u2019 Any guesses why they did this?\n\nAnd that PDF.. I don\u2019t do conventional multi in Dallas but I\u2019d be surprised if Class AA was a mid 4 cap so again, a worthless piece of information.", "replies": [{"id": "hjvf7j2", "text": "Slim  Looks like they value at market every year,\n\n&amp;#x200B;\n\n[https://comptroller.texas.gov/taxes/property-tax/valuing-property.php](https://comptroller.texas.gov/taxes/property-tax/valuing-property.php)\n\nThis is mostly for residential but again it is to the advantage of  CRE to share information.  The Assessor can get it one way or another,\n\nhttps://www.texasrealestate.com/members/posts/the-difference-between-non-disclosure-and-confidential/", "replies": [{"id": "hjvvvkm", "text": "The market value for tax assessment does not always equal the market value for sale.\n\nTexas I think has an ass backwards tax system. When a sale occurs, the assessor attempts to find the real purchase price. When they can\u2019t, they seem to value the property high (sometimes above the purchase price). Then the buyer will appeal and provide information to refute the value. We sold an asset 2 years ago that is still in litigation for the 2020 assessment even though 2021 assessments are already out (reason it\u2019s still being appealed is there was a sliding scale on PP based on the 2020 assessment. The buyer is getting screwed since the 2021 assessment will be materially higher even if the 2020 value is appealed down).\n\nPersonally I think it\u2019s way better to have a tax code more similar to CA that\u2019s very clear.\n\nFlorida is another one where you can avoid full assessments with portfolio or entity sales.\n\nStates like Arizona have caps where they can\u2019t increase more than 5% a year.\n\nSome jurisdictions in PA haven\u2019t reassessed post sale in 30+ years.\n\nWhat I\u2019m trying to tell you is\u2026 taxes really depend on the county where the property is located.", "replies": [{"id": "hjw0ga1", "text": "&gt;What I\u2019m trying to tell you is\u2026 taxes really depend on the county where the property is located.\n\nI never disagreed with that.  My contention was that Assessors work to determine market value.  In CA a buyer is required to provide information through a 441d but some buyers try to avoid and I described earlier that the Assessor does just like you described in Texas.  Over assess and make them comply if they want a correct assessment.  And yes they get punished by having to pay the higher taxes for years until the appeal is resolved.", "replies": [], "depth": 14}], "depth": 13}], "depth": 12}], "depth": 11}], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}, {"id": "hjtopk0", "text": "[https://f.tlcollect.com/fr2/212/47174/CapRateSurvey\\_Feb2012.pdf#:\\~:text=The%20CBRE%20Cap%20Rate%20Survey%20highlights%20a%20significant,basis%20point%20spread%20for%20assets%20in%20Suburban%20submarkets](https://f.tlcollect.com/fr2/212/47174/CapRateSurvey_Feb2012.pdf#:~:text=The%20CBRE%20Cap%20Rate%20Survey%20highlights%20a%20significant,basis%20point%20spread%20for%20assets%20in%20Suburban%20submarkets).\n\n&amp;#x200B;\n\nHMMMM", "replies": [{"id": "hjtpjcb", "text": "Those are general cap rate summaries where they are pulling stuff from their own transactions, Costar + other. Specific transactions with commentary is much more beneficial. Costar pulls from public DB's but the recorded price does not always equal the sales price. \n\nIn 20 years in institutional commercial real estate throughout the country, I never once had one person quote a cap rate summary from a CBRE or similar.", "replies": [{"id": "hjttd4z", "text": "Again,  **CALL YOUR ASSESSOR** They need accurate cap rates to use to assess properties and defend those assessments in Appeals hearings.  So if you call Jim Bob for a cap rate he just tells you  \"The cap rate is NINE!\"  LOL", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "hkab2b4", "text": "Truth. When buying apartment buildings the broker selling always want to use CAP as expenses are easily under-estimated. As a buyer I first look at the gross rent multiplier GRM, And I\u2019ll figure out my own cap rate based on more reasonable expenses.