Research guide

Delaware Statutory Trust Returns: How Exit Cap Rates Affect Modeled Outcomes

By Sequoia ResearchPublished Read as Markdown

What Is This Article About?

An exit cap rate turns an assumed future property income figure into a modeled sale price. This article follows that price through selling costs, debt repayment, cash reserves, and an investor's share. A fictional example shows how a small change in the rate can produce a much larger change in the money left for owners. It also explains which assumptions a sensitivity table holds still and why none of its rows is a forecast.

Table of Contents

What an Exit Cap Rate Measures

An exit capitalization rate, usually shortened to exit cap rate, is a pricing input. In a simple model, divide the chosen annual net operating income by the rate to estimate a property sale price. Net operating income, or NOI, means income after the property operating expenses included in that definition. The model must say which expenses it includes.

The basic formula is:

Modeled property price = chosen annual NOI ÷ exit cap rate.

A 6% cap rate enters the formula as 0.06. With $1.8 million of annual NOI, the modeled price is $30 million. This is a property-level calculation. It does not yet subtract debt, selling costs, or any other claim on the sale proceeds.

The OCC's commercial real estate lending handbook describes this method for stabilized NOI and a future income stream expected to be stable. It also distinguishes a discounted cash-flow approach for properties with changing income. That is bank valuation guidance, not a finding that a particular DST will sell at a selected rate. OCC Commercial Real Estate Lending, Value Analysis.

The word “exit” places the assumption at a planned sale date. It does not make the rate an observed market fact. A spreadsheet can accept 5%, 6%, or 7% with equal ease. Evidence must explain why a reviewer would consider those inputs for the property, date, and income definition being studied.

A cap rate also differs from an investor's distribution rate. One divides property income by property price. The other may divide cash paid to an investor by the investor's original contribution. Their numerators and denominators differ. Neither number alone reports the investor's total result.

For this article, every property, investor, rate range, and cash amount is invented. The examples teach how to read a model. They do not describe current market pricing, an available offering, or the likely result of any real DST.

Set Up the DST Sale Model

Our fictional Stonehaven DST begins with $12 million of investor equity and $18 million of property debt. That $30 million funds a $27 million property purchase, $2 million of entry costs, and $1 million of initial cash reserves. These are assumed uses of funds, not quoted industry costs.

Five years later, the model assumes a sale. The debt payoff is then $16 million. Prior operations have funded the assumed $2 million principal reduction before the investor payments described below. We do not subtract that earlier principal again from the sale price.

The model also assumes $500,000 of cash remains available to owners at closing. That is the balance after earlier operating needs, reserve spending, and payments. It is not the original $1 million reserve added back in full.

The sale assumptions are:

Input Fictional assumption
Annual NOI used to price the exit $1,800,000
Selling cost tied to gross property price 3%
Other closing costs, separate from that 3% $200,000
Loan payoff at the sale date $16,000,000
Remaining cash available to owners $500,000
Original investor equity $12,000,000
Prior investor payments over five years $2,400,000

The prior payments are $480,000 at each year-end, including year five before the sale proceeds. That equals 4% a year of the original equity. This payment schedule is a separate fixed assumption; it is not calculated from the exit-year NOI. The model assumes the earlier operating budgets funded it after their required costs and principal payments.

All owners have the same economic rights in proportion to their equity. There are no special classes, preferred payments, sponsor profit shares, or other claims beyond those listed. Those simplifying terms must be replaced with actual terms when reviewing an offering.

The terminal cash formula is:

Cash for owners at exit = property price − 3% selling cost − $200,000 closing costs − $16 million debt + $500,000 remaining cash.

That reduces to 97% of property price minus $15.7 million. “Terminal cash” means the modeled amount available at the end, after the stated deductions. It is separate from the $2.4 million already paid during the holding period.

No personal tax, outside account fee, unexpected claim, or loan prepayment charge is included. These omissions are visible assumptions, not findings that such costs would be zero in a real transaction. The SEC advises readers to identify costs excluded from a performance presentation. SEC Performance Claims bulletin.

