How do I get the blended cap rate?


Lets say I have a property that throws off $1,440,500 a month in gross in come for residential and $26,700 in gross income for retail. The cap rate for residential is 4.75% and retail is 5.5%. How would you blend these cap rates to show the one blended cap rate in excel?


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Comments (15)

Feb 26, 2017

Personally, I like to have these pieces bifurcated, but I get why you'd want to do this. I would probably just do a weighted average based on square footage, but I guess you could do it on income as well. Mechanically, that would be a simple sumproduct formula.

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Best Response
Feb 26, 2017

Going off from above, we use blended EGI.

Quick run through would be resi is 98.2% of total EGI and retail is 1.8%. Multiply 98.2% by resi cap of 4.75, and 1.8% by 5.50 retail cap. Sum those two products and you should get a 4.76% bifurcated cap.

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Feb 26, 2017

I like this method. Out of pure curiosity, where are you U/W retail at a 5.5% cap, seems aggressive for ground-floor retail on a midrise? I'm usually 100 bps higher on the entry, mainly due to pretty conservative assumptions.

Feb 28, 2017

Why EGI as opposed to NOI? Any deviation in expense ratio between product types is going to distort your weightings. I get this isn't an exact science but that just seems cavalier with the math

Feb 27, 2017

Historically, mixed usage being its own asset class will be underwritten with a single cap rate, not a blended or mixed based on MF vs Retail income.

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Feb 27, 2017

I would tend to agree - unless of course you're sectionalizing the 2 portions and selling them off independently.

Feb 26, 2017

I think this is definitely on a case by case basis. If I'm underwriting something with a larger retail piece, I prefer to do it as a sum of the parts. I've done it both ways with a bifurcated cap rate and with just baking the retail NOI piece (generally smaller that 5,000 sf) in as an income line item.

I like to think of them separate sometimes to plan for TIs/LCs and other unique situations. This is my perspective (equity side) and not how everyone does it, and not even I do it this way all of the time. I'm sure lender's look at it differently.

Feb 28, 2017

Wouldn't you just value the two separately as you did to get a total valuation of $30,811,700? This approach would yield a blended cap equal to total NOI/total valuation = 4.76%. This is indeed equivalent to 98.18% * 4.75% cap + 1.82% * 5.50% cap...

Feb 28, 2017

I mean I understand that if I take each portion's NOIs and divde by the blended cap rate, then I will get the 30,800,235. I just want to double-check my work which is why I am taking each portion's respective NOI's and dividing by their respective cap rates. I'm just not arriving at the same results.

Feb 27, 2017

I think this depends on the quality of tenancy in the retail space. If it is a mix of mom and pop tenants I would probably just roll it into the NOI and cap it after the fact. If there is a McDonalds with a 25 year lease on the ground floor I am breaking it out and applying a different cap rate.

Feb 27, 2017

That seems like a fair way to underwrite as an owner. I believe a banks appraiser would still just use a blanket cap rate. I could email a CBRE appraiser I know, lol.