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RICS APC 2022 > Development appraisal > Flashcards

Development appraisal Flashcards

1
Q

What is a development appraisal?

A

A tool to assess the financial viability of a development scheme

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2
Q

Why are development appraisals used?

A

To assess profitability of a proposed scheme and its sensitivity to changing inputs

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3
Q

What is the difference between a development appraisal and a residual valuation?

A

Development appraisal is a tool to financially assess viability of an investment, whereas a residual valuation is a market value of the site
• Development appraisal uses client inputs
• Residual valuation uses market inputs

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4
Q

What results do development appraisals produce?

A
  • Gross Development Value
  • Net Development Value
  • Total Development Costs
  • Residual Site Value
  • Developers Profits
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5
Q

What is the difference between GDV and Residual Value?

A
  • Gross Development Value is the capital value of the completed scheme
  • Residual value is the value of the site, if total construction costs are deducted from the GDV
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6
Q

How is a development appraisal carried out?

A
  • Calculate Gross Development Value
  • Less Total Development Costs
  • = Site Value
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7
Q

What is Gross Development Value?

A

Market value of completed proposed development at a given valuation date

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8
Q

What yield is used to calculate GDV?

A

All risks yield

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9
Q

What assumptions are made to calculate GDV?

A
  • Rents
  • Yields
  • Marketing void
  • Rent free void
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10
Q

What’s included in development costs?

A
  • Site preparation (site purchase / demolition / site clearance)
  • Planning costs
  • Building costs
  • Professional fees
  • Contingency
  • Marketing costs and fees
  • Finance costs
  • Developer’s profit
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11
Q

What site preparation costs might you consider in a new site?

A
  • Demolition
  • Remediation
  • Landfill tax
  • Provision of services
  • Site clearance
  • Planning
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12
Q

What’s included in planning costs?

A
  • Section 106 payments (Town and Country Planning Act 1990)
  • Community Infrastructure Levy (CIL)
  • Affordable housing requirements for new residential development
  • Section 278 for highway works
  • Planning application and building regulation fees
  • Costs of planning consultant
  • Cost of specialist reports (e.g. Environmental Assessment)
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13
Q

What is a Section 106 agreement?

A
  • Introduced under Town and Country Planning Act 1990
  • Site specific planning obligations enforceable by LPA
  • Agreement entered into before planning consent granted
  • Negotiated on one to one basis, no fixed charging schedule
  • Contributes to cost of new schools, community facility or open space
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14
Q

What is a Community Infrastructure Levy?

A
  • Tariff based development charge used to raise funds for infrastructure necessary to support development in the area (roads and transport facilities, flood defences, medical facilities)
  • Charging schedule based on the square meter of additional floor space
  • Tariff based on size or change to the size of development based on net floor areas
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15
Q

What is needed to initiate CIL procedure?

A

Assumption of Liability Notice (ALN)

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16
Q

Can developers be doubled charged by CIL and s.106?

A

Not for the same item, but both can be levied on one developer for separate items

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17
Q

What development charge covers affordable housing?

A

Section 106

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18
Q

What is the latest legislation on CILs?

A

Community Infrastructure Levy (Amendment) Regulations 2019

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19
Q

What does the Community Infrastructure Levy (Amendment) Regulations 2019 cover?

A

Requires all local authorities in England to produce annual report on how much money has been collected from s.106 and CIL payments, and where the money has been spent

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20
Q

What are the main differences between CIL and s.106 planning obligations?

A
  • S.106 used for social housing, CIL is not
  • CIL due for all development, s.106 only justifiable if necessary to make development acceptable in planning terms
  • CIL based on charging schedule that covers whole area, s.106 is site specific
  • CIL is tariff based, s.106 is by negotiation
  • CIL charge viability is tested at district-wide level with charges mandatory, s.106 viability testing undertaken on case by case basis
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21
Q

How do you estimate build costs?

A
  • Client information (for development appraisal)
  • RICS Building Cost Information Service (BCIS)
  • Quantity Surveyor estimate
  • Building Surveyor estimate
  • Spons Architects’ and Buildings’ Price book
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22
Q

On what basis are BCIS build costs provided?

A

GIA

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23
Q

Where does the BCIS get its information?

A

QS/BS sources and recent contract prices/tenders agreed

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24
Q

What do you typically assume for professional fees?