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hjsw6ac", "text": "As you can see from the thread there isn't a universal way to define the CAP rate shown in offering memorandums or listings in commercial property. You'll hear or see terms like \"going in\" or Year 1 CAP rate or even \"in-place\" in the OM - none of these should be taken at face value. This isn't to say that everyone is lying, the seller is expected to show the potential of an income-producing property in the best possible light. Think of an empty \"value-add\" multi-tenant property where the seller is showing a 6-month lease-up period at their estimation of a market rate rent. The seller can make all kinds of assumptions or projections in what goes into the actual or projected revenue (rent) or expense side of the net operating income (NOI) calculation. Its how they got to this number not solving the equation that takes some experience and expertise to decide if the deal is worth a deeper look. \n\nIMO what matters  is your (or an advisors) calculation of NOI using your definition, and how that corresponds to other options in the market with similar insights. Think of whatever you read in the listing or OM as an interesting idea of how the seller is trying to market the deal, and not a valid data point.", "replies": [{"id": "hjt1pkw", "text": "That's great points. Thanks!", "replies": [], "depth": 2}, {"id": "hjtd8ov", "text": "&gt;As you can see from the thread there isn't a universal way to define the CAP rate\n\nBut there is a universal what to calculate a cap rate.  Take the class,  [https://ai.appraisalinstitute.org/eweb/DynamicPage.aspx?webcode=AICourseDetail&amp;cecKey=E59E67C3-F675-4C1B-A979-6E991B2C08B8&amp;courseType=classroom](https://ai.appraisalinstitute.org/eweb/DynamicPage.aspx?webcode=AICourseDetail&amp;cecKey=E59E67C3-F675-4C1B-A979-6E991B2C08B8&amp;courseType=classroom)\n\nAll the advertising/asking  stuff is just that, what someone wants YOU to pay them.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hjtg020", "text": "u/IcySheepherder0\n\nTrailing 12?  HA HA  Maybe you live in a podunk county but the Asessor collects data on commercial sales to derive cap rates.  They have the law on their side!\n\n[https://codes.findlaw.com/ca/revenue-and-taxation-code/rtc-sect-441.html](https://codes.findlaw.com/ca/revenue-and-taxation-code/rtc-sect-441.html)\n\nNow if some clueless owner wants to ignor the information request then the Assessor can just **ESTIMATE** the information and the taxpayer will get an assessment that may be up to twice what it should be!  Then you'll see how quick the taxpayer provides the information.  But even then the Assessor can just say Appeal your assessment.  You'll have to pay the double taxes for a couple of years waiting for their hearing and then maybe getting the overpayment a year or so later with no interest.\n\nNow call your assessor since you don't want to believe me.  \n\nBe sure to keep the number because if they tell you wrong I'll be calling them.", "replies": [{"id": "hjttrfu", "text": "It's possible I misunderstood the OP. I took it to mean that it was about the use of the term CAP rate in offering memorandums and listings, not an appraisal or assessed value. My point is that the assumptions used to price the deal are critical to understand.\n\nPeace and Love", "replies": [], "depth": 2}, {"id": "hju1zgi", "text": "Nobody is using assessor's caps to make a buy/sale decision inside any commercial shop.\n\nYes if assessor's value is far and away from proposed deal price there may be language in the PSA which allows for contingencies/breaks/hard money claw backs etc. All on a deal by deal basis...\n\nRegardless, again, nobody is buying CRE based on assessor's Caps.\n\nT12, rent rolls, burn off, and non-stabilization adjustments are all a part of the valuation process.\n\nTo your other comment regarding using valuation professionals... Lmao, who do you think is working at REPE shops?!\n\nValuation is price, price doesn't exist until a trade, and those who decide to trade decide the price... Jfc do you even CRE bro?", "replies": [{"id": "hjuchy6", "text": "&gt;Nobody is using assessor's caps to make a buy/sale decision inside any commercial shop.\n\nI never stated that.  I said there are professional third party entities that calculate cap rates correctly on analyzed closed sales.  That was to illustrate that Value comes from direct capitalization.  Anyone that calculates a cap rate by only using their purchase price probably overpaid.", "replies": [{"id": "hjw10zg", "text": "Are you speaking in a macro context?\n\nIf so, sure I'll give you that. But only in so far as no single transaction makes a market. Of course you need to look at the breath and width of the market to identify cap rates at the market level. But, when talking trades it is very common to ask/say xyz property traded at a #.# cap. And I don't need a specialized third party to tell me what cap rates are. We have all the data and know pricing/replacement costs. We are very much aware what \"market cap rates\" are in any market we transact in.\n\nI assume myself and almost everyone else here, OP included, were discussing this on a per deal basis. \n\nI.e. how to calculate a cap rate on a property and why do some properties have different cap rates etc.