Cap Rate Expansion Risk (Exit Risk)
NNN exit value depends on the cap rate at the time of sale. If cap rates expand (rise) by the time an investor sells, property value compresses even when income is stable or growing — meaning years of holding can produce little appreciation. This is the structural reason NNN returns are primarily income-based rather than appreciation-based.
Key Points¶
- Example: Caliber bought at 5.75% cap; if 2039 exit cap is 6.5%, sale ~$5.98M (barely above today's $5.59M despite 13 years of holding).
- If the 2039 exit cap compresses to 5.25%, sale ~$7.41M (a ~$1.8M gain on top of cash flow).
- Lesson: do not rely on appreciation to make an NNN deal work; underwrite to the income.
- Long-term fixed-rate financing mitigates the related interest-rate/refinancing risk.