Free calculator · Real Estate
Development Spread
Calculates yield-on-cost, the development spread over the market cap rate, and the value created by building rather than buying. Inputs are land, hard, soft, and financing costs, the stabilized NOI, the market cap rate, and a required spread hurdle.
Interactive Tool
Development Spread
Total development cost
Stabilized economics
Your turn
Underwrite whether building this asset beats buying one, and quantify the value the development creates.
The development budget is $5,000,000 of land, $16,000,000 of hard costs, $3,000,000 of soft costs, and $1,000,000 of capitalized financing costs. At stabilization the property is projected to produce $1,500,000 of NOI, and comparable stabilized assets trade at a 5.00% cap rate.
The investment committee wants at least 150 basis points of spread before it will approve a ground-up deal.
Stabilized NOI over everything it takes to deliver the building. Within 0.05% counts as correct.
In basis points, yield on cost less the market cap rate. Within 5 bps counts as correct.
Stabilized value less total development cost. Within $100,000 counts as correct.
Learn the concept
This calculator comes from the free Real Estate Finance course, where the concept is taught with readings, worked examples, and practice questions.
Built by Devon Coombs, CPA, MBA, Teaching Professor of Finance at Santa Clara University.