\n\nAnd yes you can look at recent trades in a market to get an idea if the market is somewhere you want to transact. \n\nE.g. Boise MF is on fire right now, if you believe the investment thesis being pitched, it makes sense to trade at 3.25 cap on a deal to get in the market, if you don't, and your solving to target return of 20% IRR, you won't. Because no one will sell you the land/do the construction at a price to get you there (if you are developing) and no one will trade at a 5 cap, like for like, in a 3 cap market (if you are acquiring).\n\nThis whole discussion, at the micro/deal level, is all about price paid/risk assumed/and t12s, income, and rent rolls. (As well as many other things on a deal by deal basis)\n\nIn place cap rates are a thing. So are stabilized cap rates. Burning off loss to lease to get to a \"true\" cap rate are all normal talking points. I have never worked with a buyer/seller/developer who gave much thought to cap rates as a nebulous economic data point except when discussing long term strategy and market selection. Once down to the deal decision it is all about return metrics and price, and maybe, sometimes, simply wanting to own *that* building in *that* city etc.", "replies": [{"id": "hjw33gw", "text": "&gt; I don't need a specialized third party to tell me what cap rates are. We have all the data and know pricing/replacement costs. We are very much aware what \"market cap rates\" are in any market we transact in.\n\nIs your market that small?  I mean in any mid sized city how would you know all the information on every sale?  It just doesn't happen.  Perhaps you can clue me in.", "replies": [{"id": "hjyddxn", "text": "Network, experience, volume.\n\nWe trade in &gt;$50mm/deal not that many trades per quarter in any market.\n\nOf course we use market research. But, my point, to the statement you quoted, is it just isn't hard to know Caps in a market you are familiar with, and with a network, it isn't hard to get clued in on a new market you are interested in. Do we read market reports/industry analysis/macro strategy trend reports... Sure, but it's all tertiary to deal level information. \n\nWe work credit/development/JV equity and placement we do ground up development, value add, and stabilized acquisitions. We have relationships with developers/contractors/principles/brokers/lenders/money managers etc etc.", "replies": [{"id": "hjyey06", "text": "&gt;it just isn't hard to know Caps in a market you are familiar with, and with a network, it isn't hard to get clued in on a new market you are interested in. \n\nYou might want to run that by your boss.  Look, here's the deal.  I don't know what your function is but the valuation of commercial properties is a multi-billion dollar industry.  Knowledge is power and actual knowledge of the closed sales and the inputs that were used to get to a reported cap rate is all powerful.  Then to apply that information in the valuation of another property is not just \"The cap rate is nine\".", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}, {"id": "hjw3glf", "text": "&gt;In place cap rates are a thing. \n\nHow are they calculated and what do they tell you?  No one has been able to provide that information in almost 100 posts.  I say there is no in place cap rate but there is in place NOI.  I showed the math.", "replies": [{"id": "hjyev7p", "text": "They are the same thing. The equation is *literally* an equality.\n\nWhen we trade we absolutely care more about IRR and multiples, but the only way to compare one deal to the next, in so far as the trade price itself, is to right size the price to the operating cf of the property... I.e. a cap rate.\n\nYou know exactly what everyone here means when we say \"in place cap rate\" your just being pedantic/obstinate saying &gt;no, no, no it's not in place cap it is in place NOI!\n\nWho gives a damn. It is literally the same thing...\n\nYes in place NOI is a thing, and so is a purchase price... Therefore... In place cap rate!\n\nDo we, when comparing deals, sometimes adjust in place cap? Sure! All sorts of reasons to do so. But if I  buy and sell 10 deals in a market, and they are relatively comparable, it is worth looking at their cap rates... Their in place and/or adjusted cap rates (depending if adjustments are needed)\n\nDo we also look at proforma return metrics or realized exit metrics? Of course! But return metrics tell us how we did/plan to do because of our deal structure/strategy/use case/investment thesis etc., cap rates tell us about the market and the trade.", "replies": [{"id": "hjyhtsi", "text": "&gt;You know exactly what everyone here means when we say \"in place cap rate\" your just being pedantic/obstinate saying &gt;no, no, no it's not in place cap it is in place NOI!  \n&gt;  \n&gt;Who gives a damn. It is literally the same thing...\n\nThen why can't anyone show the process and explain what it means,  Can you?  Are you the one?", "replies": [{"id": "hjz4009", "text": "Please actually take the time to re-read the post your reply is to. It is in the first to sentences. I'm done. \n\nYou are either being a troll or are too dense to get we are talking past each other and your focusing on something separate from the conversation at hand. I have tried to throw you life preserver and reel you in, but you seem to be quite comfortable swimming in the depths of your own arrogance and ignorance.\n\nThank you for once again confirming if people like you can make money in this business and find success (see how I am giving you the benefit of the doubt and not being an ass?)... Anyone can.\n\nGood day, sir.", "replies": [], "depth": 8}], "depth": 7}, {"id": "hk6cq7x", "text": "&gt;You know exactly what everyone here means when we say \"in place cap rate\" your just being pedantic/obstinate saying &gt;no, no, no it's not in place cap it is in place NOI!\n\nNOPE, I have no idea what anyone thinks an **in place cap rate** is and obviously you don't either or you could actually explain where you are getting NOI and and the Value.  So far everyone is just using made up numbers or giving me word salad gobbledygook.  So don't assume I understand you.  Instead clearly explain.  Crap, do you need to be introduced to Irv?\n\nSo instead of telling me that EVERYBODY knows the **in place cap rate** story do the math for me.  I even started a thread just about this and again NOT ONE person can explain.  [https://www.reddit.com/r/CommercialRealEstate/comments/qq8s3o/what\\_is\\_the\\_process\\_to\\_get\\_an\\_in\\_place\\_cap\\_rate/hk5g97g/?context=3](https://www.reddit.com/r/CommercialRealEstate/comments/qq8s3o/what_is_the_process_to_get_an_in_place_cap_rate/hk5g97g/?context=3)\n\nSo quit telling me you know how to do something and actually show me how you do it!  Is that really too much to ask?  \n\nI'm counting on you u/Cypher1388 !!!!", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hjvcwae", "text": "The only cap rates that matter (as to purchase) are those based on the current income being produced.\n\n100% full, or 99% empty.\n\n(Income).", "replies": [{"id": "hjvhjwc", "text": "So how would that work on a new building that was only leased up 10%.  And how/why would someone be calculating a cap rate?", "replies": [{"id": "hjvmn6i", "text": "I'd have to see the numbers to answer that question but...\n\nIf you're paying a price that includes other income than that which exists....you're not buying an asset based on a cap rate, you're buying an asset based on a promise, or worse; assumption.\n\nCap rates define something that exists.\n\nPromises define something that does not.", "replies": [{"id": "hjvt8z8", "text": "1.  What numbers do you think you need?\n2. You are buying something that exists.\n\na  In place NOI\n\nb  90% space that can be leased.\n\n3.  A lease is a promise and people buy leases all the time.\n\n4.  Investors buy anticipation and that anticipation can be valued by cap rates.  Otherwise they would have to pay people to take a brand new vacant building.", "replies": [{"id": "hjwvz80", "text": "The actual, stabilized, seasoned, income.\n\nThey do \"pay people\" to take brand new buildings by virtue of a loss of actual value over perceived value.\n\nCap rates value *actual* income, nothing else.\n\nAnything else is an assumed value of *anticipated* income.", "replies": [{"id": "hjwyg9g", "text": "Cap rates measure NOI.  The calculation of NOI STARTS with PGI  **POTENTIAL GROSS INCOME**  You should actually take a class on direct capitalization.  Your understanding is completely wrong.", "replies": [{"id": "hjwyx2b", "text": "I'll get on that right away.", "replies": [{"id": "hjy3et6", "text": "And the calculation of NOI starts with PGI.  So therefore if NOI is FACT then PGI is FACT.  \n\nYou are confusing in place NOI with NOI.  Both are FACTS.", "replies": [{"id": "hjy6vpx", "text": "Semantics.  Nomenclature.\n\nCap rate calculations (to obtain a purchase price) are based on actual, seasoned income, not presumed income.\n\n(At least, they should be).\n\nI suppose you can base purchase decisions on presumed income, at which point any and all valuations are purely subjective anyway. \n\nIf that's how people want to value new assets, I'd recommend some fairy dust and some rainbow sprinkles to go along with them.