Exit Cap Rate Explained: The Number That Quietly Decides Your Return

What it is

The exit cap rate — also called the reversion cap rate — is the cap rate you assume the property will sell for on the day you eventually sell it, not the cap rate you're buying it at today.

Every pro forma has one. It's usually buried a few tabs into the model, and it's the single most consequential number in the whole spreadsheet, because it converts your future net operating income into a future sale price. Get it wrong and every other number in the deal — no matter how carefully you underwrote the rent — moves with it.

Here's how I think about it: your going-in cap rate is a fact you can verify today. Your exit cap rate is a guess about a market that hasn't happened yet. Treat it accordingly.

How it plays out in retail net lease

In net lease retail, the rent is often the easy part. You've got a lease with scheduled increases, a credit tenant, maybe a corporate guarantee. The income side of the model can look almost boring — which is the point of net lease.

That's exactly why the exit cap rate carries so much weight. If the rent is largely fixed and predictable, the swing factor in your return isn't what the tenant pays you — it's what the next buyer is willing to pay for that income stream when you're ready to sell.

I've seen models where the buyer holds the cap rate flat from entry to exit, as if nothing changes over a 5, 7, or 10-year hold. Interest rates move. Tenant credit can shift up or down. Lease term burns off, and remaining term is one of the biggest drivers of value in this asset class — a fresh 15-year lease and the same lease with 4 years left do not trade at the same cap rate, even with identical rent.

A small change in assumed exit cap rate can swing the projected sale price meaningfully — often more than a full percentage point of rent growth would. That's the lever most people don't spend enough time on.

What to watch for

• A flat or improving exit cap rate assumption. If the model exits at the same cap rate you're buying at — or better — ask why. That assumption should usually be conservative, not optimistic.
• Remaining lease term at exit. A deal that looks fine on paper can look very different to a buyer if there are only a few years of term left on your sale date.
• Tenant and guarantor credit. Cap rates for the same brand can differ depending on the specific entity behind the lease and how the market currently views that credit.
• Interest rate environment baked into the exit year. A model built when rates were low, exiting into a higher-rate world, needs its cap rate assumption revisited.
• Where the comps came from. An exit cap rate pulled from a single recent sale is not the same as one supported by a broad set of comparable trades.

How to use it to your advantage

Run your numbers with more than one exit cap rate — your base case, plus a scenario where the exit cap rate is meaningfully higher than your entry cap rate. If the deal still works in that scenario, you have real cushion. If it only works when the exit cap rate matches or beats your entry, you're not underwriting a deal — you're underwriting a hope.

This is also where remaining lease term becomes a lever you control. Structuring or timing a sale so there's still healthy term left on the lease tends to support a stronger exit cap rate than selling into a short-term tail.

Best case, worst case

Best case

• Cap rates compress or hold steady between purchase and sale
• Tenant credit stays strong or improves
• You sell with meaningful lease term remaining
• Your conservative exit assumption turns out to be beatable

Worst case

• Cap rates expand due to rate or market shifts
• Lease term has burned down significantly by your sale date
• Tenant credit weakens or a renewal becomes uncertain
• Your model assumed a flat exit cap rate that the market no longer supports

This article is general education, not investment, tax, or legal advice. Verify all figures, assumptions, and market conditions independently before making any decision.