Financial Modeling Question
Came across a model the other day that, essentially, had (Sales Cap Rate - Yield on Cost) / Sales Cap Rate. This was labeled value creation. It was fairly close to my project-level IRR. Would appreciate any advice regarding why that is and what it could mean.
[{"id": "exmk57c", "text": "The difference between the return on cost and the exit cap is your spread that you are trying to achieve. The spread in basis points is basically your profit. Divide that spread by the exit cap gets you the % of profit you made. Hope this helps\n\nLet\u2019s say you are building a Starbucks and the total project costs are $1.75mm and that Starbucks will pay you $100k in rent a year. Your return on cost is 5.71%. \n\nNow let\u2019s say you want to sell it at a 5.25% cap rate. The difference between your forward looking return or return on cost and the exit cap rate you are selling it at is .0046 or 46 bps. This is the spread. Take that .0046 divided by your exit cap of .0525 and you get 8.76%, which is essentially your profit. Take your original project costs of $1.75mm and grow it by 8.76% and you get $1,903,300. This is your sale price at a 5.25% cap rate. The rent is still $100k. The difference between the sell price and the total project cost is $153,300 which was the value created.", "replies": [], "depth": 1}]