The ratio of a property's net operating income (NOI) to its market value, expressed as a percentage. Cap rates are used to evaluate commercial real estate investments and indirectly affect tenants because landlords managing to a target cap rate may be incentivized to minimize reported expenses or maximize reported income.
Capitalization rate is calculated as Net Operating Income (NOI) divided by property value. NOI equals gross rental income minus operating expenses (excluding debt service and capital expenditures). A lower cap rate indicates higher property value for the same income level. In the context of CAM, the cap rate creates an indirect incentive structure: operating expenses reduce NOI, which reduces property value. This can motivate landlords to shift costs from operating expenses to CAM pass-throughs, since CAM reimbursements from tenants offset the expense impact on NOI.
A landlord preparing to sell a building reclassified $150,000 of operating expenses as tenant-reimbursable CAM charges, boosting NOI and increasing the building's appraised value by over $2 million at a 7% cap rate. The tenants absorbed costs that were previously landlord-borne, while the landlord captured the valuation upside.
If your landlord recently acquired the building or is preparing to sell, watch for new line items appearing in CAM that were not there before. A change in ownership often triggers reclassification of expenses to boost NOI. Compare your current reconciliation line items against prior years to catch newly added charges.
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Find My OverchargesThis page provides general educational information. It is not legal advice and may not reflect the most current law in your state. Consult a licensed attorney for advice specific to your situation.
