Terminal Capitalization Rate

What is the 'Terminal Capitalization Rate'

The terminal capitalization rate is the rate used to estimate the resale value of a property at the end of the holding period. The expected net operating income (NOI) per year is divided by the terminal cap rate (expressed as a percentage) to get the terminal value. Terminal capitalization rates are based on forecasts and estimates and changes based on the person doing the calculation.

BREAKING DOWN 'Terminal Capitalization Rate'

When looking at longer periods of time, it is a safe assumption that NOI forecasts will not be completely accurate as estimations become harder over longer periods. Therefore, it may be necessary to include a risk adjustment to the rate.

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RELATED FAQS
  1. What can cause the terminal growth rate to be negative?

    Learn about the assumptions built into terminal valuations and in what circumstances the applied terminal growth rate might ... Read Answer >>
  2. When evaluating terminal value, should I use the perpetuity growth model or the exit ...

    Examine the important calculation of a terminal value in discounted cash flow analysis, and learn which method of calculating ... Read Answer >>
  3. Why should investors care about Net Operating Income (NOI)?

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  5. When and why should the terminal value be discounted?

    Find out why investors use the terminal value, why the terminal value is discounted to the present day, and how it's related ... Read Answer >>
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