CRE Development Metrics
Development yield, also known as yield-on-cost or “going-in cap rate,” is a metric used in real estate development. It is the yield potential for a new development project and is calculated as the project’s first stabilized year net operating income (NOI) divided by the total project cost (i.e., land acquisition, construction, leasing, etc…).
Development Yield = First Stabilized Year Net Operating Income (NOI) / Total Project Cost
Once a property is stabilized and has a predictable income stream, the cap rate is the metric used to indicate the rate of return that the property is expected to generate. The cap rate can be a helpful measure for comparing the relative value of similar types of real estate investments in the market. A “trailing cap rate,” represents the NOI generated at the property during the preceding twelve-month period whereas an “initial cap rate” indicates the forecasted NOI for the first twelve months after purchase.
Cap Rate = NOI (“trailing” or “initial”) / Current Market Value or Sale Price
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Development Spread = Development Yield – Exit Cap Rate
The gross development profit margin is the expected pre-income tax profit margin.
Gross Development Profit Margin = (Development Yield / Exit Cap Rate) – 1
Last Updated on December 13, 2020 by Ramin Seddiq