Development yield is the ratio of a project's forecasted stabilized net operating income to its total development cost, covering land, hard construction costs, soft costs, and carry during the build period. It functions much like yield on cost but applies specifically to ground-up construction rather than acquisitions of existing buildings, where much of the cost basis is locked in before a single tenant signs a lease.
Because development carries entitlement, construction, and lease-up risk that a completed asset does not, sponsors generally underwrite to a development yield that sits well above the cap rate they expect to achieve upon stabilization or sale. That gap, sometimes called the development spread, is meant to reward investors for the additional uncertainty and longer hold period inherent in building new supply rather than buying existing income-producing property.
Further reading: How Preferred Return Works in Real Estate Syndications
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