Definition
Exit Value is the projected resale price of a property at the end of an investment holding period.
It is typically calculated by dividing projected exit-year Net Operating Income (NOI) by a Reversion (Exit) Cap Rate.
Formula
- Exit Value = Projected Exit-Year NOI ÷ Reversion Cap Rate
Example
Assume:
- Year 5 Projected NOI: $1,500,000
- Reversion Cap Rate: 7.5%
Exit Value = $1,500,000 ÷ 0.075 = $20,000,000
Selling costs and outstanding debt are then deducted to calculate net sale proceeds to investors.
Role in Investment Returns
Exit value often represents a significant portion of total projected return, especially in shorter hold periods.
It directly impacts:
- Internal Rate of Return (IRR)
- Equity multiple
- Total profit
Exit Value vs. Current Market Value
- Current Market Value: Value based on today’s NOI and cap rates.
- Exit Value: Future estimated value based on projected NOI and assumed cap rate.
What Drives Exit Value?
- Future income growth
- Stabilized occupancy levels
- Expense control
- Market cap rate environment at time of sale
- Overall capital market conditions
Sensitivity Analysis
Because exit value is highly sensitive to cap rate assumptions, investors typically test multiple scenarios:
- Base Case Exit Cap: 7.5%
- Conservative Case: 8.0%
- Optimistic Case: 7.0%
Even a small change in exit cap rate can materially affect projected returns.
Common Pitfalls
- Assuming cap rate compression without justification
- Over-relying on terminal value for return projections
- Ignoring transaction costs
- Underestimating market cyclicality
Investor Discipline
Strong underwriting:
- Uses conservative reversion cap rates
- Focuses on income growth rather than speculative appreciation
- Stress-tests downside exit scenarios
- Aligns exit assumptions with long-term durability standards