The exit cap rate (terminal or reversion cap rate) is the capitalization rate a real estate projection assumes for the property’s eventual sale — the final-year NOI divided by the exit cap equals the projected sale price. In most underwriting, no single assumption moves projected returns more.
Why one assumption carries so much weight
The sale typically represents the majority of a deal’s total proceeds, and the exit cap sets it: on $1 million of exit-year NOI, a 5.5% exit cap implies an $18.2 million sale while 6.0% implies $16.7 million — a 25–50 basis-point assumption difference swinging value by high single digits and levered equity multiples and IRRs by far more. The pressure tests advisors can run in minutes: exit versus entry — a projection assuming exit caps below the purchase cap is betting on market appreciation on top of the business plan (aging buildings in normal markets tend to sell at equal or wider caps than they were bought; underwriting convention adds expansion of ~10 bps per year of hold, a discipline aggressive pro formas skip); exit cap against the sensitivity table — the grid shows what happens if the assumption misses, and a deal that only works in the tightest column has told you its risk; internal consistency — high rent-growth assumptions and tight exit caps double-count optimism, since strong growth markets eventually price it in. The same assumption sits inside NAV valuations: appraisal DCFs behind non-traded REIT values disclose their terminal cap assumptions, and the 2022–24 repricing was substantially a fight over how far those had to move.
Related terms
Cap Rate · Sensitivity Analysis · Discounted Cash Flow (DCF) · Equity Multiple · Net Operating Income (NOI)
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