Yield on cost is the developer's version of a cap rate: stabilized NOI divided by everything the project costs to build.
The number on its own means little. The spread between yield on cost and the market cap rate is where development profit lives, and it is the first thing we check on any deal we build.
Yield on Cost
7.00%
Development Spread
150 bps
Developers typically target 150 to 200 bps
Value at Market Cap
$12.7M
Profit on Cost
$2.73M
Margin
27.3%
What it costs vs. what it's worth
What this means
Yield on cost is the developer's cap rate: stabilized income over what the project actually costs. The spread against the market cap rate is the margin for taking construction and lease-up risk. Build to a 7 in a 5.5 market and the day-one value exceeds the budget. Build to a 5.5 in a 5.5 market and you took years of risk to buy yourself a market-rate deal.
Want to see how we apply this?
This is the math behind every deal we underwrite.