Full Definition
Yield on Cost is the key metric for development deals. It equals Stabilized NOI / Total Development Cost. If the market cap rate for similar stabilized properties is 6% and your yield on cost is 7.5%, you've created 150 basis points of development spread — your profit margin.
Example
A development with $150K stabilized NOI and $2M total cost has a 7.5% yield on cost. If the market cap rate is 6%, the disposition value is $2.5M — creating $500K of development profit.
Related Terms
Cap Rate (Capitalization Rate)
The ratio of a property's Net Operating Income to its purchase price, expressed as a percentage. The primary metric for comparing commercial real estate investments.
NOI (Net Operating Income)
Annual income from a property after deducting operating expenses — before debt service, taxes, and capital expenditures.
Development Spread
The difference between a development project's yield on cost and the market cap rate. The profit margin of ground-up CRE development.