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Development Appraisal (L3) > Development Appraisal > Flashcards

Development Appraisal Flashcards

1
Q

What is a Development Appraisal?

A

Tool used to financially assess the viability of a development scheme based on client inputs. (IRR / Profit).

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2
Q

What is a Residual Appraisal?

A

Method of Valuation used to calculate to value of land or development site (Land Value)

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3
Q

What is the process of running a Development Appraisal?

A

GDV - Input Costs - Fixed Land Cost = Profit Metric

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4
Q

What is CIL?

A

Community Infrastructure Levy

A charge by local authorities on a new development in the area to enable them to deliver their infrastructure needs.

Charge is levied against charging schedule which is non-negotiable (inflation linked).

Some developments can be except or get relief (submit relief claim to Local Authority).

Cannot be used to secure affordable housing.

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5
Q

What is Section 106?

A

Legally binding agreement or planning obligation between planning authority and developer.

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6
Q

What are the key differences between CIL and S106?

A

CIL
-Used to fund wider infrastructure.
- Non-negotiable
- Cannot be used to secure affordable housing

S106
-Site specific infrastructure and affordable housing.
-By negotiation
-Use to secure affordable housing.

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7
Q

When should S106 Agreements be Use

A
  • Necessary to make the development acceptable in terms of planning
  • Directly related to the development
  • Fairly and reasonably related in scale and kind to the development
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8
Q

What are S106 Contributions for?

A

Used to pay for site-specific infrastructure supporting a development, including affordable housing

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9
Q

What is CIL charged on?

A

CIL is charged on development which creates net additional floor space. It applies to developments with a Gross Internal Area of new build space over 100 sq m.

It does not apply to new houses or flats, which will have CIL levied irrespective of size.

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10
Q

What is CIL not charged on?

A

Developments creating less than 100 sq m of new build space (most conversions / change of use).

Some self build projects, social housing or charitable development development meeting specific relief criteria.

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11
Q

What is sensitivity analysis?

A

Analyses how an output (profit / IRR / land value) is affected by changes in one or two key variables.

For example, GDV, Build Costs, Finance Rates

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12
Q

Tell me about your understanding of incorporating affordable housing into development appraisals.

A
  • Covered under S106 Costs
  • GDV applied at lower level.
  • Profit on Cost reduced on the affordable element of the scheme
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13
Q

What is an S Curve?

A

Reflects the typical flow of costs on a development project.

Viewed on a cumulative basis and assumes the amount borrowed increases over time.

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14
Q

What sources of information do you use to deduce build costs when undertaking a development appraisal?

A

Building Cost Information Service (BCIS)

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15
Q

What is BCIS?

A

Provides cost and price data for UK construction industry.

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16
Q

How do you calculate developer’s profit?

A

Developer’s profit is a % of GDV or construction costs – typically around 15% - 20%

It is all dependent on risk

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17
Q

Who founded BCIS?

A

RICS established BCIS as a standalone company

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18
Q

What other metrics can you produce from a development appraisal?

A

IRR – present value is 0 or you have a set land value

Land value

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19
Q

Give me a limitation of a piece of software you have used.

A
  • Limitation Argus Developer is that it assumes 100% debt finance
  • Very sensitive to minor adjustments
  • Lack of certainty of inputs in the system
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20
Q

What is Profit on Cost?

A

Development profit divided by development cost

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21
Q

What is Profit on GDV?

A

Cost of the development versus the sale of the completed properties

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22
Q

When would you use Profit on GDV?

A

Potential risk around sales rates. Provides a buffer if the site does not do as well.

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23
Q

What is a Financial Viability Assessment? (FVA)

A

Evaluates whether a site is financial viable. I.e. does the value/profit generated by development outweigh the costs.

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24
Q

Why would one be carried out?

A

During Planning Permission Stages

25
Q

What are key viability benchmarks

A

Alternative Use Value

Existing Use Vale

26
Q

What is mezzanine finance and how is it priced?

A

Mezzanine finance is additional finance for the additional monies required over the normal LTV ratio.

It is riskier so is more expensive than senior debt.

Typically 13% - 15%

(LTV ratio is typically 60%)

27
Q

What is Senior Debt?

A

This is the first level of borrowing from a financial institution.

28
Q

What is a charge?

A

It is a form of compensation to the lender for providing the funds to a borrower

29
Q

Explain what the Golden Brick means in relation to VAT.

A

Method of structuring the sale of development land to mitigate VAT exposure for a seller and buyer. Usually involves transfer of land sold by developer to housing association who qualify for zero rating.

30
Q

What tools do Natural England provide to help developments achieve biodiversity net gain?

A

The Biodiversity Metric 3.0

A means of measuring and accounting for nature losses and gains as a result of a development

31
Q

How would you identify appropriate finance costs?

A

Market rates – 6%

Bank of England base rate plus premium - 7-8%

Told by your client what they can borrow at

32
Q

What measurement basis do you calculate your build costs?

A

GIA

33
Q

Where does BCIS get its data?

A

Recent contract prices / tender amounts agreed.

34
Q

How what factors are used in BCIS to calculate build costs?

