Property Valuation
A Mississippi commercial property's 'going-in' cap rate is 7.5% and the 'going-out' (terminal) cap rate used in a discounted cash flow analysis is 8.5%. The higher terminal cap rate generally reflects:
AExpected value appreciation over the holding period
BGreater uncertainty and risk associated with the property's condition and income at the end of the holding period✓ Correct
CLower market interest rates at the time of sale
DImproved property condition at resale
Explanation
Terminal (going-out) cap rates are typically set higher than going-in rates to reflect the greater uncertainty of future conditions at the time of resale — the property will be older, the remaining lease terms will be shorter, and economic conditions are less predictable. A higher terminal cap rate reflects this additional risk.
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