Development spread question
To my understanding, one wants at least a 100-200 basis point spread depending on the market between first-year ROC and market caps when contemplating a new development. What does it mean if I am able to get to a 20%+ IRR on a five-year hold if the development spread is only between 20-100 basis points?
I am currently working on a deal where a similar dynamic is happening. For us, the difference was in the growth assumptions. Aggressive rent growth in the first few years of the proforma and minimal cap rate expansion assumptions.
Bingo
agreed on the above comment. in the equation you mentioned, breaking it down...the development cost is really only the fixed variable. Other driving factors would be the NOI and cap rate...again assuming the cost is fixed your NOI is really the driving factor for identifying that dynamic. Thus, any changes in your growth rates (as mentioned above) depending on your expense ratio can start to have a real impact. Basically, break down your proforma assumptions that drive your NOI and likely there is a variable there that is causing this outcome.
Whats your market cap rate and leverage assumptions?
What is your return on cost in the terminal year? My guess is much larger than 20-100 bps
It probably means a high degree of positive leverage is being utilized and revenue growth is high throughout the hol... Assuming this is project XIRR? What is total LTC including all debt?
75% LTC, 5 basis point cap expansion per year, and 3% matched rent and expense growth.
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