Curious how everyone looks at yield on cost..do you look at unlevered yield on cost, levered yield on cost? Both?
Also, would love to hear what people include in the yield on cost calculation. For example, if you have a 10 year deal, and your projections show you can pay general capex and/or capital reserves via cash flow, does that go into your yield on cost calc?
I’ve seen it done every which way to Sunday and thought I would see what everyone else does.
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For us,
Yield on Cost = Yearly NOI Cash Flow/ (Acq + Capital Program)
We also provide Free Cash Flow YOC, which = (Yearly NOI Cash Flow - Reserves)/ (Acq + Capital Program)
We’ll also typically breakout each of the above to YOC for the acquisition, and YOC for the total project.
Always interesting to see how people do it. For the total project YOC, do you include financing costs in that value?
Would love to know the YOC margin / spread over stabilized cap rates you guys are solving for.
We solve for an untrended 100-150 over cap rates today.
What asset class? Would think multifamily / industrial would be tighter than Office / Retail / Hospitality
build to a 10, sell at a 9 for 11% value creation
Can you explain this? Does trended yield on cost not equal your stabilized cap rate in the year of stabilization? Would appreciate the help
Untrended yield on cost assumes what the yield would be today. Let’s say you buy an apartment building for $100. NOI is $5. After investing $10 into the building, the NOI is $7.15. So it’s a 6.5% YOC.
Trended is, let’s say it’ll take two years to do the work and market rent growth is 3% per year. So instead, the NOI due to market rent growth is $7.58. (For ease of this example I grew $7.15 by 3%, twice). So the trended yield on cost is 6.89%.
By you saying the stabilized cap rate I ask back - should I include capital costs? Or is cap rate on purchase price only? Yield on cost implies purchase price plus capital costs.
NOI (including CAPEX reserves) / Total Cost of Project
Have been at 3-4 different shops both public/private and all of them were stabilized untrended NOI/true project costs to achieve C of O (inclusive of financing costs for construction loan, but no capex/no refi financing costs). A lot of developers got squeezed on the spread to spot exit cap rates pre-COVID, but especially in the multi/industrial sectors, cap rate are now compressing so much that we are back up in the 200 bps range in many cases.
Ricky Rosay when you say no capex factored into the equation, you mean if the project takes 48 months to stabilize, you looked at the yield on cost as the total cost up until that point, even if you were going to hold the asset for 120 months and have capex items going into the building in month 72, for example?
I'm talking generally about YOC on ground up development deals. On those, the only carry costs that are factored into the capitalized budget for purposes of total cost basis calculation is a small operating deficit for the negative CF balance you run the first ~6 months during lease-up. It would be interesting, but is just not typical, to include cost of carry on equity or something like that as a project expense.
Per AVB's just-released Q3 earnings data, their new MFR developments are averaging around 6.0% ROC and 3.9% stabilized cap rate. So, a 210 bps spread.
5.0 YOC is the new 6.5
This. Especially in established/hot markets. Centrally located class A multi is so so hard to find yield on nowadays. Whether development or acquisitions.
We look at it as NOI / (Total Project or Acquisition Costs + Additional Equity Injected) - the additional equity injected excludes principal paydown on financing, just hard cash equity needed to fund capital improvements. CAPEX is funded first through operating cash flow, then any deficit is covered by calling additional equity. We do not account for any portion paid by operating CFs in RoC.
So our stabilized RoC would be NOI/Project Costs on a new development, but we look at it on an annualized basis from there on out if there's a planned hold period, so any future operating deficit funded by equity increases the denominator in the relevant year and any year thereafter.
should not be NOI / total equity. that is incredibly confusing for the inexperienced guys reading this. should be NOI / (total debt&equity)
Sorry, wrote that absent-mindedly you're right, it's total costs (acquisition or project) + additional equity injected after construction/acquisition. Edited.
NOI/Total Project Costs incl. Financing Fees etc.
Yr1 Base rent PSF / Basis PSF
^That
Love lurking around year-old topics and coming across a post that cracks me up.
Anyone seeing YOC in the 6's these days? I only see stuff in the low 5's
So if there is not incentive to develop, what is everyone doing? How are your teams going to keep the lights on?
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