The Cap Rate Spread: A New Metric for Commercial Underwriting

Real Estate Economics, Forthcoming

Posted: 22 Jul 2014

See all articles by Philip Seagraves

Philip Seagraves

Middle Tennessee State University

Jonathan Wiley

Georgia State University

Multiple version iconThere are 2 versions of this paper

Date Written: July 6, 2014


This study introduces the cap rate spread as a novel metric for underwriting commercial mortgages. Cap rate spread is the difference between the cap rate and the fixed coupon rate. The spread predicts performance risk in a sample of 24,951 CMBS loans during 1993-2011. We demonstrate that the cap rate spread includes crucial information about performance risk. The results arise from the role of the cap rate spread in generating positive or negative leveraged returns to equity in situations where additional equity is required. Incorporating simplistic cap rate spread requirements in commercial underwriting is expected to reduce loan performance risk.

Keywords: Default risk, underwriting, commercial real estate

Suggested Citation

Seagraves, Philip and Wiley, Jonathan, The Cap Rate Spread: A New Metric for Commercial Underwriting (July 6, 2014). Real Estate Economics, Forthcoming. Available at SSRN:

Philip Seagraves (Contact Author)

Middle Tennessee State University ( email )

Murfreesboro, TN 37132
United States

Jonathan Wiley

Georgia State University ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

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