Quick answer: A cap rate is net operating income divided by the purchase price, so a building with $130,000 of NOI that sells for $2,000,000 traded at a 6.5 percent cap rate. NOI is rent less vacancy and operating expenses, before any mortgage payment and before capital reserves, which is why a lender's debt service coverage ratio and loan to value limits are separate tests. In Florida, the assessed value behind the property tax inside the seller's NOI resets to just value the January 1 after a sale (s. 193.1555(5), 2025 Florida Statutes), so a buyer's NOI can be lower than the seller's. The local cap rates I found are brokerage figures from 2025 and the first quarter of 2026, one firm's measurements, not a value for any specific building.
A commercial listing on the Treasure Coast or the Space Coast usually arrives with a cap rate on the flyer and a price per square foot in the summary. Buyers want to know whether the number is fair, and both sides want to know what the lender will think. This article explains what those figures measure, what they leave out, and how an appraiser and a lender get from a rent roll to a value, with a hypothetical example showing every step. It is not an opinion of value for any property.
Start with net operating income
Net operating income, or NOI, is the number every other figure depends on. The REALTORS Commercial Alliance glossary (credited to the CCIM Institute and the National Association of REALTORS, December 2005) defines it as "the potential rental income plus other income, less vacancy, credit losses, and operating expenses." Operating expenses include property taxes, insurance, repairs and management. Two things are not in NOI: the mortgage payment, and the money set aside for roofs and other capital items.
Fannie Mae's multifamily guide for small loans (Part III, Chapter 9, Section 905.01, effective September 28, 2026) shows how a lender rebuilds NOI rather than accept the seller's version: gross potential rent, less vacancy, concessions and bad debt, plus other income, equals effective gross income; less operating expenses, a management fee, real estate taxes and insurance (each a separate line in Fannie Mae's table) equals underwritten NOI; less a replacement reserve equals underwritten net cash flow. The combined allowance for vacancy, concessions and bad debt must be at least 5 percent of gross potential rent in most metro areas. Those rules are written for apartment loans, but the lesson carries: a lender following those rules will add vacancy, management and reserves even if the seller's statement shows none.
What a cap rate measures
The same glossary defines the capitalization rate as "net operating income divided by purchase price." CBRE's U.S. Cap Rate Survey for the second half of 2025 (published February 10, 2026) uses the same arithmetic, stabilized NOI divided by acquisition price, and that survey is one firm's measurement. A cap rate describes a sale that happened: a price, an NOI, and their ratio. Run the formula backward and you have the income approach in its simplest form: value equals NOI divided by the cap rate.
Price per square foot is the price divided by building area. The gross rent multiplier is the price divided by gross annual rent (the glossary describes it as a method using "the gross rents an investor anticipates" without stating the multiplier's own formula, so I use the common form). Both are cross-checks that ignore vacancy, expenses and lease terms, so two buildings at the same price per square foot can have very different NOI.
The three approaches to value
An appraiser has three approaches. The income capitalization approach converts NOI into a value. The sales comparison approach compares the property to sales of properties with "the same or similar characteristics." The cost approach values the property by "the costs of creating" it. The Florida Department of Revenue's Real Property Appraisal Guidelines (adopted November 26, 2002, and listed by DOR as under review) describe the same three in sections 13, 14 and 15, and the just value statute follows the same logic: s. 193.011, 2025 Florida Statutes, requires the property appraiser to consider the present cash value a willing purchaser would pay a willing seller, the cost of the property and the present replacement value of the improvements, and the income from the property, among eight factors.
DSCR and LTV: how the lender sizes the loan
The debt service coverage ratio, or DSCR, is NOI divided by annual debt service. Fannie Mae measures it on net cash flow, after reserves, against principal and interest. The loan to value ratio, or LTV, is the loan amount divided by the property value. Under the federal Interagency Guidelines for Real Estate Lending Policies (12 CFR part 208, Appendix C), value for a loan to purchase an existing property is the lesser of the actual acquisition cost and the appraised market value. The supervisory LTV limits are 65 percent for raw land, 75 percent for land development, 80 percent for construction of commercial, multifamily and other nonresidential property, and 85 percent for improved property. The guidelines call for minimum debt service coverage standards but set no number, and I did not find one from the OCC either, so each lender's DSCR floor is its own policy.
The OCC's Commercial Real Estate Lending handbook (version 2.0, March 2022) says the value of income-producing property "depends to a great degree on the expected NOI" and tells banks to stress test capitalization rates, so a lender may underwrite at a higher cap rate than the one on the flyer.
