Exit Cap Rate Assumptions and What They Do to a DST's Projected Return

The exit cap is the single assumption that sets the sale price, and expansion takes it straight from your equity

The OCC's Commercial Real Estate Lending handbook defines direct capitalization as dividing net operating income by a capitalization rate. A DST projection applies that to the year of sale: projected income over the exit cap rate is the gross sale price, less selling costs and the loan payoff, which leaves the equity distributed to owners. The order of those payouts is at the DST sale waterfall.

When the exit cap is above the cap rate at purchase, the projection assumes expansion; below it, compression. Compression adds value the property never earned through rent. A projection that shows a large total return with flat or modest income growth is usually leaning on the exit cap, a point the cash yield versus total return page develops.

The handbook says the discount and cap rates used to value property should reflect reasonable expectations for the returns investors and lenders require under normal, orderly and sustainable market conditions, and that rising interest rates may lead to higher capitalization rates and lower property values without any change to the property's fundamentals.

A hypothetical sensitivity table shows leverage doubling the effect on equity

Hypothetical figures, rounded. A DST bought a property for about $18.2 million at a 5.5 percent cap rate on $1,000,000 of income, with a $9,000,000 loan and $10,000,000 of investor equity after offering costs and reserves. Assume income is still $1,000,000 in the sale year, so only the exit cap changes. Run your own numbers with your CPA.

• Exit cap 5.0 percent: sale value $20.0 million, $11.0 million left after the loan
• Exit cap 5.5 percent: sale value $18.2 million, $9.2 million left after the loan
• Exit cap 6.0 percent: sale value $16.7 million, $7.7 million left after the loan
• Exit cap 6.5 percent: sale value $15.4 million, $6.4 million left after the loan

Reading the table: selling at the purchase cap rate still returns less than you invested

In the table, an exit at the same 5.5 percent cap rate returns $9.2 million on $10 million of equity, because offering costs and reserves came out of the equity at the start. Half a point of expansion takes the value down about 8 percent but the equity left down about 16 percent, since the $9,000,000 loan is repaid in full either way. Selling costs and fees at sale, not shown, widen the gap.

Income growth can offset expansion, which is why exit cap and rent growth assumptions must be read together. A projection with both generous growth and a flat or lower exit cap is stacking two favourable assumptions.

Filed appraisals show where exit caps sat at the end of 2025 and how values respond

Three non-traded REITs with DST programs disclose the weighted exit cap rates their appraisals used at December 31, 2025. A diversified REIT's Form 10-K shows 5.9 percent healthcare, 5.7 percent industrial, 6.9 percent office, 5.3 percent residential, 6.0 percent retail and 5.6 percent overall. A global REIT's shows 6.96 percent office, 5.53 percent industrial, 6.14 percent retail, 5.49 percent residential and living and 5.85 percent overall. An industrial REIT's weighted rate is 5.6 percent.

The same filings measure sensitivity. A 0.25 point increase in the weighted exit cap reduced portfolio value by 2.7 percent at the diversified REIT and 2.8 percent at the industrial REIT. Those are smaller than the roughly 4 percent a simple capitalization implies because a discounted cash flow model also counts the years of income before the sale. A DST, which receives most of its value back in one sale, sits closer to the simple calculation.

These are appraisal inputs for whole REIT portfolios, not DST pro formas, and they describe one date.

What to ask about the exit cap before you subscribe

Ask for the going-in cap rate and the exit cap rate side by side, the reason for any difference, and the sale value and equity left at exit caps half a point and one point higher. Ask what the loan balance will be at the projected sale date and whether the loan's maturity forces a sale in a weak market, a constraint covered at DST leverage and interest-rate risk. Then compare the assumed exit cap with the filed appraisal inputs for the same property type; an assumption below them is a bet on compression that the sponsor should be able to justify.

No exit cap is a forecast you can rely on; it is the assumption that moves your projected return the most. The broader read of a projection is at how to read a DST pro forma.