A

10%-15% (plus VAT) of total construction costs

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25
Q

What do professional fees cover?

A
  • Architects
  • Mechanical & Engineering consultants (M&E)
  • Project managers
  • Structural engineers
  • Building surveyors
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26
Q

What is typical the largest portion of professional fees?

A

Architects fees

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27
Q

On what basis are professional fees charged?

A

As a percentage of total construction costs

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28
Q

What is a CDM Principal Designer?

A

Construction Design Management consultant

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29
Q

What is contingency?

A

Additional costs applied to account for unforeseen risks (increasing build costs)

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30
Q

What do you typically assume as a contingency cost?

A

3% - 5% of construction costs

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31
Q

How do you determine how much contingency to assume?

A

Depends upon the level of risk and likely movements of building costs

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32
Q

What do marketing costs cover?

A
  • Cost of an EPC
  • Letting fee
  • Disposal fee
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33
Q

What do you typically assume for letting fees?

A

10% of initial annual rent

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34
Q

What do you typically assume for sale fees?

A

1.5% of GDV

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35
Q

What are the methods of calculating finance costs?

A
  • LIBOR plus premium to reflect interest rate available (now SONIA)
  • Bank of England Base rate plus premium
  • Rate at which the client can borrow money
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36
Q

What are the three uses of development finance?

A
  1. Site purchase (include purchaser’s costs) – compound interest
  2. Total construction and associated costs – calculation based on S-curve taking half of costs over length of build period
  3. Holding costs to cover voids until disposal of scheme (empty rates, service charges and interest charges)
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37
Q

How is finance for site purchase calculated?

A

Straight line basis using compound interest over length of construction period

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38
Q

How is finance for the construction period calculated?

A

Assume total construction costs (including fees) over half of time period using S curve calculation

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39
Q

What is the S curve?

A
  • Principle that payment of construction costs will adopt the profile of an ‘S’ shaped curve over the construction period
  • The usual assumption is to halve the interest that would be borrowed for all the construction period
  • The S reflects when monies tend to be drawn down
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40
Q

How is finance for ongoing holding costs calculated?

A

Straight line basis using compound interest

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41
Q

What is developers profit?

A

Profit taken by the developer for the completed development

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42
Q

How is developers profit calculated or targeted?

A
  • Percentage of GDV (more common for residential)
  • Percentage of total construction costs
  • Profit on capital employed (cash-on-cash)
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43
Q

What do you typically assume as a profit target?

A

10%-20% depending on risk (higher target is development is riskier)

44
Q

What has increasing build costs done to developers profit targets?

A

Percentage of profit required has risen due to higher costs and riskier market conditions

45
Q

How do you calculate site value?

A
  • GDV (Gross Development Value)
  • Less TDC (Total Development Cost)
  • = Site value
46
Q

How do you target a developers profits?

A

Profit on costs / profit on GDV – typically 10%-20%

47
Q

How do you establish site value?

A

Total Development Costs - Gross Development Value = Residual Site Value

48
Q

What are the two main methods of development finance?

A
  1. Debt finance – lending money from bank or other funding institution
  2. Equity finance – selling shares in a company / JV partnership / own money
49
Q

What is a typical Loan to Value ratio used?

A

LTV of 60%

50
Q

What do lenders adopt in difficult markets?

A

Loan to costs (LTC) ratio – also around 60%

51
Q

How is interest calculated on debt finance?

A

Rolled-up basis (added to loan as project proceeds)

52
Q

What is senior debt?

A

First level of borrowing that takes precedence over secondary/mezzanine funding

53
Q

What is mezzanine funding?

A

Additional funding for the additional monies required over normal LTV lending

54
Q

What are swaps?

A

Form of derivative hedging rate for interest rates

55
Q

What are some other methods of arranging finance?

A
  • Joint ventures

* Forward sales (completed scheme pre-sold)

56
Q

What is an overage?

A

Arrangement to share extra receipts received over and above profits originally expected as agreed in pre-agreed formula. Also known as a ‘claw back’

57
Q

What is VAT payable on?

A

All professional fees

58
Q

What is the profit erosion period?

A

Length of time it will take for development profit to be eroded by holding charges following completion of the scheme until the profit from the scheme has been completely drawn down, due to interest charge, and the scheme is loss making

59
Q

What is sensitivity analysis?

