cap rate = NOI/Cost (or Value)
* Measures rate of return
* Direct capitalization... income generating property is often valued according to projected cap rates used as investment criteria... i.e. asset price = cash flow / cap rate
* NOI takes net income and backs out adjustments made for depreciation, interest expense, profit tax, & reserves for repairs
+ Because depreciation doesn't directly affect cash generated by asset.
+ But more careful & realistic definition... est annual maintenance expenses or capital expenditures will be included in non-interest expenses
* NOI, and thus cap rate, is a capital structure-neutral valuation measure
* Lower cap rates for properties indicate less risk associated w/investment (& and thus lower rate of return demanded for investment)
* Factors considered when assessing risk include... creditworthiness of tenants, terms of lease, quality & location of property & general volatility of market
* ERV (Estimated Rental Value)... states valuer's opinion as to the open market rent which could reasonably be expected to be achieved on the subject property at the time of valuation
* reversionary... diff between the "in-place" (or "passing") rent and the ERV (Estimated Rental Value)
* "rack rented"... if the passing rent payable on property is equivalent to its ERV
