Going-in cap rate and exit cap rate: which statement is correct regarding their use and impact on value?

• A. Going-in cap rate uses first-year NOI; exit cap rate is used for terminal value in multi-year projection
• B. Going-in cap rate uses stabilized NOI; exit cap rate is used for annual rent growth
• C. Going-in cap rate uses terminal value; exit cap rate uses first-year NOI
• D. Exit cap rate has no relation to value calculations

Answer: (A)

In property valuation, cap rates translate income into value. The going-in cap rate is the one applied to the first-year net operating income to estimate the current value of the property, reflecting the return investors expect at the outset. The exit cap rate is used at the end of the holding period to estimate the terminal value, by applying it to the NOI at exit (often stabilized NOI). So the statement that going-in cap rate uses first-year NOI and exit cap rate is used for terminal value in a multi-year projection is the correct description. The other ideas mix up how these rates are used: the going-in rate isn’t based on stabilized NOI, the exit rate isn’t used for annual rent growth, and exit value calculation depends on the cap rate rather than having no relation to value calculations.