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.
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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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