Yield on Cost - Condo Development
Hi all,
Since Yield on Cost is calculated by stabilized net operating income, is it normal or typical to calculate Yield on Cost for a mixed use building that sells condos and has retail? If so, what would you use to calculate because the NOI is so minor in comparison to the bulk of the profit from the condo sales.
Thanks!
Equity multiple. IRR and YoC aren’t really helpful metrics because the goal is to build and sell the condos as quickly as possible. It isn’t a cash flowing asset.
Agree that margin on cost and equity multiple are your main drivers for condo, but disagree that IRR is useless. Any institutional partner will still use IRR as a driving metric for condos.
@OP regarding YoC on a mixed use development with condos, but you would have to allocate/separate the non-condo costs and use those with NOI.
For any analysis, then how would you calculate development spread if you can't really calculate the yield on cost for mixed use?
Additionally, if I used yield on cost to calculate back into the land of a rental building, then what metric could I use to back into the land of a condo?
You wouldn’t use a development spread. That metric is just a measure of profit anyways, so if you can already look at profit margin or margin on cost then why are you worried about it?
You can use literally any metric to back into land value. IRR is most common, but you can also use equity multiple, total profit, whatever.
Also you 100% can calculate a development yield for mixed use, just not for the condo component. Just look at it for the other functions. You should be looking at mixed use in its individual components anyways before you do a roll up to consolidated PF.
For any analysis, then how would you calculate development spread if you can’t really calculate the yield on cost for mixed use?
Additionally, if I used yield on cost to calculate back into the land of a rental building, then what metric could I use to back into the land of a condo?
You would have to treat them as separate business units. All hard and soft costs belonging to either condo or retail have to be separated. Where it gets tricky is allocating the appropriate land costs, I would do it as a percentage of the total sqft that each business unit is built on. If it is a podium style building I would use the GBA for each business unit.
For condos, I've always used profit margin. So what's my net profit (after deducting selling costs and total build costs) divided by my gross sellout. As an example, I think the total sellout of my condo development is $40M and it cost me $25M to build. I expect total selling costs to be 6%. So my profit margin would be ($40M*(1-6%)-$25M)/$40M, or 31.5%. Rule of thumb is you want a profit margin of 20%+ for condos, 15%+ for townhomes, and 10%+ for single-family homes. The problem with using equity multiples is that those can be juiced with additional leverage, which gives the appearance of a better deal when in reality you are increasing returns through additional risk. That being said, equity multiples are a good reference point for your returns since condo pro forma IRR's always look pretty high relative to other asset classes. I've seen a lot of deals where a developer is touting an amazing IRR, but when you look at the equity multiple your sort of scratch your head why anyone would want to do that deal.
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