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.