What is Cap Rate (Capitalization Rate)?
The ratio of a property's net operating income (NOI) to its current market value or purchase price, expressed as a percentage.
Formula
Cap Rate = NOI ÷ Property Value
Cap Rate (Capitalization Rate) in commercial lending practice
Cap rate is a primary metric in CRE underwriting used to evaluate investment returns and compare properties across markets. A lower cap rate generally indicates lower perceived risk and higher property values; a higher cap rate signals higher risk or weaker market conditions. Cap rates compress in low-interest-rate environments and expand when rates rise. Credit analysts use cap rate trends to assess collateral value risk and refinancing assumptions over the loan term.
Related terms
Related concepts in commercial underwriting
NOI (Net Operating Income)
Total property revenue minus operating expenses, excluding debt service, capital expenditures, depreciation, and income taxes.
Read definitionCRE (Commercial Real Estate)
Real property used for business purposes, including office, retail, industrial, multifamily (5+ units), and hospitality properties.
Read definitionLTV (Loan-to-Value Ratio)
The ratio of the loan amount to the appraised value of the collateral property.
Read definitionDebt Yield
The ratio of a property's net operating income to the total loan amount, expressed as a percentage.
Read definitionSee it in Aloan
How Cap Rate (Capitalization Rate) shows up in AI underwriting
Aloan automates the underwriting analysis where cap rate (capitalization rate) matters — spreading, global cash flow, credit memo generation — with source-cited audit trails on every figure. See it run on a real deal in your standardized format.
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