A
  • Location
  • Age of Building
  • Type of works
  • Floor area
  • Number of storeys
35
Q

What is an S-Curve in development finance?

A

Reflect the flow of project costs over the course of the construction period.

Initial Phase (Starts Small) - Foundational work, could include planning/initial groundwork, setting up infrastructure.

Middle Phase (Highest Costs) - Project gains momentum, point at which highest costs are incurred as typically this will involve greatest amount of resource.

Final Phase (Costs Reduce) - Towards the completion of the project the rate of growth slows as most major tasks have been completed.

36
Q

What is a straight line cost?

A

Assumption that preliminary costs are incurred near to / at the start of a development period.

Costs spread evenly over the course of the development.

37
Q

What is contingency?

A

Allowance built into an appraisal for unexpected increases in costs resulting from unforeseen circumstances.

38
Q

What would happen to the rate of return if you require more contingency?

A

Cost increases are an inherent risk in development

Developer requires higher development return targets to compensate for these risks.

Higher contingency = lower rate of return

39
Q

What is included within professional fees?

A

Architects

Environmental / planning consultants

Quantity surveyor / structural engineer

M&E specialists

Acoustic consultants

Project managers

40
Q

What is yield on cost?

A

Initial full annual rent / total development cost = Yield on cost

41
Q

What is an overage agreement?

Also known as claw-back or uplift…

A

Type of contract

Seller paid extra by the buyer on top of the original purchase price if and when certain events happen.

i.e Buyer increases value of site by obtaining planning permission

42
Q

Why would a seller want to include overage agreements if selling?

A

Anti-embarassment - land’s future development potential may not have been realised at the time of sale.

  • Planning regulations change over time.
  • Seller wants to dispose of land quickly but not miss out on potential uplift in the future.
43
Q

What are the key elements of an overage agreement?

A
  1. Duration - Period of time seller benefits from uplift. Typically a number of years.
  2. Triggering events - Granting of planning permission / implementation of planning / subsequent sale of the land at higher value / sale of the developed land or individual units.
  3. Method of calculation - pre-agreed percentage of any increase in land value / fixed sum for each unit developed / pre-agreed percentage of the buyer’s profits from their subsequent sale.
  4. Protection / securing buyers obligation to pay
  • Registering restriction on the buyer’s title, limits the buyer to sell unless future purchaser agrees to be bound by the overage.
  • Register legal charge over the land - buyer must pay to seller or ensures future buyers are tied into overage.
44
Q

Why would a buyer agree to overage?

A

Potentially avoids over-paying for development site.

Lower initial sum for the land on completion rather than inflated value based on anticipated amount that may never be realised.

Overage included = Lower Purchase Price Agreed

45
Q

Can a development be profitable but not financially viable?

A

Yes

Profits reflect relationship between revenue and costs.

Viability is more complex - considers timing of project, financing, market conditions.

46
Q

What is an Article 4 Direction?

A

Planning law

Allows council to remove permitted development rights and change of use from an area or property.

Usually done to protect local amenity or character of an area.

Example - City of London (removes GPDR for change of use from office to resi).

47
Q

What are Permitted Development Rights?

A

Permissions which allow certain building works and changes of use to be carried out without the need to make a planning application.

48
Q

Is development carried out under General Permitted Development Order liable to CIL charges?

A

Yes

Depends on when and where the development is due to take place.

49
Q

What is prior approval?

A

Developer has sought approval from local planning authority that specifies elements of the development are acceptable before work can proceed.

50
Q

What guidance is there for Net Developable Area?

A

RICS Professional Standard Land Measurement for Planning and Development Purposes

51
Q

What does the Professional Statement on Land Measurement for Planning and Development Purposes state?

A

Provides clarity and consistency to professionals by enabling accurate descriptions of the size of development site at all stages of development process:

Sets out 5 technical core definitions:

  1. Land Ownership Area (LOA)
  2. Site Area (SA)
  3. Net Developable Area (NDA)
  4. Site coverage (SC)
  5. Plot Ratio (PR)
52
Q

What is Net Developable Area?

A

The extent of the site upon which one or more buildings or other operations and their ancillary space can be built, measured on a horizontal plane.

53
Q

What is the purpose of measuring the NDA?

A

Financial appraisal and valuation of land for which planning permission may be sought

Allocation or zoning of land

Calculation of residential density

54
Q

When is NDA accurately calculable?

A

Once the development is completed

55
Q

What is the Site Area?

A

Area of land submitted in the planning application drawings that is subject to an application for permission.

No exclusion/inclusions as it accounts for all elements of land that compromise part of the development - Gross Development Area.

56
Q

What is the Land Ownership Area?

A

The single legal interest or title delineate by a red line on title documents.

There are no inclusions or exclusions from this area.

57
Q

What is Plot Ratio?

A

The ratio of total development floor area to Site Area.

Development Floor Area measured as GEA or GIA.

58
Q

What is Site Coverage?

A

The ratio of ground floor area (measured in GEA) to SA, expressed as a percentage.

Development Appraisal (L3) (1 decks)

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