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 the sale price, Exit cap rate sensitivity step
- Exit, rows 16–19: Forward NOI at the sale, Sale price: forward NOI / exit cap rate, Selling costs, Net sale proceeds
- Returns, rows 6–7: Owned through the sale (1), Unlevered cash flow: NOI less cost, plus the sale
- Returns, rows 10–13: Permanent loan outstanding in the quarter (1), 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 (forward at the refinance), Yield on cost: stabilised NOI / total cost, Development spread: yield on cost less the exit cap rate…
- Returns, rows 27–29: Sale price at the exit cap less one step, Sale price at the exit cap plus one step, Development spread at the exit cap plus one step
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.