Cap Rate

Cap rate = NOI ÷ price. It is a single-year, unleveraged return metric, which makes it useful for quickly comparing properties but a poor substitute for a full discounted cash flow analysis on assets with lease rollover, near-term capital needs, or below-market rent that will reset. A 6% cap rate on a property with three years left on a below-market lease is a different investment than a 6% cap rate on a fresh 15-year absolute NNN lease, even though the metric is identical.

Cap rates move inversely with price and are sensitive to interest rates, tenant credit, lease term remaining, and asset class — single-tenant net-lease credit deals typically trade at the tightest (lowest) cap rates, while value-add and cannabis-use properties trade wider to compensate for operating risk, financing scarcity, and shorter buyer pools.

In Michigan cannabis real estate specifically, cap rates run meaningfully wider than comparable conventional industrial or retail because the buyer pool is smaller, conventional bank financing is largely unavailable, and municipal opt-in status can change the asset's highest-and-best use overnight. We underwrite cannabis cap rates against that narrower comp set rather than against conventional industrial benchmarks.

Sellers should ask what NOI a quoted cap rate is based on — trailing twelve months, in-place, or pro forma — before comparing offers, since the same asset can be marketed at very different "cap rates" depending on which NOI figure is used.