A

Analysis of how changes in the inputs impact values

60
Q

What key variables do you conduct sensitivity analysis on?

A
  • GDV
  • Build costs
  • Finance rates
61
Q

What are the three forms of sensitivity analysis?

A
  1. Simple sensitivity analysis of key variables
  2. Scenario analysis – changing scenarios of scheme/timing/costs
  3. Monte Carlo simulation – using probability theory
62
Q

What RICS guidance is there on development property?

A

RICS Guidance Note ‘Valuation of Development Property’ 2019

63
Q

What is the key purpose of RICS Guidance Note ‘Valuation of Development Property’ 2019?

A

Supplement to International Valuation Standards (IVS) 410 ‘Development Property’

64
Q

What are the key suggestions of RICS Valuation of Development Property 2019?

A
  • Assumptions / special assumptions must be clearly stated in report
  • Market Value as basis of value
  • Market comparison approach valuations must be cross-checked against residual method
  • DCF technique best for complex / lengthy developments
  • Risk analysis via multiple scenarios changing inputs
  • Single figure should be reported
65
Q

What key legislation governs the UK planning system?

A
  • Localism Act 2011

* National Planning Policy Framework

66
Q

What are some of the planning rules and initiatives of the Localism Act 2011?

A
  • Decentralisation
  • Community rights to permit development (focus on neighbourhood planning)
  • Encourage housing development
  • Neighbourhoods benefit from CILs
  • Statutory duty for local authorities to co-operate on planning matters
  • Developers to consult local communities / take on their views
  • The Community Right to Buy scheme enables local people to develop bids and take over assets of community value
67
Q

What are the key policies of National Planning Policy Framework (NPPF)?

A
  • Balance economic growth with environmental protection
  • Streamline planning process (less red tape)
  • Planning decisions made at grass roots level
  • Promoting sustainable development
  • Return to local plan system
  • LPAs to demonstrate 5-year housing land supply
  • Local housing targets, not regional
  • Review Green Belt boundaries and protection of town centres
  • Front loading planning applications with pre-application engagement
68
Q

When was the National Planning Policy Framework (NPPF) last updated?

A

Last revised in July 2021

69
Q

What were the key changes to planning policy under NPPF 2021?

A
  • Environmental objectives (to address UN Sustainable Development Goals)
  • Design quality requirements to extend to places not just individual developments, with 30 year vision
  • Article 4 limited to when it will prevent adverse impacts or protect local amenity and wellbeing
  • Neighbourhood planning groups to consider small – medium sized sites to provide sufficient supply of homes
  • Public infrastructure (pedestrian / cycle routes) planning before planning application made
  • Sustainable transport modes should be considered
  • Emphasis on “beautiful and sustainable places”
  • Promotes tree planting
  • Plans must account for flooding risk
70
Q

What is the Planning White Paper?

A

UK government White Paper ‘Planning for the Future’ launched in August 2020

71
Q

What are some of the proposals of the Planning White Paper?

A
  • New focus on design and sustainability
  • Streamlining and modernising the planning system
  • Cutting the time taken for local plan adoption by a third
72
Q

What is the definition of development?

A

The carrying out of building, engineering, mining or other operations in, on, over or under land, or the making o any material change in the use of any buildings or land

73
Q

What are the 2 types of planning application?

A
  • Outline application – to establish the principle for development
  • Full application – for full consent
74
Q

How long does full planning permission usually last?

A

3 years from date of consent

75
Q

What is typically included in a planning application?

A
  • Copy of completed application form
  • Ownership certificate
  • Agricultural holding certificate
  • Location plan 1:1250
  • Site plan 1:500
  • Drawings 1:50
76
Q

What is the normal planning application timetable for determination?

A

8 weeks from date of validation

77
Q

What is the Local Infrastructure Tariff?

A

Proposal for a hybrid system of broad and low level Local Infrastructure Tariff that will replace s.106 and the CIL

78
Q

What are the methods of appeal against a planning decision?

A
  • Written statement
  • An informal hearing
  • Planning inquiry
  • Decision ‘called in’ for review by Secretary of State
79
Q

What RICS guidance is there covering development viability assessment?

A

RICS Professional Statement ‘Financial Viability in Planning: Conduct and Reporting’ 2019

80
Q

What does RICS Professional Statement ‘Financial Viability in Planning: Conduct and Reporting’ 2019 cover?

