Alternative

Question 1

What is Earn-Out?

Answer 1

Earn-outs are typically used in venture capital investments where the acquisition price paid for portfolio companies by private equity firms is tied to the companies’ future performance.

Question 2

Ratchet

Answer 2

Ratchet is a contract term that specifies the allocation of equity between management and shareholders.

Question 3

Terminal Cap Rate

Answer 3

the terminal value is just the present value of the NOI received by the next investor
The terminal cap rate could be higher if interest rates are expected to increase in the future or if the growth rate is projected to be lower because the property would then be older and might be less competitive. Also, uncertainty about future NOI may result in a higher terminal cap rate. The terminal cap rate could be lower if interest rates are expected to be lower or if rental income growth is projected to be higher. These relationships are easily mastered using the formula presented earlier (cap rate = discount rate − growth rate).