Capitalization Rate

Overview

The capitalization rate ("cap rate") is the ratio of a property's annual net income to its purchase price (cap rate = net operating income ÷ price), a standard real-estate finance metric used to compare or value income-producing assets.[1] Because a cap rate links a stock value (selling price) to a flow value (annual rent or income), it is the conversion factor needed whenever a land selling-value estimate must be turned into an annual land-rent estimate, or vice versa — the arithmetic underlying tax capitalization more generally, where price = rent ÷ (discount rate + tax rate).

The conversion matters directly for the Georgist LVT revenue debate. Lars Doucet's Land is a Big Deal (Ch. 14–15) surveys roughly a dozen methods estimating total US land selling value at $19–65 trillion (2020), then applies cap rates of 5–8% to convert those stock estimates into annual land-rent estimates of roughly $1.2–3.5 trillion — the figures then compared against federal, state, and local budgets. Doucet's own presentation flags this conversion as a source of real uncertainty: the choice of cap rate within the 5–8% range alone moves the implied annual-revenue estimate by a wide margin, on top of the underlying dispersion in selling-value estimates.

Why It Matters for the Georgist Case

Because 100% land value taxation is defined as taxing the annual rental value of land rather than its selling price, any revenue claim built from selling-value data (the more commonly available kind, since transacted sale prices are far more observable than rental streams) implicitly depends on the cap rate used to convert it — and different assumed rates, or different macroeconomic conditions affecting the "true" discount rate, produce materially different revenue projections from the same underlying land-value estimate.

Limits and Caveats

The 5–8% range cited above is a rule-of-thumb band drawn from ordinary commercial-real-estate practice rather than a rate specifically estimated for land alone; cap rates vary by asset class, location, risk, and interest-rate environment, and land's own appropriate cap rate is itself contested territory rather than a fixed constant. [CITATION NEEDED: a study estimating land-specific capitalization rates directly, as opposed to general commercial real estate.]

See Also

• Tax Capitalization — the related present-value mechanism by which expected future taxes are reflected in current land prices
• Land is a Big Deal — Doucet's book, the discovery-source applying this conversion to US land-value and revenue estimates
• Objection: LVT can't raise enough revenue — the debate this stock-to-flow conversion directly feeds
• Oates (1969), the founding capitalization study — the empirical capitalization literature this concept sits within

Sources

1. Corporate Finance Institute, "Capitalization Rate" — corporatefinanceinstitute.com/resources/valuation/capitalization-cap-rate — used for the standard NOI ÷ price definition and formula (basic-facts citation).
2. Lars A. Doucet, Land is a Big Deal: Why rent is too high, wages too low, and what we can do about it (Shack Simple Press, 2022), Ch. 14–15 — discovery source book; used for the survey of US land selling-value estimates ($19–65 trillion) and the 5–8% cap-rate conversion to annual land-rent estimates ($1.2–3.5 trillion), per this wiki's existing research summary of the book.

[VERIFY: the Doucet figures here are drawn from this wiki's own prior chapter-by-chapter research summary of the book (sources/books/summaries/land-is-a-big-deal-research-summary.md), not a fresh direct read of Ch. 14-15. A future revision should confirm quotations and exact figures against the source text directly.]