Development Appraisals Flashcards
What appraisal tool do your currently use
Bespoke excel based appraisal model produced for my employer and reviewed annually by KPMG
If you had to how do you calculate interest manually ?
Divide your interest rate by the number of payments you’ll make in the year (interest rates are expressed annually).
What is a development appraisal ?
A development appraisal is a process undertaken to understand the financially viability of a project.
How do you carry out sensitivity analysis ?
You would identify one or more relevant
variables, i.e. rent, sales values, build costs,
which are varied in turn to show the differing
results on the financial performance of the scheme.
What is LBTT and how do you calculate LBTT?
F rom 1 April 2015, LBTT is a tax applied to residential and commercial land and buildings transactions (including commercial properties and commercial leases) where a chargeable interest is acquired.
To ensure accuracy, I would use the Scottish Government’s LBTT tax calculator which allows taxpayers and agents to work out the amount of LBTT payable on residential, non-residential or mixed property transactions, and non-residential lease transactions based on the rates and thresholds.
How do you establish the GDV of a scheme?
Typically in the work I am instructed in, this would either be, or involve, using indicative sales pricing for private residential units and or calculating the rent extracted from affordable homes over a holding period together with any grant receipts. Taking all these together would produce the GDV.
How do you calculate s.75 costs ?
For an indicative scheme, I would review planning policy to see what the planning authority requires contributions for and the relevant prevailing rates Where possible, the preference would be to extract information from a signed section 75 agreement which will establish the exact figures required.
What is the difference between sensitivity analysis and scenario analysis ?
Sensitivity changes the key variables one at a time- yield, GDV, build cost, programming and finance rate to demonstrate the impact on the financial performance of the scheme.
Scenario analysis changes the tenure, timing, costs and phasing. This often involves changing multiple variables at a time in order to produce best case worst case situations to understand how the scheme would perform financially should these come to pass.

What payment profiles could you change and what would did this involve ?
Build duration or Phasing of scheme - this would change the monthly cash flow and elongating the programme
. How is interest rate broken down ?
At present is London Interbank Offered Rate + risk premium
What is the current Bank of England Base Rate?
0.75%
The current interest rate in the UK is 0.75% (March 2022).
How does the base rate impact development projects?
The base rate is the single most important interest rate in the UK. It is the rate that the BoE pay to commercial banks/lenders that hold money with them. It influences the rates those banks in turn charge people to borrow money. In short, the higher the interest rate the more expensive it is to borrow money (particularly over a longer period of time due to compounding interest).
What is the typical interest rate and what does you employer borrow at?
Rates from 6.0-7.5% are common for most applications for experienced developers. Arrangement fees may also apply.
Sanctuary are able to finance development projects at around 4%. This is because of the Group’s strong financial covenant, experience as a residential developer and with wider Group’s stable and diverse cashflows with good credit fundamentals.
What is the interest rate a reflection of ?
Risk- higher interest rate if it perceived to be more risk in a transaction.
Supply and demand- if there is a lot of demand for debt capital then higher interest rates.
Base rate- based on future outlook. To encourage spend reduce interest rates. To encourage saving, increase interest rates.
What is debt, what is equity and what is the difference between them?
Simply put, Debt involves borrowing money to be repaid, plus interest, while Equity involves raising money by selling stake in the scheme/project. The motivation of using either of these will depend on a borrower’s risk appetite and the scheme itself.
What are the benefits and limitations of using debt finance?
Debt can be extremely useful in magnifying returns. It can be potentially cheaper that equity however it carries greater risk as repayment is required irrespective of whether the project performs well. Debt finance is a rising market is easy and cheap to obtain where there is lots of competition amongst lenders. In this way, it can create choice, options and flexibility that wouldn’t be possible with equity financing. However, Debt in a failing market can exacerbate negative returns in a falling market.
What are the benefits and limitations of using equity finance?
For a risky project or in a falling market, equity may be a more prudent approach for a developer as they will mitigate their exposure to negative returns as the risk is distributed between shareholders. However, in a rising market, equity is more expensive as the cost of doing so would almost certainly be higher than if it was financed with debt. Also as shareholders hold equity they tend to have certain rights over the company/scheme which limit the developers choice, options and flexibility.
What’s the most common capital structure for development schemes? And what does your employer assume?
I have limited knowledge in this area although I understand that experienced developers typically may use a capital structure of 80% debt to 20% equity.
In Sanctuary’s appraisal we assume 100% debt finance which I understand is quite common.
What is BCIS and can you tell me anything about it?
Build cost information Service
It is described by RICS as ‘the leading provider of cost and price information to the construction industry and anyone else who needs comprehensive, accurate and independent data.’
It was established in 1961 to facilitate the preparation of elemental cost plans, where an ‘element’ is defined as, ‘a major physical part of a building that fulfils a specific function or functions, irrespective of its design, specification or construction’
Does your employer use BCIS? If not, how does your employer monitor costs?
No, we don’t have access to this. Sanctuary has a number of employers agent who are qualified surveyors who will assess the costs of proposals by using information from live and recent development schemes undertaken by Sanctuary or its RSL partners. Moreover, as part of any grant funding application, the costs are reviewed independently by the Scottish Government’s More Homes Division who do have access to BCIS.
Are there any limitations to BCIS ?
Only deals with base build costs, no externals/ Landscape
What is a s-curve cost profile and why would you use it ?
S curve is a mathematically calculated payment profile which shows the cumulative progression of costs during a construction project.
What is NPV?
Net Present Value (NPV) is the value of all future cash flows (positive and negative) over the entire life of an investment discounted to the present.
What is IRR?
he internal rate of return (IRR) is a metric used in financial analysis to estimate the profitability of potential investments. IRR is a discount rate that makes the net present value (NPV) of all cash flows equal to zero in a discounted cash flow analysis.
As a standard assumption, what does your employer allow as contingency in your appraisal ?
Typically 1% contigency is allowed because the appraisal as a standard assumption also builds in 3% build cost inflation.
How could you make a scheme generally more profitable
Increasing density
Changing the design
Value engineering to the specification
