Folio II · 2 of 7
Cap rates, explained — and misunderstood
NOI definitions, going-in versus terminal, and why a hotel that looks “cheap on cap” is often expensive on honesty.
A cap rate is a price with a percent sign. It is not a risk-free rate, not a brand score, and not a moral judgment. The entire fight is about the NOI in the numerator and the story you are stuffing into a single year.
A cap rate is a price with a percent sign. The entire fight is about the NOI in the numerator.
Methods · named, not blended
I · Going-in
A price with a percent sign
First-year NOI ÷ purchase price. Only as honest as the stop you named. Not a law of physics.
II · NOI stop
Write the numerator
Before or after reserve, incentive fee, ground rent. Two buyers can capitalize “the same hotel” and not share dollars.
III · Terminal
Residual, not habit
Older product, shorter flag, harder exit. Adding 50 bps because a textbook said so is not analysis.
IV · Shock
±50 bps before love
If the equity dies in the down cell, the point estimate was never the file. Harbor bands are teaching defaults.
01Write the NOI definition first
Before you argue 7.25 versus 7.75, write what you divided. Rooms revenue from the PMS or from the CIM? After commission? After incentive management fee? After FF&E reserve? After ground rent? After a one-time property-tax appeal?
Harbor’s engine uses a teaching NOI: total revenue times one minus an expense ratio you control. That is deliberately crude. It is there so you can see the leverage, not so you can paste it into a lender memo. If your T12 is real, replace the defaults. If it is not, do not dress our assumption as your trailing twelve.
- Going-in cap = first-year NOI ÷ purchase price.
- Terminal cap = exit NOI ÷ assumed sale price, years from now.
- Implied cap from a sale is only as public as the price and the NOI the press was given.
02Going-in is not terminal
Buyers compress going-in caps when they believe NOI will grow. That is a bet on operations, not a gift from the market. Terminal caps should be wider when the product will be older, the franchise shorter, or the market you exit into less kind. Adding 50 basis points because a textbook said so is a habit, not analysis.
03Why hotels lean on DCF
A select-service Courtyard with a flat PIP and a boring demand set can live in a direct cap. A 90-key independent about to leave a soft brand, replace the GM, and close 40 rooms for bathrooms cannot. The cap rate will hide the year you actually lose money. Hotels use DCF because occupancy is a path and labor is not a line you freeze.
04Harbor research defaults — not a survey product
The band table on this desk is Harbor’s own teaching default, built so the estimate engine has a transparent starting point. It is not HVS. It is not PKF. It is not CBRE or JLL proprietary research. If you have a paid survey, use it — and cite it. If you do not, move our sliders and write why.
Gateway luxury sits tighter than tertiary economy. Resort trophies are wide because they trade on scarcity and replacement cost as often as on a going-in cap. Shock every file ±50 basis points. If the equity story dies, it was never a 7.4.
Questions owners ask
- Are Harbor cap-rate bands HVS numbers?
- No. They are Harbor research defaults for education. We do not reproduce proprietary survey tables.
- Why is my implied cap different from the CIM?
- You are probably using a different NOI. Rebuild rooms revenue from the PMS before you accuse the market of being wrong.
- Should I use trailing or forward NOI?
- Say which. Trailing is evidence. Forward is a claim. A going-in cap on a forward NOI is a story about next year, priced today.
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