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APC > Development Appraisal > Flashcards

Development Appraisal Flashcards

1
Q

What is a development appraisal ?

A

A tool used to financially assess the viability of a development scheme.

They can also be used to assess the profitability of a proposed scheme, and it’s sensitivity to changing inputs.

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2
Q

Define a development appraisal ?

A

A series of calculations used to assess to establish the value/viability/ profitability/ suitability of a proposed development based on inputs.

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3
Q

When would you use a residual site valuation ?

A

For a specific valuation of a property, hoping to find the market value of the site based on market inputs.
Assumes 100% debt financed

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4
Q

What dates should the inputs be taken from?

A

The date of valuation.

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5
Q

Explain the methodology of a residual site valuation ?

A

GROSS DEVELOPMENT VALUE

  • Find the market value of the site, based on market inputs.
  • Comparable method used to establish rents and yields.
  • All risk yield is often applied.
  • Rent free and voids are to be assumed.

MINUS

TOTAL DEVELOPMENT COSTS

  • Site Preparation: Demolition, remediation works, services, clearance (based on contractors estimates)
  • Planning Costs: Section 75’s, consultant fee’s, specialist reports.
  • Buildings costs: Total cost of building works.
  • Professional Fees: 10% - 15% of total construction costs. Usually for architects, project managers, engineering consultants.
  • Contingency: 5% - 10% of total construction costs.
  • Marketing Costs: EPC, sale fee, letting fee
  • Finance Costs: Interest rates, costs of borrowing.

MINUS

DEVELOPERS PROFIT

  • Usually in the region of 20% of GDV.
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6
Q

What are the methods of funding for a development ?

A
  1. Debt Finance: Lending from a bank or institution.
  2. Equity Finance: Own funds used.
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7
Q

Limitations of a Residual Valuation ?

A
  • Relies on accurate information to be inputted.
  • Does not consider timings of cash flow.
  • Very sensitive to minor adjustments.
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8
Q

What is a sensitivity Analysis ? and what is it used for?

A

There are 3 forms:

  1. Simple sensitivity analysis - based on key principles
  2. Scenario analysis - changes in design
  3. Monto Carlo Simulation - Using crystal ball software.
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9
Q

What purchase/acquisition costs can be expected ?

A

Legal fee’s - agency fee’s - Any taxes.

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10
Q

What developer contributions are expected ?

A

Mandatory requirements providing benefit to the community. Such as contributions to education etc.

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11
Q

What is the development yield ?

A

Rental income % by the actual cost incurred.

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12
Q

Define GDV?

A

The market value of the proposed development.

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13
Q

What is the holding costs?

A

The cost associated with holding onto a site. For example, taxes, maintenance etc.

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14
Q

What is an interest rate?

A

The rate of finance applied in a development appraisal.

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15
Q

What is net development value?

A

The gross development value minus assumed sales costs.

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16
Q

Talk me through the process of a residual development valuation ?

A
  1. Instruction - T+C’s agreed.
  2. Investigation: Inspection, property analysis, market research.
  3. Collection of data: Specific to the development.
  4. Qualification and verification
  5. Valuation Report
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17
Q

What two methods of valuation are usually used in development property ?

A
  1. Comparable method
  2. Residual method
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18
Q

What analysing the development potential of a property, a valuer should consider ?

A
  • Planning permission
  • Available services
  • Infrastructure
  • Ground conditions
  • Development restraints
  • Accessibility
  • Car parking
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19
Q

What are purchaser costs?

A

Stamp Duty Land Tax: Circa 5%
Agency Fees: 1% of GDV
Legal Fees: 0.5%

20
Q

What is the stamp duty land tax ?

A

£0 - £150,000 = 0%

£150,001 - £250,000 = 1%

£250,000 + = 5%

21
Q

Did your build costs vary between the flatted scheme / houses? If so, by how much?

A

Yes there was about a £40 per sq ft difference. (flatted schemes are in general more expensive as there is communal space that cant be monetised, more utility room and thus boilers, more regulations that are expensive like sprinklers in Scotland post Grenfell)

22
Q

Tell me a bit about a S75? Does it all have to be onsite?

A

Section 75 of the Town and Country Planning (Scotland) Act 1997 (often referred to as Section 75 agreements or planning obligations) is a legal mechanism that allows local planning authorities to impose certain conditions or requirements on developers as part of the planning permission process. These conditions are intended to mitigate the potential negative impacts of a proposed development on the local community and infrastructure. It includes area such as affordable housing (% of affordable housing units within the development), infrastructure (roads, parks, public transport), community facilties (health care centre) , transportation (access roads, public transport).
Section 75 agreements are negotiated between the local planning authority and the developer on a case-by-case basis, taking into account the specific circumstances of the proposed development and the needs of the local area. Once agreed upon, these conditions become legally binding and must be fulfilled by the developer as a condition of receiving planning permission.
Do not necessarily have to involve on-site obligations. These agreements can encompass a wide range of conditions or obligations that developers may need to meet as part of their planning permission. Whether the obligations are on-site or off-site depends on the specific circumstances of the development and the priorities of the local planning authority.

