Development returns and spread
Yield on cost, development spread, profit on cost, IRR.
By Surojit Chakraverti, founder of L3VLUP and an investor running a long-short healthcare and technology equities strategy.
On this subject: development returns and spread.Updated 2 October 2026
Part of real estate models, with the models, labs and guides around it.
What it does
How a development is judged. Yield on cost is stabilised NOI over total development cost including capitalised interest; the development spread is that yield less the cap rate the building would sell at, the margin that pays for construction, leasing and market risk; profit on cost is value less cost over cost. The quarterly unlevered and levered cash flows give IRRs, annualised, and the equity multiple, with a sensitivity to the exit cap rate.
Where it lives
The same schedule in each model that carries it, with the rows to open. Open a model in the browser, go to the sheet, and click the lines.
- Assumptions, rows 38–40: Exit cap rate, Selling costs, % of sale price, Exit cap rate sensitivity increment
- Exit, rows 16–19: Forward NOI at sale, Gross sale price, Selling costs, Net sale proceeds
- Returns, rows 6–7: Ownership flag, Unlevered cash flow
- Returns, rows 10–13: Permanent loan flag, Permanent loan interest, NOI to equity after interest, Levered cash flow to equity
- Returns, rows 16–24: Total development cost including capitalised interest, Stabilised NOI, Yield on cost, Development spread…
- Returns, rows 27–29: Exit cap rate, Sale price by exit cap rate, Development spread by exit cap rate
What a reviewer looks for
- Yield on cost on cost before financing.
- A quarterly IRR quoted as annual.
- A spread measured against today’s cap rate rather than the exit cap rate.
Learn it, then build it
Vocabulary: Yield on Cost, Development Spread, Profit on Cost, Equity Multiple.