What does yield-on-cost (YOC) represent?

• A. The market cap rate
• B. The return implied by total development cost at stabilization
• C. The rent per square foot
• D. The equity yield required

Answer: (B)

Yield on cost is the return you would earn on the total amount invested in developing a property once it is stabilized. It’s calculated using the stabilized net operating income as the numerator and the total development cost as the denominator. In other words, it asks: if you spend all the money to build or redevelop this project, what annual return does the stabilized income produce on that full cost?

For example, if the total development cost is $200 million and the stabilized NOI is $16 million per year, the yield on cost is 8%. This helps compare projects on a cost basis rather than on current market value.

This is different from the market cap rate, which uses the stabilized value of the property as the denominator (NOI divided by value). It’s not a rent-per-square-foot figure, which describes the level of rent itself rather than the return on investment. And it isn’t the equity yield required, which reflects an investor’s desired return on their equity given financing—it's more about the project’s yield on total cost before financing considerations.