Follow Five Exit Cap Rates to Investor Cash

Hold every input above fixed and change only the exit cap rate. The table uses exact intermediate calculations, then rounds displayed dollars to the nearest dollar.

Exit cap rate Modeled property price Terminal cash for all owners Prior payments plus terminal cash
5.00% $36,000,000 $19,220,000 $21,620,000
5.50% $32,727,273 $16,045,455 $18,445,455
6.00% $30,000,000 $13,400,000 $15,800,000
6.50% $27,692,308 $11,161,538 $13,561,538
7.00% $25,714,286 $9,242,857 $11,642,857

Take the 6% row. Dividing $1.8 million by 0.06 gives $30 million. The 3% selling cost is $900,000. Subtract that cost, the separate $200,000, and $16 million of debt, then add the $500,000 cash balance. The result is $13.4 million for owners at exit.

Adding the five years of prior payments produces $15.8 million of total modeled cash. Relative to the original $12 million contribution, that is a 1.3167 cash multiple, rounded to four decimals. It means roughly $1.3167 received for each dollar contributed across the full assumed holding period.

It does not mean a 31.67% annual return. The table does not calculate an internal rate of return, which would use each payment's timing. Nor does it assume the prior payments earn anything after receipt.

Now consider Maya, a fictional investor who contributed $240,000 for a 2% share under the equal-rights assumption. She receives $9,600 in each modeled year, or $48,000 before the terminal payment. Her sale cash changes with the exit cap rate:

Exit cap rate Maya's terminal cash Her prior payments plus terminal cash
5.00% $384,400 $432,400
5.50% $320,909 $368,909
6.00% $268,000 $316,000
6.50% $223,231 $271,231
7.00% $184,857 $232,857

At 7%, Maya's total is about $7,143 below her original contribution. This occurs even though the model paid her $9,600 every year. The distribution schedule did not protect the ending principal.

None of the five rows has an assigned probability. The middle row is simply a reference case. Placing it in the middle of a table does not make it the most likely outcome or turn the outer rows into statistical confidence limits.

Why Property and Equity Changes Differ

Higher cap rates lower the price when NOI stays fixed. Owners can feel a larger percentage change because debt and other fixed deductions come out before they receive the remaining cash.

Moving from a 6% exit cap rate to 7% lowers the modeled property price from $30 million to about $25.71 million. That is a 14.29% price decline. Terminal cash for owners falls from $13.4 million to about $9.24 million, a 31.02% decline.

The loan payoff stays at $16 million in both rows. The 3% sale cost falls with the price, but the other fixed deductions remain. The owners receive the smaller amount left over. This is a result of this model's funding structure, not a universal multiplier for financed DSTs.

The reverse change is not a mirror image. Moving from 6% to 5% increases the property price from $30 million to $36 million, a 20% increase. A one-percentage-point rate change therefore produces different price percentages depending on its direction and starting rate.

Be precise with rate language. A move from 6% to 7% is one percentage point, or 100 basis points. One basis point is one-hundredth of a percentage point. The rate itself rises by 16.67% relative to its starting level. Those are three descriptions of the same rate move, not three competing price forecasts.

Even a five-basis-point change can matter in a large-dollar model. Moving this example from 6.00% to 6.05% lowers terminal owner cash by about $240,496. That does not establish that the model can predict a sale rate to five basis points. It shows why a precise-looking output can depend heavily on an input that remains uncertain.

Read percentages alongside dollars. A 31.02% decline in terminal cash is measured against the $13.4 million reference result, not against original investor equity. Using the original $12 million as the denominator would answer a different question. Clear labels prevent a model from sliding between these measures.

Choose the Income Period Before Choosing the Rate

The NOI used in a sale model needs a period, a definition, and a source. A rate cannot repair a mismatched income figure.

Stonehaven's $1.8 million is assumed stabilized annual NOI for the first full year after the planned sale. “Stabilized” means the modeled income level after the property's temporary leasing or operating changes have settled. It is an assumption here, not a measured fact.

Suppose the last full year before the sale instead produced $1.65 million. Using that trailing amount with the same 6% rate gives a $27.5 million property price. Under the same closing formula, owner cash would be $10.975 million. That is $2.425 million less than the $13.4 million reference result.

