Valuation
The Blended Cap Rate Is Not the Average of the Cap Rates
Averaging the rates and valuing each income stream give different answers. One of them is wrong, and it is costing sellers money.
A property with two tenants: one paying $250,000 a year on a long lease to a national credit, one paying $150,000 on a shorter lease to a weaker covenant. You price the first at a 5 cap and the second at an 8. What is the blended cap rate on the property?
The common answer is to weight the rates by income: 250 over 400 times five, plus 150 over 400 times eight, giving 6.125 percent. That answer is wrong, and the error is not academic.
Do it the other way
Value each stream separately. $250,000 at a 5 cap is $5,000,000. $150,000 at an 8 cap is $1,875,000. Total value $6,875,000 against total income of $400,000, a true blended cap rate of 5.82 percent.
Price the property using the 6.125 percent average instead and you get $6,530,612. The difference is $344,388 on a deal under seven million dollars.
Why the average is always wrong in the same direction
Because averaging the rates weights them by income, while valuing each stream weights them by value, and low-cap tenants carry more value per dollar of rent. The true blend therefore always lands below the income-weighted average, and the shortcut always understates what the property is worth. On a two-tenant deal the gap is a few hundred thousand. On a strip center with a national at a 5 cap beside a string of locals at 8, it is real money.
The caveat that matters
Pricing tenant by tenant is how you build and defend a number. It is not always how the market pays. A buyer acquires one property, with one loan and one management burden, and will often apply a single rate with a premium or discount for the mix rather than stacking your caps.
Use the tenant-by-tenant build to understand where value actually comes from, and to argue your number. Do not assume a buyer will agree with every line.
Price it properly: Strip & retail center model values each tenant at its own rate and shows what the shortcut costs.
Related notes
How to read this. These are working notes. Figures come from public reporting and from the models on this site, and market conditions change, check anything time-sensitive against the source before you rely on it. Nothing here is investment, tax or legal advice, and no note is a substitute for diligence on a specific property.
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