Lease

Under a lease, the tenant gets to occupy a property for an agreed term and pays rent in return. The leases in place are the legal source of a property's income, so they set the NOI and, through it, the cap rate a buyer is paying for.

Read the leases, not just the rent roll. Term, renewal options, scheduled increases and who pays which expenses all change the NOI. A building with long leases below market has a lower current cap rate but upside at rollover; one with leases above market may face a rent cut when they expire.

On residential property, leases are usually a year or shorter, so NOI resets to market quickly. On commercial property a lease can run ten years or more, which makes the cap rate reflect the tenant's credit as much as the real estate. See net lease for how expense terms change the calculation.