Yield on Cost
Yield on cost is the projected stabilized NOI divided by the total development or renovation cost, used by developers and value-add investors to measure the return generated relative to what was spent creating or improving the asset.
Understanding Yield on Cost
Yield on cost is the projected stabilized NOI divided by the total development or renovation cost, used by developers and value-add investors to measure the return generated relative to what was spent creating or improving the asset. For example, if a developer spends $10 million building a NNN property that will generate $800,000 in stabilized NOI, the yield on cost is 8%. This metric is compared to prevailing market cap rates to determine the 'development spread' - the premium earned for taking development risk. A yield on cost of 8% versus a 6% market cap rate represents a 200 basis point spread, implying $3.3 million in value creation on day one of stabilization. Yield on cost is the primary metric developers use to decide whether a project is worth the risk, time, and capital required.
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Frequently Asked Questions
What is Yield on Cost in commercial real estate?
Yield on cost is the projected stabilized NOI divided by the total development or renovation cost, used by developers and value-add investors to measure the return generated relative to what was spent creating or improving the asset.
Why is Yield on Cost important for NNN investors?
Yield on Cost is a key concept that affects property valuation, financing decisions, and investment returns in the triple net lease market. Understanding Yield on Cost helps investors make informed acquisition and management decisions.
How does Yield on Cost affect property value?
Yield on Cost directly influences how commercial properties are valued, financed, and traded. Changes in Yield on Cost can impact cap rates, NOI calculations, and overall investment performance for net lease properties.
Where can I learn more about Yield on Cost?
NNN Triple Net's Learning Center offers practical guides covering Yield on Cost and related CRE concepts. Visit the glossary for related terms and explore our calculators for practical application.