how do we measure cap rate for a build to suit development and should we consider cr as more crucial than irr?

We develop BTS for 3PL's ( 3rd party logistic) companies. We have a high IRR expectation but at the same time i am keen to understand how does the Cap Rate come to play in our case. We neither buying nor selling but developing for long term recurrent income with an intend to spin off to REIT Funds after 10 years.
In Leasing Property - Asked by Luis M. - Nov 12, 2015
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William R. H.
Corona Del Mar, CA

Your IRR computation requires assumptions regarding the initial investment cost and spin off price. If the initial investment cost is "market value", your high IRR expectation will require a corresponding high level of appreciation over the 10 year hold. If your initial investment is the BTS cost (land + development cost) and is below "market value", a high level of appreciation may not be required to achieve you IRR expectation. The cap rate can be used to measure both "market value" and the spin off price. Both market value and spin off price should reflect cap rates derived from competitive property investments.
Since you are not buying or selling, the IRR is likely the more crucial to your investment criteria. However, as noted above, the IRR computation incorporates assumptions directly related to cap rates.

Nov 15, 2015
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Timothy C.
Chesapeake, VA

Do a Top Down approach. Assume property is fully developed, what would be acceptable rents and cap rate pricing, then remove improvement costs, then development costs (include soft costs and developer margins). then you can figure pricing.

Nov 17, 2015
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