Net lease glossary
Cap Rate (Capitalization Rate)
A property's annual net operating income divided by its purchase price, expressed as a percentage.
The capitalization rate is the first-year net operating income divided by the price. In net lease, where most expenses are paid by the tenant, NOI usually equals the base rent, so a property leased at $100,000 per year and sold for $1,600,000 trades at a 6.25% cap rate. Cap rates move inversely to price and reflect tenant credit, lease term, rent growth, location, and interest rates. A cap rate is a snapshot, not a total return.