In a real estate pro forma, what does terminal value typically represent in simple exit calculations?

• A. The sum of all future cash flows beyond year 7.
• B. The tax basis of the property.
• C. The initial investment adjusted for inflation.
• D. The sale value at exit, often computed as year 7 NOI divided by an exit cap rate.

Answer: (D)

Terminal value is the estimated sale price of the property at the end of the holding period, used to capture the value of all remaining cash flows in a single figure. In simple exit calculations, it’s typically computed as year 7 NOI divided by an assumed exit cap rate, which converts the final year’s earnings into a sale price reflecting market capitalization. This makes terminal value a practical approximation of what the property would be worth at exit, rather than the sum of future cash flows beyond year seven, the tax basis, or the initial investment adjusted for inflation.