Marlin Detweiler wrote:

Recently I have come across a term that "befuddles" me. (Befuddles is a PA Dutch colloquialism for confuses.) The term is "Leveraged Cap Rate." What, pray tell, is a Leveraged Cap Rate?" Is it the "cash on cash return after consideration of leverage/debt service?" Beyond that I haven't a clue what the term means. I trust that the someone can make good sense of this terminology for me. Or, if my speculation of the definition is correct, that we might consider a term which does not confuse the true definition of
cap rate; NOI/Value.

Lest you think I nitpick, please consider the confusion that surrounds the family of terms including net-leased, triple net leased, and absolute net leased. Clear definition and understanding seems of significant importance as we grow and seek to eliminate geographical boundaries in our business practices.

Marlin Detweiler CCIM

>Gary sez;

Dear Marlin...

It is not surprising that you would have trouble with this term, as it comes to us in an exotic and unconventional manner, and few in the business today are fully conversant with the meaning of the term 'Leveraged Cap Rate.'

To begin with, a number of early Florida real estate brokers came out of professional baseball (e.g. Tinker, in Orlando). When they quit hardball and started pitching land they kept their caps, perhaps to protect themselves from the dazzling Florida blue sky (see also, Blue Sky Laws). As their claims became more extravagant, apparently the blue sky became less bothersome and they pushed back their caps, thus:

"A leveraged cap is one whose bill is tilted, or 'leveraged' with respect to the horizontal plane. The leverage is expressed not in degrees, as might be expected, but as the rate (%) of elevation from the horizontal to 90 degrees. Thus a leveraged cap rate of 17% equates to a bill tilted at 15 degrees."

Observers could tell how big a whopper the land guys were telling by observing how far back they pushed their caps (thus the phrase 'pushing the cap rate'). If the cap fell off ('Leveraged Cap Rate = 100%') they knew that the prospect would have to cave very soon (see also Florida Land Boom).

I hope this helps. When you're back down in Orlando drop in for a cup of coffee.

ggt