\n\nOr a set of darts perhaps.", "replies": [{"id": "hjyf6iu", "text": "&gt;Cap rate calculations (to obtain a purchase price) are based on actual, seasoned income, not presumed income.\n\nPLEASE show me that process!  No one else can.  Maybe you are the one.", "replies": [], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}, {"id": "hjwyhed", "text": "&gt;loss of actual value over perceived value.\n\nCan you explain what you think that means?", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hjx98eu", "text": "This isn\u2019t an either/or scenario. Cap rates are used to determine a property\u2019s value. Their are several ways to value a CRE property: \n\n**As-Is Value**: value based on in-place rents/NOI divided by the value of the property (or sales price). \n\n**As Complete**: only used for new construction or substantial renovation projects. This valuation is based on costs more so than income or cap rates. \n\n**As Stabilized**: value based on projected rents using market rents divided by the value of the property (or sales price).", "replies": [{"id": "hjxyg68", "text": "&gt;As-Is Value  \n&gt;  \n&gt;: value based on in-place rents/NOI divided by the value of the property (or sales price).\n\nCan you explain the math?  I agree that there is an as-is value but don't see how you got there based on your formula.", "replies": [{"id": "hjzv3ag", "text": "Happy to explain. \n\nLet\u2019s say you have a fully leased property with annual in-place rents of $77,000 and NOI of $50,000. The as-is value of the property is $1,000,000 so $50,000/$1,000,000=5% cap rate\n\nhttps://www.investopedia.com/terms/c/capitalizationrate.asp", "replies": [{"id": "hjzzoxk", "text": "&gt;The as-is value of the property is $1,000,000\n\nHow did you calculate the \"as-is\" value?  Also the investopedia definition is 100% incorrect.\n\nAlso we were talking about a property that had excess vacancy.", "replies": [{"id": "hk1e34m", "text": "A property with excess vacancy will be valued on an **as stabilized basis** where market rents are assumed for the vacant units. \n\nThose were arbitrary numbers used to answer your question about the math.", "replies": [{"id": "hk21rcm", "text": "&gt;As-Is Value  \n&gt;  \n&gt;: value based on in-place rents/NOI divided by the value of the property (or sales price).\n\nThis is your equation,  **As-Is Value**: *value based on in-place rents/NOI divided by the value of the property (or sales price).*\n\nWe are trying to solve for VALUE but you already placed an arbitrary value (($1,000,000) so you didn't solve for anything.  What am I missing here?", "replies": [{"id": "hk6ohdt", "text": "Go back to my original post where I described the variety of ways property value is determined. Yes, the As-Is Value is one of the ways to determine a property\u2019s value. In the case where the property **is not stabilized** (ie, excess vacancy), then the **as stabilized value** is the appropriate way to determine the property value. \n\nYou asked for math, I gave you math. Then you whine about the math. Oof, I\u2019m happy to explain/discuss cap rates all day long, but you seem more interested in arguing, which isn\u2019t in the wheelhouse I\u2019ve created with 15+ years of experience reviewing thousands of CRE appraisals. I know, with certainty, what I\u2019m talking about. \n\nLook, I don\u2019t debate facts or math. The math to determine a cap rate is super simple: NOI/Value. That\u2019s how cap rates are calculated. That\u2019s it. Non-negotiable. Full stop. \n* NOI is based off of the property performance, or market rents for an unstabilized  property with excess vacancy. \n*Value is based off of what the market is willing to pay based off of comparable property purchases, ie \n\n*Paul bought a nearly identical building down the street for $1 at a 5% cap rate* and *Sally sold a very close comparable property for $1.05 at a 4.95% cap rate*. **The market dictates pricing**. Cap rates are simply a result of prior purchases. \n\nNot quite sure how better to explain this very simple formula to you. You seem more interested in arguing, which is your choice if that\u2019s how you want to live your life.", "replies": [{"id": "hk7gcdi", "text": "I'm sorry you feel frustrated.  I am not arguing with you. I am also sorry you feel that way but you should also understand that arguing is not in itself a negative thing.  Lawyers do it all the time and even appraisers do it when there is opposing opinions of value.  I am collecting facts at this stage.  Can we agree that not either of us is arguing at this stage and calmly exchange facts?\n\nIn this case I actually cut and pasted your statement.\n\n**Their are several ways to value a CRE property:**\n\n**As-Is Value: value based on in-place rents/NOI divided by the value of the property (or sales price).