How much of the return depends on the exit cap rate?
Use forward NOI, sale costs and debt repayment. Then widen the exit cap rate by one point.
“we’ve taken a couple of these to market already and we’ve sold two data centers” (opens the source)
The question
Willow Industrial is an invented 100,000-square-foot U.S. warehouse. All amounts are in U.S. dollars. The hold lasts five years. No rent growth, tax, depreciation, promote or refinancing is modeled.
| Assumption | |
|---|---|
| Forward annual NOI | $1.08m |
| Base exit cap rate | 6% |
| Stress exit cap rate | 7% |
| Selling costs | 2% of sale price |
| Debt repaid at exit | $9.6m |
| Year 5 operating cash to equity | $504,000 |
The buyer gets year 6 NOI. No rent growth is assumed; year 6 equals the stabilized run rate.
“Calculate sale value and net sale proceeds to equity at 6% and 7%. Show the change in final-year cash.”
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A strong answer, step by step
Open each step in turn. This is one strong answer, not the only one.
Step 1: Use the income the buyer will receive
What would you do here? Open the move you’d make.
Multiply $1.08m by 6%.
Tempting, but it misses something. That is not a capitalization calculation.
Divide forward NOI by the cap rate.
The strong move. The units produce property value.
See how a strong candidate says it
“At a 6% cap, value is $1.08m divided by 0.06, or $18m.”
Why it works: A cap rate divides one year of net operating income by property value.
Step 2: Pay sale costs and debt
What would you do here? Open the move you’d make.
Treat $18m as equity proceeds.
Tempting, but it misses something. That omits both debt and selling costs.
Repay the full interest-only principal.
The strong move. Interest payments did not reduce the loan.
See how a strong candidate says it
“Selling costs are $360,000. Net sale equity is $18m less $360,000 less $9.6m, or $8.04m.”
Why it works: The gross property price does not belong entirely to equity.
Step 3: Widen the cap rate
What would you do here? Open the move you’d make.
Raise NOI when the cap rate rises.
Tempting, but it misses something. Those are separate assumptions.
Keep NOI fixed while changing the cap.
The strong move. This isolates the exit-price assumption.
See how a strong candidate says it
“At 7%, gross value is $15.43m and net sale equity is $5.52m.”
Why it works: The same NOI supports a lower value when buyers require more yield.
Step 4: Reconnect value to the equity return
What would you do here? Open the move you’d make.
Add the property’s full NOI again.
Tempting, but it misses something. Interest must still be paid in year 5.
Add operating cash once.
The strong move. The sale does not replace the year’s operation.
See how a strong candidate says it
“Final-year cash falls from $8.544m to $6.024m. That is $2.52m less to equity.”
Why it works: The annual $504,000 operating cash is separate from net sale proceeds.
The answer, in short
- Decision
- Show the 7% exit next to the 6% case.
- Because
- A one-point cap-rate move removes $2.52m of equity proceeds even when rent is unchanged.
- What would change it
- Verified sale evidence may support a different cap rate. It cannot remove the downside test.
Rent now reaches only $13 per square foot. What happens at a 7% exit cap?
Common traps
- Using today’s NOI with an unexplained exit price.
- Counting gross asset value as equity value.
Check your answer
- I used forward NOI.
- I included selling costs.
- I repaid the loan principal.
- I separated annual cash from sale proceeds.
Last reviewed Nov 10, 2026