This difference comes entirely from the income choice. It is not a cap rate change. A review that compares two models must identify both the rate and the income attached to it.

Do not conclude that the trailing figure is always the correct one. A buyer might evaluate a future rent schedule, and an appraisal may use a defined stabilized period. The task is to inspect the basis, adjustments, and evidence. If two rates were derived from different income conventions, copying them into one table may create a false comparison.

The 2023 interagency commercial real estate workout statement discusses the limits of direct capitalization when a troubled property's income is not normal or stabilized. It describes discounting the earlier period and applying a terminal cap rate at the later point. This is valuation guidance for financial institutions, not a rule that assigns a DST's exit price. Interagency policy statement, Appendix 3.

For an original review file, record rent assumptions, vacancy, free rent, property taxes, insurance, management costs, and any replacement-reserve treatment. Mark which figures are actual, contractual, or estimated. A line called NOI can include different items in different documents.

Keep trust overhead, financing, and investor payments outside that property figure unless the chosen definition explicitly includes them. Then disclose that definition. Subtracting an expense inside NOI and again from sale cash would count it twice.

A buyer's future annual NOI also is not cash already received by the seller. The terminal value uses expected future earnings to support a price. The seller's prior distributions remain a separate cash history. Combining those two roles without labels can make future rent appear to have been paid twice.

Test Income and Exit Cap Rates Together

A one-input table explains the effect of the exit rate. It does not show what happens if income and pricing both change. A second table can answer that narrower two-input question.

The next grid changes only annual exit NOI and cap rate. It keeps debt, remaining cash, closing costs, prior distributions, and ownership rights at their original assumptions. Each cell shows terminal cash for all owners, rounded to the nearest dollar.

Annual exit NOI 5% cap rate 6% cap rate 7% cap rate
$1,620,000 $15,728,000 $10,490,000 $6,748,571
$1,800,000 $19,220,000 $13,400,000 $9,242,857
$1,980,000 $22,712,000 $16,310,000 $11,737,143

The low and high income rows are 10% below and above the reference NOI. They are selected tests. They are not estimated chances, historical averages, or a complete range of possible results.

The upper-income row helps answer a common question: can better operations offset a higher exit rate? Here, $1.98 million at a 7% cap rate leaves about $11.74 million. That is still below the $13.4 million from $1.8 million at 6%. Ten percent income growth does not fully offset this particular rate change.

To keep a $30 million property price at 7%, annual NOI would need to reach $2.1 million. That is 16.67% above $1.8 million. Holding price steady also holds terminal cash steady only because every other closing input stays fixed.

The lower-income, higher-rate cell leaves about $6.75 million at exit. Adding the fixed $2.4 million prior payments gives about $9.15 million in total cash. That combination shows the model's exposure when both inputs move against owners.

It does not prove that the five years of prior payments could survive the same weaker operating path. This grid changes the exit income assumption only. A full downside review would also rebuild earlier collections, expenses, debt payments, reserves, and distributions. If it changes those inputs, it should show the new history rather than keep the old payments silently.

Likewise, better income may require spending that this grid does not add. If renovations, leasing costs, or a new cash contribution are needed to reach $1.98 million, the favorable row needs another version with those costs. An increase in projected NOI is not free merely because a table lets the user type it.

Find Two Different Capital-Recovery Thresholds

“Getting the money back” can mean two different things. It can mean receiving the full original contribution at the sale, or receiving that amount across all prior and final payments. These thresholds differ even before taxes and timing enter the analysis.

First, require terminal cash alone to equal the original $12 million. The model must satisfy:

97% of sale price − $15.7 million = $12 million.

The required property price is about $28.557 million. With $1.8 million of exit NOI, that corresponds to a cap rate of about 6.3032%. Under the fixed assumptions, a higher rate would leave less than $12 million at closing.

Second, count the $2.4 million already paid. Terminal cash then needs to be only $9.6 million for total cash to equal the original contribution. The required property price falls to about $26.082 million, which corresponds to a cap rate of about 6.9012%.

