Yield on Cost: Development Analysis
Yield on cost (YOC): projected stabilized NOI / total development cost. Example: $800K NOI / $1M cost = 8%. Used to: evaluate feasibility, compare opportunities, and measure value creation. Value created when YOC > market cap rate. Example: 8% YOC, 6% cap = $1.3M value on $1M cost ($3.3M created). Target: 100-200 bps above cap. FL factors: construction costs (labor/materials), land (premium locations), insurance, impact fees, entitlement risk, and lease-up period. Carefully project all costs.
What It Is
- NOI / development cost
- Value creation metric
- 100-200 bps target spread
vs. Cap Rate
- YOC: developer return
- Cap: investor return
- YOC > cap = value created
FL Factors
- Construction, land, insurance
- Impact fees, entitlement
- Lease-up period
Related Terms
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Reviewed by the attorneys at Barnes Walker, Goethe, Shea & Robinson, PLLC