In the context of commercial real estate, the term "cap" is most often used in two contexts: cap rate (capitalization rate) and cap on operating expenses.

Cap Rate (Capitalization Rate): This rate is a yield indicator used to evaluate the return on investment in real estate. The cap rate is calculated by dividing the annual net income from the property by the price of the property. For example, if a building produces $100,000 in net income annually and is valued at $1,000,000, the cap rate is 10%.

Cap on operating expenses: Some leases may set a limit, or "cap," on the annual increase in operating expenses that the landlord can charge the tenant. This cap can be set as a fixed percentage increase, or it can be indexed to inflation or another economic indicator. It serves to limit the risk to the tenant by protecting the tenant from excessive cost increases. On the other hand, they may limit the landlord's ability to pass on increased operating costs to the tenant. The operational cost cap and its specific terms should be clearly stated in the lease agreement.

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