Yield on cost calculator.
Yield on cost is the developer’s and value-add investor’s yardstick: stabilized NOI over everything you spend to get there. Compared to the market cap rate, the gap — the “development spread” — is the reward for the risk.
Measuring created value
Yield on cost is the developer’s and value-add investor’s yardstick: stabilized NOI divided by everything you spend to get there — purchase, hard costs, soft costs, and carry. Compared to the market cap rate you would sell at, the gap is the development spread, and it is the reward for taking on construction and lease-up risk.
Example. Spend $2,900,000 all-in and stabilize at $210,000 of NOI, and your yield on cost is about 7.2%. If the market cap rate for the finished asset is 6.5%, your development spread is only 70 basis points — thin. Trim costs or lift rents until yield on cost clears roughly 8% and the spread widens into territory that actually pays for the risk.
Frequently asked questions
Is the development spread real?
Yield on cost only beats buying if the spread survives the build. Send me the site and the budget and I'll test it against what finished product is actually trading at.
Estimates are for planning only and use simplified assumptions — not tax, legal, or investment advice. Verify with your lender, CPA, and a full broker analysis before acting.
The spread only counts if it survives the build
Yield on cost is stabilised NOI divided by total project cost. Compared against the cap rate finished product trades at, the difference is the development spread — the compensation for taking construction and lease-up risk instead of buying something already working.
The spread is measured at the start and earned at the end, and everything in between can erode it. Construction costs rise, the schedule slips, lease-up takes longer than modelled, and the exit cap rate widens while you build. A spread that looked comfortable at underwriting can be gone by delivery without anything unusual happening.
What to test before committing
Run the yield on cost with a contingency you would actually believe, a lease-up period longer than the optimistic case, and an exit cap rate wider than today's. If the spread survives all three, it is real. If it only exists in the base case, you are being paid nothing for the risk.
Then check the land basis, because that is the one input you control by not overpaying. Across the tri-county commercial roll, land is assessed above the improvement on about 41% of parcels — a reminder that what a site is worth to a developer and what a building on it is worth are different questions.
Common questions
What is a good development spread?
There is no fixed number; it depends on asset type, construction duration and how much risk the project carries. What matters is whether the spread survives a realistic contingency, a longer lease-up and a wider exit cap rate.
What is the difference between yield on cost and cap rate?
Yield on cost divides stabilised income by what the project cost you to create. A cap rate divides income by what a building costs to buy. The gap between them is the development spread.
What erodes the spread most?
Construction cost overruns and schedule slippage, followed by slower lease-up and a wider exit cap rate at delivery. Each is ordinary rather than exceptional, which is why the base case alone is not a test.
Tools: deal analyzer · DSCR · IRR · all calculators · Justin Crow, South Florida commercial broker