That second point is nominal cash recovery. It gives no return for waiting five years, assumes no reinvestment, and excludes personal taxes and outside costs. It is not an economic break-even for every investor. Even Maya and another owner with the same investment size might have different outside costs or cash needs.

The two thresholds also explain the 6.5% row. Its terminal cash is below original equity, yet prior payments plus terminal cash exceed it. Calling that row either “capital preserved” or “capital lost” without defining the measure would leave out important information.

Treat a threshold as a conditional equation, not a safe range. The 6.3032% figure would move if the sale fee, loan payoff, cash balance, or income changed. Four decimal places show the solution to chosen inputs; they do not show four decimal places of real-world knowledge.

If a calculation produces negative cash after the listed claims, preserve the shortfall as a funding problem. It is not automatically a required investor payment. Actual rights, guarantees, obligations, and closing choices would determine the legal and cash outcome. A simple exit model cannot decide who must cover a deficit.

Check Selling Costs, Debt, and Remaining Cash

A cap rate sensitivity can be mathematically correct and still omit a large cash item. Check the path from price to owner proceeds before debating the rate's second decimal place.

At the 6% reference rate, the property price is $30 million. Change only the percentage selling cost from 3% to 4%, and the cost rises by $300,000. Terminal cash drops from $13.4 million to $13.1 million. Maya's 2% share drops by $6,000.

That change is separate from the cap rate rows. Do not add it to every row unless the revised table clearly says that the selling cost is now 4%. The SEC's fees bulletin distinguishes transaction and ongoing charges and explains that costs reduce investment results. The actual offering and transaction documents are needed to identify the applicable charges. SEC fees and expenses bulletin.

Next, change only the payoff from $16 million to $17 million. Terminal cash becomes $12.4 million, a $1 million decline. Do not use the original $18 million loan balance when a supported sale-date balance is available, or use an expected lower balance without checking how principal will be paid.

A debt balance and a payoff quote may also cover different items. The amount required to close can include costs beyond outstanding principal. Our model excludes those extra charges. A real review should obtain the relevant terms and identify the assumed payoff date.

Finally, suppose $200,000 of the stated $500,000 cash must remain restricted and is not available at closing. In that separate branch, available cash is $300,000, and terminal cash becomes $13.2 million. The owner's money at closing falls by $200,000 even though the property price does not change.

Restricted money might later be released, used for a claim, or remain unavailable. Do not count it as a same-day payment without support. A later release belongs on its own date and depends on its own conditions.

These three branches are alternatives, not a combined stress case. A combined version could be useful, but it would need an explicit new assumption set. Otherwise, readers can accidentally subtract the same changed cost twice while moving between tables.

Keep the Exit Date and Investor Rights in View

A sale price is only one part of an exit. The model also assumes a sale occurs, the required parties can close, and the owners receive cash under the stated rights. A property sale estimate alone does not establish any of those facts.

Suppose Stonehaven sells one year later at the same price, with the same payoff and available cash. If it also pays one additional $480,000 annual distribution, total modeled cash rises from $15.8 million to $16.28 million. Those are new assumptions: the extra year does not automatically leave the debt and cash balances unchanged.

The higher total does not, by itself, prove a higher annual return. Owners waited longer for the terminal payment. A dated return calculation would need the full revised payment schedule. This article keeps that timing question separate from the cap rate sensitivity instead of assigning an annual rate to undated totals.

A later sale might also require more operating cash, new loan terms, or a different income estimate. Do not change only the table's year label while leaving every affected line untouched. Record the dependencies and obtain the evidence needed for the new path.

The SEC describes private placements as illiquid and warns that resale can be difficult. That general risk is relevant when a modeled exit date becomes a household spending assumption. It does not establish a right to sell a specific DST interest or a buyer's willingness to pay the modeled property value. SEC private-placement bulletin.

Also check what the investor is expected to receive. Our model assumes cash distributed in direct proportion to equal economic interests. A transaction involving units, a holdback, different classes, or a separate payment order needs its own analysis. The 2% multiplication used for Maya is a premise of this example, not a rule for all trusts.

Review a Changed Exit Illustration

Imagine an updated Stonehaven worksheet changes the exit cap rate from 6.5% to 6%. Everything else remains the same. The revised terminal cash rises from about $11.162 million to $13.4 million, an increase of about $2.238 million.

