Exit Cap Rate
The capitalization rate assumed at sale, used to convert projected NOI in the exit year into an estimated resale price.
Definition
Exit cap rate (also called reversionary or terminal cap rate) is the yield a buyer assumes a future purchaser will pay at the end of the hold period. In a pro forma, exit value is typically exit-year NOI (or the following year's NOI, depending on convention) divided by the exit cap rate. A higher exit cap produces a lower sale price and a lower IRR; a lower exit cap assumes the market pays more for the same income. Underwriters often set exit at or slightly above the going-in cap rate to avoid baking in perpetual multiple expansion. For small bay, exit assumptions should reflect tenant mix, remaining lease term, deferred maintenance, and local liquidity, not only the entry quote. Exit cap is an input, not a market fact, until a sale clears.
Formula
Exit Value ≈ Exit-Year NOI / Exit Cap RateExample
A five-year hold model shows year-5 NOI of $320,000. At a 7.25% exit cap, estimated sale price = $320,000 / 0.0725 ≈ $4,414,000 before selling costs. At an 8.0% exit cap, sale price falls to $4,000,000. The 75 bp difference changes sale proceeds by about $414,000 before costs.
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