Loaded Cap Rate: Adding the Property Tax Rate in Appraisals
A loaded cap rate adds the effective property tax rate to the base cap rate, so value can be found from NOI before taxes. The formula, why appraisers use it, and an example.
By the CapRateCalculator.co team
A loaded cap rate is a base cap rate plus the effective property tax rate. Appraisers use it to value a property from NOI before property taxes. The tax-loaded rate is the standard tool in assessment appeals, because the tax bill depends on the very value being estimated.
The circular problem it solves
Normally you subtract property taxes as an operating expense, then divide NOI by the market cap rate. But when the property’s assessed value is the question, as in a tax appeal, the tax bill itself depends on the answer. A higher value means a higher tax, a lower NOI and a lower value. The loaded rate breaks the loop by leaving tax out of the expenses and adding it to the cap rate instead.
Loaded cap rate formula
Loaded cap rate = base cap rate + effective tax rate.
Value = NOI before property taxes / loaded cap rate.
The effective tax rate is annual property tax divided by market value. It is not the nominal mill rate if the jurisdiction assesses at a fraction of market value.
A worked example
The standard $500,000 house has $28,892 of NOI after $6,000 of property taxes. The base cap rate is 5.78%, and taxes run 1.2% of value.
NOI before property taxes is $28,892 + $6,000 = $34,892.
Loaded cap rate is 5.78% + 1.2% = 6.98%.
Value = $34,892 / 6.98% = about $499,900. That matches the $500,000 from the ordinary method, apart from rounding. The two methods agree when the tax really is 1.2% of value.
| Method | NOI used | Cap rate | Value |
|---|---|---|---|
| Standard | $28,892 (after tax) | 5.78% | $500,000 |
| Tax-loaded | $34,892 (before tax) | 6.98% | $499,900 |
When the methods disagree
The standard method uses the current tax bill. If that bill is based on an outdated assessment, NOI and the value it supports will be off by the difference. The loaded method assumes the tax will equal the effective rate times the value it finds. That is why owners and assessors argue about which one to use in an appeal: the answer can differ by thousands of dollars on a commercial property.
Other things that get loaded into a cap rate
The same idea works for any cost that scales with value. Some appraisers load a reserve for replacements into the rate instead of deducting it, or load in a recapture rate for a building with a limited remaining life. Each one moves a value-driven cost out of the NOI and into the rate.
The cap rate valuation guide covers the standard method and the does cap rate include expenses guide explains what normally sits above NOI.
Frequently asked questions
What is a loaded cap rate?
It is a base cap rate plus the effective property tax rate. Appraisers use it to value a property from NOI before property taxes, because the tax depends on the value they are trying to find. Dividing pre-tax NOI by the loaded rate gives the same value as dividing after-tax NOI by the base rate.
Why use a tax-loaded cap rate?
When the property tax bill is set by the assessed value, and the assessed value is what you are estimating, deducting the tax first is circular. Loading the rate removes the circle. It is common in tax assessment appeals and in jurisdictions that assess at market value.
How do you calculate a loaded cap rate?
Add the effective tax rate, annual property tax divided by market value, to the base cap rate. A 5.78% base rate in a market where taxes run 1.2% of value gives a loaded cap rate of 6.98%.