The exit cap rate, also called the terminal or reversion cap rate, is the capitalization rate a sponsor assumes will apply when a property eventually sells. Multiplying projected net operating income in the final year of the hold by this assumed rate produces the estimated sale price used in a deal's return projections.
Because it is a forecast rather than an observed number, the exit cap rate is one of the most consequential assumptions in any underwriting model, and even small changes to it can meaningfully shift projected investor returns. Conservative sponsors typically assume an exit cap rate somewhat higher than the going-in cap rate, building in a cushion for the possibility that market pricing softens by the time the asset is sold. For background on why these rates move over a hold period, see what drives cap rate movement.
Further reading: Understanding Cap Rates: Context Cycles and the Real Measure of Value
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