Cap Rate = Net Operating Income (NOI) divided by Price.
NOI is the revenue of the building from rent minus the expenses, such as taxes, utilities, etc (but not including debt).
So the cap rate, which is expressed as a percentage, is the return on the deal. For example if you own a shopping center that gives you $100,000 per year in profit from rent (NOI) and you sell it for $1,000,0000, that reflects a 10% cap rate. The buyer is getting a 10% unleveraged return on their investment.
May 1, 2013