Capitalization Rate or “Cap Rate”

The Cap Rate is utilized in commercial real estate financing and sales transactions. It is the percentage derived by dividing the income generated from the use of the property by the value of the property. It is used to determine debt service coverage for a loan or potential return on investment. It also used for appraisal of properties whereby appraisers will use an assumed “Cap Rate” (according to market conditions) to determine the value of the property when using the “income approach” to valuation. See Commercial Real Estate Appraisal below.