James Scheidt is looking at a free-standing retail center that is subject to a triple net lease to DrugSmart. The property’s lease payment for the first three years is $250,000 per year. In lieu of percentage rent, the rent contractually increase 2% per year starting in year-four. James investment period is five years and he intends to sell the property at market rate pricing at the end of year-five. The market requires a real rate of return of 7% on similar real estate investments.

Assuming that there is no vacancy or credit risk associated with expected NOI stream, what is the terminal cap rate (associated with year 6 NOI) for the property?