The expected Net Operating Income in the year following the sale (Year n+1).
The estimated capitalization rate at the time of sale (Exit Cap Rate).
Broker commissions and closing costs as a percentage of sales price.
Gross Terminal Value (Exit Price):–
Estimated Selling Costs:–
Net Sale Proceeds:–
function calculateTerminalValue() {
var noiInput = document.getElementById('projectedNOI');
var capRateInput = document.getElementById('terminalCapRate');
var costInput = document.getElementById('sellingCosts');
var noi = parseFloat(noiInput.value);
var capRate = parseFloat(capRateInput.value);
var costPercent = parseFloat(costInput.value);
// Validation
if (isNaN(noi) || noi < 0) {
alert("Please enter a valid Projected NOI.");
return;
}
if (isNaN(capRate) || capRate <= 0) {
alert("Please enter a valid Terminal Cap Rate greater than 0.");
return;
}
if (isNaN(costPercent) || costPercent < 0) {
costPercent = 0;
}
// Calculation: Terminal Value = NOI / (Cap Rate / 100)
var terminalValue = noi / (capRate / 100);
// Calculation: Selling Costs Amount
var sellingCostsAmount = terminalValue * (costPercent / 100);
// Calculation: Net Proceeds
var netProceeds = terminalValue – sellingCostsAmount;
// Display Results
var formatter = new Intl.NumberFormat('en-US', {
style: 'currency',
currency: 'USD',
maximumFractionDigits: 0
});
document.getElementById('grossValueResult').innerHTML = formatter.format(terminalValue);
document.getElementById('sellingCostsResult').innerHTML = formatter.format(sellingCostsAmount);
document.getElementById('netProceedsResult').innerHTML = formatter.format(netProceeds);
document.getElementById('resultsBox').style.display = 'block';
}
Understanding the Terminal Cap Rate
The Terminal Capitalization Rate, also known as the Exit Cap Rate, is a critical metric used in real estate financial modeling and Discounted Cash Flow (DCF) analysis. It represents the yield an investor expects to receive at the end of a holding period when the property is sold. It is essentially the projected rate of return for the new buyer of the property.
Real estate investors use the terminal cap rate to estimate the Terminal Value (or Resale Value) of a property. This estimated future sale price is often a significant component of the total return in a long-term real estate investment.
How to Calculate Terminal Value
The standard formula for calculating the Terminal Value relies on the Net Operating Income (NOI) expected in the year immediately following the sale (Year n+1). By dividing this future NOI by the Terminal Cap Rate, you arrive at the estimated gross sale price.
Terminal Value = Projected NOI (Year n+1) / Terminal Cap Rate
For example, if you plan to sell a property at the end of Year 5, you would use the projected NOI for Year 6 to determine the value, as the new owner is paying for the future income stream.
Terminal Cap Rate vs. Going-In Cap Rate
The Going-In Cap Rate (or Entry Cap Rate) is the rate at which you purchase the property based on current operations. The Terminal Cap Rate is a forward-looking assumption applied to the future sale.
Typically, investors assume the Terminal Cap Rate will be higher than the Going-In Cap Rate. This difference accounts for:
Aging of the Property: Older buildings may require more capital expenditures.
Market Uncertainty: It is difficult to predict interest rates and market conditions 5–10 years in the future.
Risk Premium: A "spread" of 50 to 100 basis points (0.50% to 1.00%) is often added to the Going-In Cap Rate to stay conservative.
Example Calculation
Scenario:
An investor expects the NOI in the year after sale to be $200,000.
Based on market trends and a conservative risk adjustment, they select a Terminal Cap Rate of 6.0%.
Calculation:
$200,000 / 0.06 = $3,333,333
This result represents the estimated gross sale price of the asset at the end of the holding period.
Why is this Important?
In a Discounted Cash Flow (DCF) model, the Terminal Value is discounted back to the present day to calculate the Net Present Value (NPV) and Internal Rate of Return (IRR). Since the sale proceeds often make up a large portion of the total profit, small changes in the Terminal Cap Rate input can drastically affect the feasibility of a deal.