**\n\n*I read that as V=i/V*\n\nDo you stand by that calculation?  Do you see where I felt collected facts needed to be clarified?\n\nI also questioned your use of the investopedia's incorrect definition of a cap rate as as a return.  I don't want to muddle this thread any more and will start a thread of my own about the purpose of cap rates.\n\nI assume the purpose of this forum is to exchange ideas, learn from others and at times have a lively discussion when there are differences of opinion.  That is all I am trying to do here.  Is that OK?\n\n&amp;#x200B;\n\nPS  Check out this thread dealing with excess vacancy.  https://www.reddit.com/r/CommercialRealEstate/comments/qq8s3o/what\\_is\\_the\\_process\\_to\\_get\\_an\\_in\\_place\\_cap\\_rate/", "replies": [{"id": "hk8clny", "text": "The actual formula is C=I/V. Cap rates are determined by that formula in my world, where decisions are made on lending $$$. \n\nHow do you calculate cap rates? I\u2019d love to learn more about your thoughts, processes, and reasoning why I\u2019m wrong.", "replies": [{"id": "hk8ig4i", "text": "I'm not sure I said you were wrong.  I did say the investopedia definition was wrong.  I questioned your formula of V=i/V.  \n\nI scanned back and still don't see where I said you were wrong.  If you can show me where and I am wrong I will surely apologize.\n\nAre you serious about discussing cap rates?  I'd love to but most people bail as soon as I point out a correction.", "replies": [{"id": "hk9dsdj", "text": "You keep saying the definition I provided from investopedia is incorrect, which I firmly believe is 100% accurate based upon way too much experience and reviewing way too many appraisals, so that equates to you telling me I\u2019m wrong. I\u2019d like to understand how/why. \n\nYou seem confident that your version of calculating cap rates is better. I\u2019d like to learn your point of view.", "replies": [{"id": "hkaidav", "text": "&gt;You keep saying the definition I provided from investopedia is incorrect, which I firmly believe is 100% accurate based upon way too much experience and reviewing way too many appraisals, so that equates to you telling me I\u2019m wrong.\n\nI'm not sure where I keep saying to you, but my internet posting have definitely pointed out the flaw in this definition.  I have even reported it to investopedia and in the last posts from them they have omitted any definition of cap rates.\n\n&amp;#x200B;\n\nSo to be clear, you are saying that cap rates are a measure of RETURN?\n\n**I AM SAYING THAT CAP RATES DO NOT MEASURE RETURNS OR RISK AND THAT THEY ONLY MEASURE VALUE.  THEY CAN BE INDICATIVE OF BOTH BUT 100% DO NOT MEASURE EITHER.**  I will not back down from that or try to gobbledygook  an excuse.  Am I clear enough?  Will you stand by your claim?", "replies": [{"id": "hkb0d72", "text": "Still waiting for an explanation", "replies": [{"id": "hkbc3vb", "text": "Cap rates come from an income approach to value called direct capitalization.  In a 10% cap rate market it means that investors have paid $10 for a possible dollar of NOI.  In a 5% cap rate market they have paid $20.  See, it is a value metric.  I challenge anyone to show which market has higher risk or return.", "replies": [{"id": "hkbjsxe", "text": "Still waiting for your response.", "replies": [], "depth": 15}], "depth": 14}, {"id": "hkbdt6y", "text": "This information was provided in a thread that the moderators(YOU?) removed.  There were 20 replies.  Making America Great Again?\n\n&amp;#x200B;\n\nCap rates come from an income approach to value called direct capitalization. They tell you what investors HAVE paid for NOI. In a 10% cap rate market that would be $10 and in a 5% cap rate market that would be $20. The formula is r=i/V If you are in a 10% cap rate market you can determine the probable value of NOI by using these cap rate comp numbers. The formula is V=i/r So if yo are buying $50,000 of NOI then the probable market value is $500,000=$50,000/10% You can always offer more or less depending on where you think the market is moving. In the above example the 22% cap rate means his NOI is worth only $4.55 per dollar. That also means that if he can increase his NOI by a dollar he will only see an increase in value of $4.55!", "replies": [], "depth": 14}], "depth": 13}], "depth": 12}, {"id": "hkaiq52", "text": "&gt;You seem confident that your version of calculating cap rates is better. I\u2019d like to learn your point of view.\n\nI really hope you mean that!  Can I hold you to that?", "replies": [], "depth": 12}, {"id": "hkbbvwz", "text": "K  I paid $1,000,000 for a possible $100,000 NOI  That is a 10% cap rate.  