23
Q

What are current build costs?

A
  • Industrial £70 psf +
  • Office £220 psf +
  • Residential (c. 145 and £180 for flats)
24
Q

What might ancillary costs be?

A

Building will need to be connected to infrastructure –gas mains, highway networks etc –sometimes mains have to be moved or on site substations relocated.
For expansive developments, business parks – extensive landscaping and surface car parking (for ex, necessitate the installation of oil interceptors to prevent ground and water course pollution from on-site spillages.

25
Q

What is an ‘S’ curve?

A

The purpose of the ‘s’ curve is to reflect when monies tend to be drawn down

The principle of an ‘s’ curve is that as the payment of construction costs adopts the profile of an ‘S’ shaped curve over the length of the development projects, the usual assumption is to halve the interest that would be borrowed for all of the construction period

Allows you to estimate cost timing

26
Q

What are the different types of debt financing available?

A

Senior debt: takes precedence over other sources of funding. If the borrower defaults, the lender can take ownership of the property
Mezzanine finance: will sit below the senior debt in terms of priority. Typically has a higher rate of return than senior debt but lower than equity
Equity: riskiest and most profitable portion of the capital stack. Riskiest as the other tranches of capital will be repaid before the equity holders

27
Q

What are other methods of arranging financing?

A

Joint ventures – 2 or more parties join to develop, can share the risk, draws on pooled financial ability & expertise, legal vehicle, SPV
Forward sales – where completed scheme pre-sold to either an investor or occupier

28
Q

What is typical LTV ratio?

A

60%

29
Q

What is Overage?

A

Arrangement made for the sharing of an extra receipts received over and above the profits originally expected as agreed in pre-agreed formula
It can be shared between the vendor’ landowner and developer in a pre-arranged apportionment

30
Q

What is the profit erosion period?

A

This term relates to the length of time it will take for the development profit to be eroded by holding charges following completion of the scheme until the profit from the scheme has been completely draw down, due to interest charges, and the scheme is loss making

31
Q

If a development took longer than expect how would this impact

A

Interest is calculated on a rolled – up basis – i.e added to the loan as the project proceeds (longer it takes more interest to pay etc)

32
Q

What is CIL?

A

Community Infrastructure Levy. Used by LPA’s to raise funds from developers for local infrastructure in areas

33
Q

Under current conditions, how would you alter your approach to a residual valuation?

A
  • Increase contingency to reflect uncertainties associated with material costs
  • Increase timescales to reflect greater lead in times
  • Increase finance as debt is harder to get
34
Q

What three elements does developer need to borrow for finance?

A
  • Site purchase + purchaser’s costs: compounded so straight line
  • Construction costs + fees: based on s curve
  • Holding over costs until disposal: compounded so straight line
35
Q

What capital stack does development appraisal assume?

A

100% debt finance

36
Q

What inputs change depending on site

A

Build costs
Interest rates dependant on developer
Time frames
Rents and sales prices
Sales rates

37
Q

What is profit erosion

A

The length of time it will take for the development profit to be eroded by holding charges following the completed of the scheme until the profit from the scheme has been completely drawn down due to interest charges and the schemes is loss making

38
Q

Limited of a development appraisal

A

Very sensitive to minor adjustments
Important of accurate information and inputs

39
Q

What is an ancillary cost

A

Gas mains , highway networks

40
Q

Limitations of Argus developer

A

Human error
Hidden assumptions
Reporting format

41
Q

Abnormal costs

A

Costs deducted from the headline price due to abnormal site specific characteristics such as ground conditions (contamination , remediation) access. It could be a third or a half of your costs could be this

42
Q

How can a developer de risk a development

A

Pre - let
Forward funding
Fixed construction costs (but difficult to get at the minute and wouldn’t work in this market)
Secure planning permission (but again the buyer could change it)
JV

43
Q

How would you obtain finance costs

A

Libor plus premium
Bank of England rates plus premium
Client costs

44
Q

Random strips

A

When the access to a development site is accessed through another piece of land. The site is purchased under a special purchase basis in order to unlock the site

45
Q

NPF4

A

Brown vs green field - focus on brown field
Focus on sustainability where as before was economic gain

46
Q

Section 75

A

Housing , education, infrastructure, cycle paths , roads

APC (25 decks)

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