A prime, fully leased downtown Philadelphia office building has a projected annual Net Operating Income (NOI) for 2021 of $10,000,000. You own it and have been negotiating to sell it to a major Real Estate Investment Trust (REIT). The REIT establishes its potential offering price by capitalizing 2021 Projected NOI by its internal "buy" Cap Rate. When you began negotiations with the REIT, its internal "buy" Cap Rate. When you began negotiations with the REIT, its internal "buy" cap rate for prime downtown properties was 6.00%. However, reactions to recent economic and market events have resulted in a 150 basis point increase of this REIT's internal "buy" cap rate to 7.5%. (a) How important financially is this 1.5% (150 basis points) difference in cap rate to you? Explain.

Answer rating: 100% (QA)

The capitalization rate cap rate is a crucial factor in determining the value of a commercial proper... View the full answer