In one sentence
The assumed capitalization rate at a future sale, used to project a property's exit value in underwriting.
The longer version
The exit cap rate is the rate applied to projected stabilized income to estimate a future sale price. Conservative underwriting assumes an exit cap rate somewhat higher than the going-in rate, since future conditions are uncertain.
Lenders scrutinize the exit cap assumption closely, because an optimistic one inflates projected returns and the apparent cushion behind the loan.
Common questions
- What is an exit cap rate?
- The cap rate assumed at a future sale, applied to projected net operating income to estimate the property's value at exit.
- Why is the exit cap rate usually higher than the going-in?
- Because the property will be older and market conditions may be less favorable. Assuming a higher exit cap rate is a conservative underwriting practice.
- Why do lenders care about the exit cap rate?
- Because it affects refinance and sale value at maturity. An aggressive exit assumption can overstate the property's ability to repay.
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