Cap-Rate Expansion & Leverage

Isolates how exit cap-rate expansion hits property value and, magnified by leverage, the equity beneath it, holding NOI and debt fixed. Inputs are the NOI, the going-in and exit cap rates, and the loan-to-value ratio.

Interactive Tool

The deal (NOI & debt held fixed)

Net operating income

Going-in cap rate

Exit cap rate

Loan-to-value

Going-in value (NOI ÷ going-in cap)

$10,000,000

Debt (65% LTV, fixed)

$6,500,000

Going-in equity

$3,500,000

Exit value (NOI ÷ 6.00%)

$8,333,333

Equity at exit (value − debt)

$1,833,333

Cap-rate move

+100 bps

exit − going-in

Asset value loss

16.7%

unlevered

Equity loss

47.6%

2.9× the asset loss

Debt is fixed while equity absorbs the move, so the 16.7% asset decline becomes a 47.6% equity loss. The equity cushion is 35.0% (1 − LTV): a value decline beyond that wipes the equity out.

Learn the concept

This calculator comes from the free Real Estate Finance course, where the concept is taught with readings, worked examples, and practice questions.

Open Real Estate Finance

Built by Devon Coombs, CPA, MBA, Teaching Professor of Finance at Santa Clara University.