A

Sets out mandatory requirements on conduct and reporting in relation to Financial Viability Assessments for planning in England

81
Q

What are the mandatory requirements of RICS Professional Statement ‘Financial Viability in Planning: Conduct and Reporting’ 2019?

A
  • Practitioners must employ evidence-based judgement, collaboration, transparency and a consistent, standardised approach
  • Must include sensitivity analysis and non-technical summaries in their reports
82
Q

What RICS guidance acts as a supplement to RICS Professional Statement ‘Financial Viability in Planning: Conduct and Reporting’ 2019?

A

RICS Guidance Notes ‘Assessing viability in planning under the National Planning Policy Framework 2019 for England, 2021

83
Q

What does RICS Guidance Notes ‘Assessing viability in planning under the National Planning Policy Framework 2019 for England, 2021 cover?

A

Supplements the professional statement on planning, providing advice on the appropriate frameworks related to Financial Viability Assessment (including Red Book Global)

84
Q

What is a lawful development certificate?

A

Allows for the possibility of obtaining a statutory document confirming the use or activity named in the document is lawful

85
Q

What is a stop notice?

A

Prohibits the continuation of any activity that is set out in an enforcement notice until the enforcement notice has been complied with

86
Q

What legislation relates to use classes?

A

Town and Country Planning (Use Classes) Regulations 2020

87
Q

What type of property does class B cover?

A

Industrial

88
Q

What type of property does class C cover?

A

Residential

89
Q

What type of property does class E cover?

A

Commercial, business and service

90
Q

What type of property does class F cover?

A

Local community and learning

91
Q

What are permitted development rights?

A

Forms of development where planning permission is not required

92
Q

What do the Town and Country Planning (Use Classes) Regulations 2020 cover?

A

Overhauled the 1987 Use Classes Order, with the aim to allow businesses more flexibility in what buildings can be used for

93
Q

What was introduced under the Town and Country Planning Order 2021?

A

Permitted development class MA – the right to change the use of premises from commercial, business or service purposes to be used as a dwelling (Class E to C3)

94
Q

What are the conditions of change of use from E to C3 under class MA permitted development right?

A
  • Building must be vacant for 3 months
  • Building must have been class E for 2 years
  • Cumulative floor space to be converted cannot exceed 1,500 sq m
95
Q

What are listed buildings?

A

Buildings considered to be of national architectural or historic interest or under threat

96
Q

Under what legislation are listed buildings listed?

A

Planning (Listed Buildings and Conservation Areas) Act 1990

97
Q

What are the three grades of listed buildings?

A
  • Grade 1 (buildings of exceptional interest)
  • Grade 2* (buildings of particular importance)
  • Grade 2 (90%+ of all listings – buildings of special interest
98
Q

What are the six general principles of listing?

A
  1. Age
  2. Rarity
  3. Selectivity
  4. National interest
  5. State of repair
  6. Aesthetic merit
99
Q

What are conservation areas?

A

Areas of special architectural or historic interest, the character or appearance of which is desirable to preserve or enhance

100
Q

What are tree preservation orders?

A

Protection for trees against cutting down, lopping, damaging or destroying – LPA consent must be obtained

101
Q

Where are TPOs recorded?

A

Local Land Charge Register

102
Q

What is an environmental impact assessment?

A

Systematic process used to identify, predict and evaluate the environmental effects of proposed development action prior to permission being granted

103
Q

What are Article 4 directions?

A

Directions issued by LPAs where specific control over development is required, and restricts permitted development rights

104
Q

What are Enterprise Zones?

A

Zone that benefits from business rates discounts, tax breaks, and a simplified planning process

105
Q

What is covered in Section 73 of the Town & Country Planning Act 1990?

A

Allows for LPA to agree a request to remove, vary or discharge a planning condition following the grant of a planning consent

106
Q

What is the Infrastructure Act 2015?

A
  • Makes easier for empty/redundant buildings to be converted to productive uses
  • Cuts red tape allowing for surplus/redundant public-sector land to be sold quicker
  • End excessive delays on projects already with planning consent
  • Allows Land Registry to create a digitised local land charges register
  • Gives local communities right to buy stake in renewable energy infrastructure projects

RICS APC 2022 (7 decks)

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