Development Yield

Also referred to as a project’s Yield-on-Cost, Development Yield is calculated as a development’s net operating income (or sometimes cash flow from operations) at stabilization divided by the total project cost.

Net Operating Income at Stabilization ÷ Project Cost

The net operating income at stabilization may be calculated with (trended) or without (untrended) income and expense grow assumptions.

Putting ‘Development Yield’ in Context

Consider the development of ‘Riverfront Lofts’, a 175-unit mid-rise apartment project located along the scenic Colorado River in Austin, Texas. This project, managed by Clearwater Real Estate Development, focuses exclusively on residential units, emphasizing luxury living and accessibility.

• Location: Austin, Texas
• Development Name: Riverfront Lofts
• Developer: Clearwater Real Estate Development
• Total Project Cost: $45 million
• Units: 175 luxury apartments

Upon stabilization, Riverfront Lofts is expected to generate a Net Operating Income (NOI) of $3.6 million annually on a trended basis. Calculating the trended Development Yield (i.e. Yield-on-Cost):

• Development Yield = NOI at Stabilization ÷ Total Project Cost = $3.6 million ÷ $45 million = 8%

This trended yield provides a direct measurement of the project’s financial performance based solely on the actual cost to develop, rather than the market value. For Clearwater Real Estate Development, comparing this 8% trended development yield to the current market cap rate of 6% in Austin for similar residential projects reveals a favorable trended development spread of 2%. This generally signifies a strong investment opportunity.