Development Spread vs Cash on Cash Return

Is it possible to have a development project that doesn't pencil out with a development spread, but it produces such a high cash on cash return that it still makes sense to develop and hold versus develop and sell? How do you think about this? 

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Comments (6)

Nov 23, 2021 - 11:20am

What if there is favorable financing for new construction projects. For example, suppose you could get a 90% LTV amortized over 40 years. That seems like it would product a high cash on cash return, even if there is a tiny development spread. Do developers look at both build to sell and build to rent scenarios in their calculations or just development spread?

Nov 23, 2021 - 11:37am

ROC / development spread is a better gauge for the profitability and attractiveness of an investment. You can manufacture higher cash on cash yields through higher leverage for any investment, but this is just financial engineering created by taking on more risk (leverage). Trying to make a bad development pencil by underwriting HUD financing is not a best practice IMO.

Nov 23, 2021 - 3:17pm

Some people want to monetize investments quickly, other people want to rip tax advantaged cashflow over 20-30 years. People tend to fall in the first group more when they are younger and move to the latter later in their careers (obviously this is a generalization). 

Nov 27, 2021 - 3:18pm

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