Author Topic: Cap Rates Used in ROIC Calculations  (Read 943 times)

Poor Charlie

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Cap Rates Used in ROIC Calculations
« on: December 07, 2018, 04:32:52 PM »
I have a question for the real estate / retail people:  Why do most companies use 6-7x to capitalize their leases?

Assuming it’s a net lease, the tenant’s rent expense should be close to the owner’s NOI.  Owners capitalize their property at 16-17x (cap rate of 6% for Class A), so why should the tenant capitalize their lease at 6x for ROIC calculations?   


Spekulatius

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Re: Cap Rates Used in ROIC Calculations
« Reply #1 on: December 09, 2018, 04:54:44 AM »
I have a question for the real estate / retail people:  Why do most companies use 6-7x to capitalize their leases?

Assuming it’s a net lease, the tenant’s rent expense should be close to the owner’s NOI.  Owners capitalize their property at 16-17x (cap rate of 6% for Class A), so why should the tenant capitalize their lease at 6x for ROIC calculations?

The 6-7x capitalization is due to the lease duration. 6-7x lease capitalization equates to an duration or roughly 10 years discounted.
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