Yield on Cost (YoC)

Definition

Yield on cost (YoC) shows the income a development or value-add project is expected to produce once it reaches stabilization relative to every dollar required to complete it. Total project cost generally includes the land or acquisition price, construction or renovation costs, soft costs, financing costs, and other capital required before the property operates normally. The numerator is stabilized NOI—the annual income remaining after operating expenses once leasing, rents, and expenses have reached their expected steady state. Unlike a cap rate, which divides NOI by the property's current market value or purchase price, YoC measures the return created by the business plan. Investors use the difference between YoC and the market cap rate for comparable stabilized properties, often called the development spread, to judge whether the project is compensating them for execution risk, time, and capital. For small bay industrial, that comparison can help an owner decide whether subdividing, renovating, or re-leasing an older flex building is likely to create enough value. YoC depends on the underwriting assumptions: a trended calculation uses future rent growth and expense inflation, while an untrended calculation holds them at today's levels. Because those assumptions can materially change the result, investors should compare projects using the same stabilization timing and methodology.

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