What is the difference between the market cap rate and yield-on-cost (YOC) called?

What is the difference between the market cap rate and yield-on-cost (YOC) called?

• A. Cap rate difference
• B. Development spread
• C. Yield spread
• D. Profit margin

Answer: (B)

The question tests the term used for the gap between what the market implies as a stabilized yield (the cap rate) and the yield implied by the cost to develop (yield-on-cost). The market cap rate compares stabilized net operating income to price, while yield-on-cost compares stabilized NOI to total development cost. The difference between these two yields is called the development spread. This spread captures the additional return investors expect to compensate for development risk, timing, and capital outlay versus buying an already stabilized asset at market prices. A larger development spread suggests more cushion for development risk, while a smaller spread signals tighter economics. Other terms like cap rate difference or yield spread are less precise in this development context, and profit margin describes profitability rather than the yield gap between development cost and market pricing.

The question tests the term used for the gap between what the market implies as a stabilized yield (the cap rate) and the yield implied by the cost to develop (yield-on-cost). The market cap rate compares stabilized net operating income to price, while yield-on-cost compares stabilized NOI to total development cost. The difference between these two yields is called the development spread. This spread captures the additional return investors expect to compensate for development risk, timing, and capital outlay versus buying an already stabilized asset at market prices. A larger development spread suggests more cushion for development risk, while a smaller spread signals tighter economics. Other terms like cap rate difference or yield spread are less precise in this development context, and profit margin describes profitability rather than the yield gap between development cost and market pricing.