What is the formula for calculating terminal value?

The calculation of terminal value is essential in real estate finance as it estimates the value of an asset at the end of a holding period, capturing the future cash flows projected beyond that period. The correct formula, which is represented by the choice, involves the stabilized Net Operating Income (NOI) divided by the exit cap rate.

In this context, stabilized NOI refers to the expected income generated by the property after it has reached a normalized level of occupancy and operational efficiency, reflecting the long-term performance of the property. The exit cap rate is an essential metric used to capitalize that income into a value estimate. It represents the investor's required rate of return on an investment property at the time of sale, and it reflects market conditions, risk, and expected growth.

By dividing the stabilized NOI by the exit cap rate, one can derive the terminal value, which provides an estimate of what the property is expected to be worth at the end of the holding period, factoring in anticipated future performance. This method efficiently captures the ongoing potential of the asset and aligns with valuation practices used within the real estate investment community, making it a vital formula for investors and analysts in determining the overall value of a property at disposition.