What a cap rate leaves out
Three things. First, debt: the cap rate says nothing about loan terms. Second, reserves: a cap rate on NOI and a cap rate on net cash flow are different numbers, and Fannie Mae's underwritten cap rate uses net cash flow. Third, and the one that matters most in Florida, the tax bill inside the seller's NOI is the seller's bill. Under s. 193.1555(5), 2025 Florida Statutes, nonresidential property is reassessed at just value as of January 1 of the year after a change of ownership or control, which includes "any sale, foreclosure, transfer of legal title or beneficial title in equity to any person." Freddie Mac's multifamily appraisal guidance on property taxes (March 2026) says "the tax liability projection utilized in the valuation of the Property must assume a sale." A buyer's NOI can be lower than the seller's trailing NOI for that reason alone. My post on why the seller's tax bill is misleading covers the residential version of the same reset.
A hypothetical worked example
Every figure below is invented for illustration, and the 15.000 mills in the tax step is a round number, not any taxing authority's rate.
| Step | Calculation | Result |
|---|---|---|
| Gross potential rent | 10,000 square feet x $20.00 per square foot per year | $200,000 |
| Vacancy and credit loss at 5 percent | $200,000 x 0.05 | $10,000 |
| Effective gross income | $200,000 less $10,000 (no other income) | $190,000 |
| Operating expenses (taxes, insurance, repairs, management) | Assumed | $60,000 |
| NOI | $190,000 less $60,000 | $130,000 |
| Value at a 6.5 percent cap rate | $130,000 / 0.065 | $2,000,000 |
| Price per square foot | $2,000,000 / 10,000 | $200.00 |
| Gross rent multiplier | $2,000,000 / $200,000 | 10.0 |
| Replacement reserve at $0.25 per square foot | 10,000 x $0.25 | $2,500 |
| Net cash flow | $130,000 less $2,500 | $127,500 |
| Cap rate on net cash flow | $127,500 / $2,000,000 | 6.375 percent |
| Loan at 75 percent of value | $2,000,000 x 0.75 | $1,500,000 |
| LTV | $1,500,000 / $2,000,000 | 75 percent |
| Annual debt service | Assumed; depends on rate and amortization | $104,000 |
| DSCR on NOI | $130,000 / $104,000 | 1.25 |
| DSCR on net cash flow | $127,500 / $104,000 | 1.226 |
Now the tax reset. Assume the seller's assessed value was $1,500,000 and the combined rate is 15.000 mills. The seller's tax is $1,500,000 x 0.015 = $22,500, and that figure sits inside the $60,000 of expenses. If the property appraiser sets just value at the $2,000,000 price (an assumption; the appraiser, not the contract, sets just value), the tax becomes $2,000,000 x 0.015 = $30,000, an increase of $7,500. The buyer's NOI falls to $130,000 less $7,500 = $122,500. At the same 6.5 percent cap rate, the value supported by the buyer's NOI is $122,500 / 0.065 = $1,884,615.38, and the DSCR on the same $104,000 of debt service drops to $122,500 / $104,000 = 1.178. Nothing about the building changed. Only the owner did.
The formula also runs backward. If a comparable building sold for $3,000,000 with an NOI of $195,000, its cap rate was $195,000 / $3,000,000 = 6.5 percent. That is where a cap rate comes from in practice: sales, not a rule.
Local figures, their limits and what to verify
I did not find a primary source that publishes local cap rates, only brokerage research. The figures below come from Matthews reports (the Brevard reports credit CoStar Group as the data source), dated August 7, 2025 (Treasure Coast industrial), August 6, 2025 (Space Coast industrial) and May 1, 2026 (Brevard retail). They are one firm's measurement; the Treasure Coast report does not define its metrics, and I found no definitions in the other two.
| Market and type | Cap rate | Sale price per SF | Vacancy | Asking rent per SF |
|---|---|---|---|---|
| St. Lucie industrial, Q2 2025 | 8.0% | $116 | 3.3% | $16.92 |
| Indian River industrial, Q2 2025 | 8.1% | $111 | 15.8% | $11.75 |
| Martin industrial, Q2 2025 | 8.7% | $134 (narrative says $133) | 3.0% | $17.85 |
| Brevard retail, Q1 2026 | 6.1% | $200 | 4.2% | $18.58 |
| Brevard industrial, Q2 2025 | "in the 9.0% range" | "around $120" | 3.5% | $13.62 |
Use these for a sense of scale, not as the cap rate for a specific building. I did not find a dated Treasure Coast retail, office or multifamily cap rate report.
