Glossary of Terms

Terminal Cap Rate 2015-11-10 08:00:00

Terminal Cap Rate

The estimated or actual cap rate of a property on date of disposition or sale. Also known as the Exit Cap Rate. The terminal cap rate, also known as the reversionary cap rate, is a metric used to estimate the gross value of an investment property at sale.

It is calculated by dividing the expected net operating income (NOI) by the expected sale price and is expressed as a percentage. For example, if the NOI in the year of sale (or the following year) is $450,000 and the expected sale price is $7,000,000, then the terminal cap rate would be 6.43% (NOI of $450,000 divided by $7,000,000 sale price). In practice, the terminal cap rate is more typically applied to the estimated NOI in order to estimate terminal value. Using a similar example, if an investor applied a 6.5% terminal cap rate to an estimated NOI of $450,000, then the projected terminal value would be $6,923,077 (NOI of $450,000 divided by the terminal cap rate of 6.5%).

 


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