Full Definition
Exit cap rate is the cap rate applied to the final year's NOI in DCF analysis to calculate terminal sale value. Conservative underwriters project exit cap rates 25-50 basis points higher than entry cap rates (reflecting the building's additional age at disposition). Exit cap rate assumption is one of the most sensitive variables in DCF returns.
Related Terms
DCF (Discounted Cash Flow)
Valuation method that discounts projected future cash flows (including sale proceeds) back to present value using a target rate of return.
Cap Rate (Capitalization Rate)
The ratio of a property's Net Operating Income to its purchase price, expressed as a percentage. The primary metric for comparing commercial real estate investments.
Reversion Value
The estimated sale value of a property at the end of an investor's hold period or at the end of a ground lease term.