Am I getting a 10% return?", "replies": [], "depth": 12}, {"id": "hkbcxfm", "text": "I just saw that you are a moderator.  Did you delete my thread on cap  rates?  Maybe it is me but I sure can't find it.  Please advise.", "replies": [{"id": "hkc91uq", "text": "I woke up to 8 different comments from you. \n\nI\u2019m onlyl going to respond to this one because  I don\u2019t have the time, patience, or bandwidth to debate with all of your comments. \n\nI tried to understand your rationale about cap rates, but I can\u2019t understand why someone has a personal problem with basic math. I\u2019m locking this thread because it\u2019s gone completely off course . . . and yes, I am a moderator and will block you if you continue to do what you are doing. You know what you are doing. I\u2019m not your mother and I don\u2019t have the time to educate you.", "replies": [], "depth": 13}], "depth": 12}, {"id": "hkbk7h7", "text": "If I am selling $100,000 NOI in a 10% cap rate market I will get $1,000,000.  If I am selling $100,000 NOI in a 5% cap rate market I will get $2,000,00.  If the 10% is a return why am I getting HALF the amount for TWICE the return?", "replies": [], "depth": 12}], "depth": 11}], "depth": 10}, {"id": "hk98aij", "text": "&gt;I\u2019d love to learn more about your thoughts, processes, and reasoning why I\u2019m wrong.\n\nYou can view his post history and find there are at least 10,000 people that would like the very same question answered.\n\nAnd if you read his post history, you'll find he has a fetish (seriously) about cap rate formulas.  Weird.\n\nThis guy has an IQ of a potato (my apologies in advance for insulting potatoes).\n\nHaving read *YOUR* posts (many times), I would *immediately* defer to any point you made where we differed even slightly.\n\nDisregard this dude. *Completely*.\n\n*(He couldn't find his car keys if he was sitting in the driver seat and the car was running).*", "replies": [{"id": "hk9gyix", "text": "I\u2019m always curious when people have drastically different opinions. From my interactions with u/honobob, I don\u2019t see much (or any really) actual facts, or even the rationale behind what their point of view is. \n\nFor example, I included the investopedia definition for cap rates. U/honobob says it is incorrect, 100% incorrect actually. Does u/honobob clarify why it is incorrect? Nope. \n\nIdeally, I\u2019d like to understand where u/honobob is coming from. It\u2019s up to them to decide if they can properly explain their point of view instead of being argumentative just for the sake of arguing.", "replies": [{"id": "hkakhxj", "text": "&gt;Ideally, I\u2019d like to understand where   \n&gt;  \n&gt;u/honobob  \n&gt;  \n&gt; is coming from.\n\nI really hope you mean that.", "replies": [], "depth": 12}, {"id": "hkbaqo9", "text": "&gt;For example, I included the investopedia definition for cap rates. U/honobob says it is incorrect, 100% incorrect actually. Does   \n&gt;  \n&gt;u/honobob  \n&gt;  \n&gt; clarify why it is incorrect? Nope.\n\nI think you are being disingenuous.   \n\nCap rates come from an income approach to VALUE called direct capitalization.  In a 10% cap rate market it FACTUALLY means that investors HAVE paid $10 for a possible dollar of NOI.  In a 5% cap rate market they have paid $20 for that same dollar.  See, it measures VALUE!  Cap rates do not measure risk or return.  I challenge you or anyone on the forum to show which market has a higher \"return\" as investopedia defines it.  Please have at it!", "replies": [], "depth": 12}, {"id": "hkbaytd", "text": "&gt;I\u2019m always curious when people have drastically different opinions. From my interactions with   \n&gt;  \n&gt;u/honobob  \n&gt;  \n&gt;, I don\u2019t see much (or any really) actual facts, or even the rationale behind what their point of view is.\n\nI really don't pay attention to usernames as I respond to facts more so than personalities.  I have no recognition of meaningful interactions with you.  Can you document what you are talking about?  I would surely go back and review why you seem to be so bewildered by my posts.", "replies": [], "depth": 12}, {"id": "hkbb7g7", "text": "&gt;It\u2019s up to them to decide if they can properly explain their point of view instead of being argumentative just for the sake of arguing.\n\nJust ?????  Help me out here, you just seem to be on an attack here and not moving the discussion forward.  I can only guess that is your plan.  Why?  I would prefer to stay on topic.  Can you do that?", "replies": [], "depth": 12}], "depth": 11}], "depth": 10}], "depth": 9}, {"id": "hk97t55", "text": "\"There\".", "replies": [], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}]