In one sentence
The difference between a project's yield on cost and the market cap rate, measuring the value creation in a development.
The longer version
Development spread, sometimes called the developer's margin, is yield on cost minus the exit cap rate. A wider spread means the completed project is worth meaningfully more than it cost, the reward for development risk.
Lenders use the spread to test whether a construction or value-add business plan has enough cushion to absorb cost overruns and market shifts.
Common questions
- What is development spread?
- The difference between a project's yield on cost and the market cap rate for comparable stabilized property, measuring the value created by building.
- What is a good development spread?
- It depends on risk and market, but the spread must be wide enough to compensate for construction, lease-up and market risk.
- Why do lenders look at development spread?
- Because a thin spread leaves little cushion. If costs rise or cap rates move up, the project's completed value may not cover the loan.
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