Cap Rate Methodology & Definitions
Cap Rates
Definition: One-year forward cash operating income divided by property value.
Usage: The primary valuation metric used to describe the yield for property transactions.
Cap Rate =
Net Operating Income (NOI)
Property Value
Types of Cap Rates:
Nominal (Nom.): Metric used by industry participants to gauge the yield of property transactions.
Economic (Econ.): Measure the actual after cap-ex (capital expenditures) cash flow of a property to the investor.
Implied Nominal Cap Rate (Implied): The cap rate at which the current share price equals Green Street's NAV per
share estimate; i.e. the current market value of the assets owned by a REIT as "implied" by it's share price.
NOI Calculation
Nominal Cap Rate
(numerator)
Implied Nominal Cap Rate
(numerator)
Total Asset Value
Revenues
- (Expenses)
- (Non-Cash Rent)
+ 12M Fwd. Growth Est.
Nominal NOI
- (Tenant Improvements)
- (Leasing Commissions)
- (Structural Reserve)
= Nominal NOI
= Economic NOI
Cap Rate =
Prop. Value
Calculation
Economic Cap Rate
(numerator)
(from GSA's NAV estimate)
X
Nominal Cap Rate
(from GSA's NAV estimate)
= Implied NOI
Net Operating Income (NOI)
Property Value
Nominal Cap Rate
(denominator)
Economic Cap Rate
(denominator)
Implied Cap Rate
(denominator)
Total Property
Transaction Value
[Debt + Equity]
Total Property
Transaction Value
Total Value of the REIT
[Debt + (Shares * Share Price)]
[Debt + Equity]
Property Value is estimated using either:
Property Value is estimated using either:
(1) Relevant Transactions
(1) Relevant Transactions
(2) Estimated present value of property/
(2) Estimated present value of property/
portfolio cash flows.
portfolio cash flows.
Total Value of the REIT is assumed to be equal
to the Market Implied Total Assets.
Calculation
Usage
GSA and Sector Specific Cap Rates:
Fully Loaded Implied Cap Rate
Market Cap Rate (Apartments)
Market Cap Rate (Hotels)
Cap rates which factor in market valuation,
overhead, capital expenditures, and near-term
growth prospects of each REIT
Yield measure commonly used by
apartment industry participants.
Yield measure commonly used by
hotel industry participants.
Implied Nominal Cap Rate
- (Green Street's cap ex reserve)
- (G&A as % of assets)
+/- Near-term NOI growth
= Fully Loaded Imp. Cap Rate
WWW.GREENSTREETADVISORS.COM
Nominal NOI
- ($400/unit cap ex reserve)
= Market NOI (Apartment)
÷
Property Value
Market Cap Rate
Nominal NOI
- (4% of rev. cap ex reserve)
= Market NOI (Hotel)
÷
Property Value
= Market Cap Rate
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