Yield on Cost Analysis Information
Yield on cost (YOC) is calculated as: Stabilized NOI ÷ Total Development Cost. For example, if a development costs $10 million and the projected stabilized NOI is $800,000, the YOC is 8%. This metric is compared to the market cap rate for similar existing properties: if comparable stabilized properties sell at a 6% cap rate, the developer creates 200 basis points of value by developing (the YOC of 8% exceeds the market cap rate of 6%). The total development cost includes: land acquisition, hard construction costs, soft costs (architecture, engineering, permits, and legal), financing costs (interest during construction), and lease-up costs (marketing, tenant improvements, and leasing commissions).
Florida Legal Definition
Yield on cost analysis is a financial metric not directly governed by Florida law. However, it is relevant to: property tax assessment (under §193.011, the property appraiser may assess newly constructed property based on the development cost approach; the YOC analysis helps the developer evaluate the assessment), development financing (lenders evaluate YOC to assess the feasibility of the project and the developer's return), and impact fee analysis (the development cost, including impact fees, affects the YOC; higher impact fees reduce the return).
How It's Used in Practice
In practice, attorneys advise developers on YOC analysis in feasibility evaluation and financing. The attorney: reviews the development pro forma for YOC calculation accuracy, evaluates the total development cost (ensuring all costs are captured: land, hard costs, soft costs, financing, and lease-up), assesses the NOI assumptions (rental rates, vacancy, and operating expenses), compares the YOC to the market cap rate (determining whether development creates value), advises on strategies to improve YOC (reducing development costs through value engineering, obtaining incentives, or reducing impact fees), and structures the financing to optimize returns (the weighted average cost of capital should be below the YOC for the project to create equity value).
Key Takeaways
- YOC = Stabilized NOI ÷ Total Development Cost.
- Compare to market cap rate: development creates value if YOC > cap rate.
- Total cost includes: land, hard costs, soft costs, financing, and lease-up.
- Higher YOC = better return relative to buying an existing property.
- Improve YOC: reduce costs, obtain incentives, or reduce impact fees.
Disclaimer: The information and opinions provided are for general educational, informational or entertainment purposes only and should not be construed as legal advice or a substitute for consultation with a qualified attorney. Any information that you read does not create an attorney–client relationship with Barnes Walker, Goethe, Perron, Shea & Johnson, PLLC, or any of its attorneys. Because laws, regulations, and court interpretations may change over time, the definitions and explanations provided here may not reflect the most current legal standards. The application of law varies depending on your particular facts and jurisdiction. For advice regarding your specific situation, please contact one of our Florida attorneys for personalized guidance.
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