Property Valuation
What does the 'capitalization rate' indicate when applied to income-producing property?
AThe percentage of gross income paid as property taxes
BThe rate of return an investor expects on the property before financing✓ Correct
CThe loan-to-value ratio required by Pennsylvania lenders
DThe percentage of a property's value that is depreciated annually
Explanation
The capitalization rate (cap rate) represents the expected rate of return on an income-producing property, calculated as NOI ÷ Value. It reflects both the risk and return expectations of the market for that property type and location. Pennsylvania cap rates vary significantly — Class A office in Philadelphia may be 5–6%, while suburban retail or industrial may be 7–9%, reflecting different risk profiles.
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