What Is Yield on Cost?
Yield on cost — also called return on cost, unlevered yield on cost, or untrended return on cost — measures a development or value-add project's projected stabilized net operating income against its total project cost (land, hard costs, soft costs, and financing).
Formula
Yield on Cost = Stabilized NOI ÷ Total Project Cost × 100
Example
A ground-up development projected to generate $800,000 in stabilized NOI on a $12 million total cost has an 6.7% yield on cost.
Why It Matters
Developers compare yield on cost against the market's going-in cap rate for stabilized, similar assets — a healthy spread between the two (the "development spread") is what justifies taking on construction and lease-up risk instead of just buying a finished asset.