Capitalization rates, or cap rates, are the annual net operating income of the property divided by the building property value. The cap rate is also known as the overall rate (OAR) or the return on assets (ROA). It is determined by capital investment supply and demand in the asset market (Geltner, Miller, pg. 18) and based on 3 factors: 1) 2) 3) Opportunity cost of capital (OCC) - the potential rate of return earned by investing in assets with similar risk and duration. Growth expectations the forward-looking consideration investors apply when reviewing the potential net rent. The greater the potential rent, the more investors are willing to pay for a property, so the lower the cap rate can be assigned. Risk If the potential net rent is higher, then investors are more willing to invest in the asset. Investors like less risk and are willing to pay more =