What is a Capitalization Rate?
A capitalization rate is essentially a rate that is utilized to convert income into some sort of value that is realized on the asset. Perhaps the easiest way to think of a capitalization rate is to consider the ratio between the original cost of acquiring an asset in comparison to the amount of income that is produced by the asset within a specified time frame. From this perspective, capitalization rates can be though of as a ratio on earnings associated with the ownership of the asset. Calculating a capitalization rate follows a very simple process. Essentially, knowing the capital cost of the asset, as well as the total amount of revenue generated by the asset within a given period of time is all that is needed. By calculation the ratio between the two figures, the capitalization rate for the asset is determined. A capitalization rate may be calculated from the point of acquisition through the current date, or for any period between the two. Some investors like to calculate the rate
Austin writes.” Maybe I have been in this business too long and need a change. It seems the more they stir this USPAP pot, the worse it stinks.” No, it sounds like you have been in the business just the right amount of time and are hitting your prime. Just to throw a little more tripe in the Pepper Pot, would you believe that another name for NOI is EBITDA – Earnings before interest, taxes, depreceiation and amortization – as opposed to EBITD, EBIT (and then there is dilluted and fully-dilluted). Like Paul says, capitalize the names or don’t, but explain it. Try to tailor your explanation to your target audience and quote when necessary. Either your audience understands it or they don’t. About 18 months ago, I had a little go-round on an assignment with present value calculations. One of the appraisers insisted that the yield rate, the discount rate and the IRR were three different rates. Anyone care to hold forth on that one.
