Most commercial brokers and investors in Mesa County use “cap rate” (capitalization rate) as one of the primary factors in determining the value of a commercial piece of property. The Capitalization Rate (“Cap Rate”) is a ratio used to estimate the value of income producing properties.  Generally, the Cap Rate is computed by taking the rental net ordinary income (NOI) and dividing it by either the sales price or fair market value (FMV) of the property.
 
The Cap Rate is used by investors, lenders and appraisers to establish a reasonable purchase price for a given investment property in a specified market. Capitalization rates for a particular area are generally derived by analyzing the selling price, gross income and operating expenses of comparable properties. A market capitalization rate provides a more reliable estimate of value than the gross rent multiplier since the calculation incorporates more of a properties financial detail. The gross rent multiplier calculation only considers the sales price and the gross rents. 
 
Capitalization rates may vary in different areas of the country for many reasons such as location, schools, level of crime and general condition of an area. Acceptable capitalization rates for investors in our area typically range from a minimum of 6 and anything above 10 is considered exceptional. In my experience the minimum cap rate acceptable to an investor is normally about 6 if it is a prime property and in excellent condition. If the property is less desirable, they will normally want a higher cap rate before they will be willing to invest in it!
 
Example: A property has a NOI (Net Ordinary Income) of $55,000 and the asking price is $650,000. This yields a Capitalization rate of 8.46.  Net operating income in the above calculations is equal to gross income minus the vacancy amount and operating expenses. Operating expenses include such items as advertising, insurance, maintenance, property taxes, property management, repairs, supplies and utilities and do not include depreciation, interest and amortization.

Some brokers and investors use a cap rate to help them determine the value of a property. For example: If they desire a cap rate of 7.5%, they would divide the annual NOI by 7.5%. If the property had an annual NOI of $125,000 divided by 7.5% = $1,666,666.00 as a property value. If they used a 7.0% cap rate on the same property; $125,000 divided by 7.0% = $1,785,714.00 might be how much this property is worth to a potential investor or real estate broker. Of course there are normally other factors considered when determining value of a property!