That improvement comes entirely from the pricing assumption. No new lease was signed in this example, no additional rent was collected, and no debt was repaid between the two versions. A reviewer should label it an assumption-driven model change.

Now imagine the author says the lower rate reflects a new comparable sale. Ask which property sold, when, and what income definition supports its rate. Review the reported price and any terms that might affect the comparison. A named transaction can be useful evidence without being a direct match.

Keep the prior model. Record the changed input, source, reason, and date. Then rerun the earlier rate using the new model's other inputs. That separates the effect of the rate from any changes in income, costs, or debt that arrived at the same time.

If evidence supports several reasonable interpretations, show the competing versions and their limits. Do not average rates simply to remove a disagreement. A disagreement about the correct income period may need a different model, not a midpoint rate.

This process improves traceability. It does not certify that a selected rate is correct. The SEC's performance bulletin notes that targets and projections are hypothetical and encourages readers to understand the method. The same discipline applies when a revised illustration looks better than its earlier version. SEC Performance Claims bulletin.

Turn the Sensitivity Table Into Specific Questions

A useful review ends with questions tied to the rows that matter. Start with the income input: what period does it cover, what work must be done to achieve it, and which costs are included? Ask for the schedule that connects current operations to the selected exit-year figure.

Next, ask how the cap rate range was chosen. The answer should identify evidence and judgment separately. An assumed rate, an observed transaction rate, and a rate adjusted for property differences are different kinds of inputs.

Then trace the closing deductions. Confirm the sale fee base, separate costs, date-specific debt payoff, and cash available to owners. Read the actual payment order before applying an investor percentage. Identify any amount whose availability remains conditional.

Finally, state what the table cannot answer. Stonehaven's table does not assign probabilities, test every risk, calculate taxes, establish liquidity, or approve a household investment plan. Its useful result is specific: it shows how chosen exit assumptions move the modeled cash remaining for owners.

FAQ

Does a higher exit cap rate improve Delaware Statutory Trust returns?

With the same positive annual NOI, a higher cap rate lowers the modeled property price. In the Stonehaven example, it also lowers owner proceeds because the price falls while debt and fixed costs stay in place. Other assumptions can change at the same time, so inspect the complete model before attributing an actual outcome to one input.

Is the exit cap rate the same as the investor's annual return?

No. It is a property pricing input applied to annual NOI. An investor's result depends on contributions, distributions, costs, sale proceeds, and timing. A 6% exit cap rate does not promise a 6% distribution or a 6% annual investment return.

Should I always use a higher exit rate than the purchase rate?

This article does not prescribe a fixed spread. A credible comparison needs matching income definitions and evidence about the property and relevant dates. A higher assumed exit rate may be one stress test, but its usefulness depends on the rest of the model and the limits disclosed beside it.

Does a sensitivity table show the odds of losing money?

No. The tables here apply selected inputs without assigning probabilities. Five rows do not mean each outcome has a one-in-five chance. Estimating likelihood would require a separate method and evidence, and even that estimate would have limits.

Can income growth offset a higher exit cap rate?

It can in a model, but the size of both changes matters. Keeping Stonehaven's $30 million price while moving from 6% to 7% requires NOI to rise from $1.8 million to $2.1 million. The costs and feasibility of reaching that income would still need review.

Why can the sale payment be below my investment while total cash is above it?

You may have received earlier payments. In the 6.5% Stonehaven row, terminal owner cash is below original equity, but adding the prior $2.4 million takes total cash above it. That comparison is before taxes, outside costs, and the value of waiting; it is not a promise that principal was protected.

What should I request if an exit model looks unusually strong?

Request the NOI schedule, rate support, closing-cost assumptions, debt payoff, remaining-cash schedule, investor payment rights, and dated distribution model. Ask which inputs changed from the earlier version. Those records let a reviewer identify the source of the modeled result instead of relying on the final percentage alone.

About Sequoia Research

Sequoia Research, LLC provides independent research on DSTs and other real estate investment offerings. This educational library helps readers trace claims, compare evidence, and identify questions that need further review.

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