Commercial Real Estate Dictionary

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Capitalization

Definitions of Capitalization
  • Capitalization is the process of converting an asset's net operating income into an estimate of value by using an appropriate percentage rate (capitalization rate).
    Through capitalization of the apartment building's net income, the broker estimated a value of 1 million dollars using a capitalization rate of 5 percent.


What Is Capitalization?

Capitalization is the process of estimating a value of an asset by using an appropriate percentage rate to convert income generated by that asset into a monetary amount.

If we define capital as money or property invested in an asset to create wealth or generate income, then the capitalization approach works backward in order to value the asset. Starting from an income, the capitalization approach applies a rate to the income generated by that asset to determine the monetary value of that asset.

The capitalization approach is useful in estimating the value of real estate as an investment. Because we have an established net operating income from operating the property, we have a reliable number to begin with, but we do not have an established value.

The cap rate allows us to convert the investment property's income into a market value. The cap rate is a percentage rate that is established by the market for similar investment properties.

We can determine the cap rate by looking at recent sales of comparable properties. With a known sales price and net operating income (NOI), we can establish a cap rate to value similar properties.

Capitalization provides a useful approach to determining an amount to be invested in an asset to produce a benchmarked income and generate wealth.


        

Real Estate Terms

1. How much cash will be required to make your mortgage payments? Debt Service >>


2. Who can you go to to finance your construction or development project? Construction Lender >>


3. What professional can assist you in maximizing the value of your investment property? Asset Manager >>


4. How can we assess future commitment to infrastructure to support our communities and future development? Capital Improvements Projects >>


5. What measurement indicates if a property's financial performance can cover its debt? DSCR >>


6. What part of a city is the center of urban economic development? CBD >>


7. What allows property owners and professionals to estimate the market value of a commercial property? Comparable Property >>


8. What can landords do to entice prospective tenants? Concession >>


9. What critical factor do stores depend on to drive traffic? Anchor Tenant >>


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