"Average" Cap Rates 
Late last year I noted the term "average cap rate" in relation to a Cole REIT's acquisition.  Cole took an average NOI over the anticipated hold period, rather the capitalizing the first year NOI.  Using an average cap rate implies an acquisition at better terms than in actuality.  For example, if you have a 100% triple net leased building that was purchased for $1 million and the first year lease payment is $60,000, the cap rate is 6%.  If the lease rate has 2% annual increases and a ten-year term, the average lease rate over the term of the lease is $65,698.  If the average lease rate is used to calculate the cap rate, the cap rate jumps to 6.57%.  This makes it seem like the buyer did not pay as much for the property.   This is wrong, because cap rates are based only on the first year's NOI.

Now I see another REIT using the bogus average cap rates.  American Realty Healthcare Trust made a filing on Thursday listing three potential acquisitions.  Each of the cap rates disclosed in the filing was based on the average lease rate over the lease term, not the first year NOI. The wordsmithing is:

"calculated by dividing annualized rental income on a straight-line basis less estimated property operating costs by the purchase price"

The phrase "annualized rental income on a straight-line basis" is the slight of pen.  

This cap rate discussion may be a mute point for American Realty Healthcare Trust, as it just broke escrow at $2 million, but will need cash of $28.5 million to close the three targeted acquisitions.  The REIT has to pay offering costs on its equity raise, and it just declared a 6.6% distribution.  It will have to have raise an additional $30 million or more to acquire the three properites, pay its load and distribution.  If the REIT has to use acquisition financing, then the disclosed cap rate figures will be evenless reliable.