I could not read the income section of the Florida DOR guidelines, so the definitions above come from the industry glossary. No regulator I found publishes a minimum DSCR. CBRE's survey has no Florida breakout that I retrieved. Before you rely on any cap rate, get the seller's trailing twelve months of income and expenses, the rent roll, the current tax bill and the property appraiser's just value. Then ask a licensed appraiser how the three approaches reconcile for that building, ask your lender what cap rate, DSCR and LTV it will underwrite to, and ask a CPA how the reassessed tax bill changes your returns.
The practical takeaway: a cap rate is a shorthand for one sale, built on an NOI that someone else prepared. Rebuild the NOI with your own vacancy, management, reserves and the tax bill you will actually pay, and the cap rate becomes a number you can defend to a lender.
Questions buyers ask about cap rates and NOI
What is a cap rate?
Net operating income divided by the purchase price, in the REALTORS Commercial Alliance glossary's definition. CBRE's survey uses stabilized NOI divided by acquisition price. Value equals NOI divided by the cap rate when you run it backward.
Does NOI include the mortgage payment?
No. Fannie Mae's debt service coverage ratio compares net cash flow to principal and interest, which are measured separately from NOI. The cap rate says nothing about the loan.
Are capital reserves in NOI?
In Fannie Mae's small loan table, replacement reserves are subtracted after NOI to reach net cash flow. A cap rate on net cash flow is lower than a cap rate on NOI for the same price.
What LTV do bank regulators allow on commercial property?
The interagency supervisory limit is 85 percent for improved property, 80 percent for commercial construction and 65 percent for raw land (12 CFR part 208, Appendix C). Individual lenders can be more conservative.
Why might my taxes be higher than the seller's?
Nonresidential property is reassessed at just value as of the January 1 after a change of ownership or control (s. 193.1555(5), 2025 Florida Statutes). The seller's bill may reflect a capped value from earlier years.
What are the three appraisal approaches?
Cost, sales comparison and income capitalization, as described in the REALTORS Commercial Alliance glossary and in the Florida Department of Revenue's appraisal guidelines.
Talk with William. Looking at a commercial listing with a cap rate on the flyer? Send me the offering memorandum, the rent roll and the seller's operating statement. I will help you rebuild the NOI line by line, flag what the cap rate leaves out, and put together the questions for your lender, appraiser and CPA. Call or text (772) 800-2274 or send a message.
General information, not legal, tax, lending, insurance, survey, environmental or engineering advice. The worked example is hypothetical, the local cap rates are one brokerage firm's estimates from 2025 and the first quarter of 2026, and lender underwriting standards vary and change. Confirm value, loan terms and the post-sale tax bill with a licensed appraiser, a lender, a CPA and the county property appraiser. Statute and rule references are as reviewed on October 22, 2026. William Merchant, REALTOR®, RE/MAX Gold. Each RE/MAX office is independently owned and operated. Equal Housing Opportunity.
Sources
- Florida Statutes 193.011, Factors to consider in deriving just valuation (2025)
- Florida Statutes 193.1555, Assessment of certain residential and nonresidential real property (2025)
- 12 CFR part 208, Appendix C, Interagency Guidelines for Real Estate Lending Policies
- Federal Reserve: Interagency Guidelines for Real Estate Lending Policies (undated posting)
- OCC Comptroller's Handbook: Commercial Real Estate Lending, Version 2.0 (March 2022)
- Florida Department of Revenue: Florida Real Property Appraisal Guidelines (adopted November 26, 2002)
- Fannie Mae Multifamily Selling and Servicing Guide: Part III, Chapter 9, Section 905.01, Underwritten Net Cash Flow for Small Mortgage Loans (PDF effective September 28, 2026)
- Fannie Mae Multifamily Selling and Servicing Guide: Glossary, Underwritten Capitalization Rate and Underwriting Value (PDF effective September 28, 2026)
- Fannie Mae Multifamily Guide glossary: Debt Service Coverage Ratio (undated)
- Fannie Mae Multifamily Guide glossary: Underwritten Debt Service Coverage Ratio (undated)
- Freddie Mac Multifamily: Appraisal guidance on property taxes (March 2026)
- Glossary of Commercial Real Estate Terms, REALTORS Commercial Alliance, CCIM Institute and National Association of REALTORS (December 2005), hosted by Miami Realtors
- CBRE: U.S. Cap Rate Survey H2 2025 (published February 10, 2026; brokerage report, secondary)
- Matthews: Q2 2025 Treasure Coast Industrial Market Report (August 7, 2025; CoStar data, secondary)
- Matthews: Brevard County, FL Retail Market Report Q1 2026 (May 1, 2026; CoStar data, secondary)
- Matthews: Q2 2025 Space Coast Industrial Market Report (August 6, 2025; CoStar data, secondary)
