A terminal capitalization rate is usually set slightly above the going-in rate because:
Correct Answer
B) The building will be older and riskier at the sale date
Why this is correct: A terminal cap rate is typically higher than the going-in rate because the property is older at sale, with shorter remaining economic life and higher risk, requiring a higher return. Why the other choices are wrong: "Lenders require a higher rate for any future transaction" is not a general rule; terminal rates are market-driven. "Terminal rates are set by regulation rather than by the market" is false; they are market-derived. "The projection period always ends during a market downturn" is incorrect; downturns are not assumed. Exam tip: Terminal cap rate usually exceeds going-in rate due to increased risk from aging; modeling same rate assumes no aging.
Why This Is the Correct Answer
Why this is correct: A terminal cap rate is typically higher than the going-in rate because the property is older at sale, with shorter remaining economic life and higher risk, requiring a higher return. Why the other choices are wrong: "Lenders require a higher rate for any future transaction" is not a general rule; terminal rates are market-driven. "Terminal rates are set by regulation rather than by the market" is false; they are market-derived. "The projection period always ends during a market downturn" is incorrect; downturns are not assumed. Exam tip: Terminal cap rate usually exceeds going-in rate due to increased risk from aging; modeling same rate assumes no aging.
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