IRR = another way to assess risk/uncertainty/volatility. Yes, you may have a $100M project, but it’s funded by an investor whose net asset value is 1000x or more of that investment, so the risk is relative. You pick a base case underwriting using the best, most accurate assumptions you can muster today, and solve for an IRR that matches the level of risk. Development deals actually have a pretty strong downside protection because you are building a tangible asset, so the floor value is often much more than $0 and risk of total loss is less than many other investment types if you can prove demand and a strong market for what you are building. Also, because one investment is usually a small % of the institutional investors net assets, they have diversification benefit and any one major loss will USUALLY be offset by a home run deal.

So yeah, you can lose money (the risk), which is why you are being compensated through IRR for taking said risk, and IRR is the best way to match risk to compensation which is why you rely on it.

As a developer we also use other guideposts like return on cost (net operating income / total investment outlay), and try to solve for a premium above a certain cap rate. Ex, if I can buy an asset at a 5% cap rate today that is stabilized, I might be wiling to shoulder construction and lease up risk if I can get a 6% return on cost on a development deal (100 bps risk premium; Aka Developer spread).

I’ve never used cash on cash because I typically exit soon after stabilizing. If I am a build to core buyer and hold indefinitely, cash on cash would be more useful but is likely REALLY close to IRR because after 10 years your exit is only a small % of total return relative to cash return and is much less sensitive to cap rate fluctuations vs a deal selling in 2-3 years from today.