Final answer:
To find the implied cap rate of the retail property, calculate the annual net operating income (NOI) using the lease rate and square footage, then divide by the sale price. The NOI is $232,500 and when divided by the sale price of $5,000,000, the result is an implied cap rate of 4.65%.
Step-by-step explanation:
The question is asking us to calculate the implied cap rate of a retail property given specific financial information. To begin, let's reiterate that the cap rate, or capitalization rate, is a real estate valuation measure used to compare different real estate investments. Though cap rates are commonly used to estimate the yield on an investment, in this scenario, since we have the sale price and the lease details, we can work backwards to determine the implied cap rate.
An absolute net lease means that the tenant is responsible for all operating expenses, including taxes, insurance, and maintenance. However, the provided operating expense ratio is a red herring as it is not needed for a property with an absolute net lease structure since the landlord doesn't bear any operating expenses.
First, let's calculate the annual net operating income (NOI) of the property:
• NOI = Lease Rate per Square Foot × Total Square Feet
• NOI = $23.25/SF × 10,000 SF
• NOI = $232,500
Now, the implied cap rate is determined using the formula:
• Cap Rate = NOI / Sale Price
• Cap Rate = $232,500 / $5,000,000
• Cap Rate = 0.0465 or 4.65%
Thus, the implied cap rate for the property sold for $5,000,000 is 4.65%.