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APC > Development Appraisals > Flashcards

Development Appraisals Flashcards

1
Q

What is CIL?

A

・Charge set on new developments by local authorities to fund the local infrastructure required to support it e.g schools & transport - calculated on additional sq ft at the LA rate

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2
Q

What is S106?

A

・Negotiated between LA and developers to enter into legally binding agreements or planning obligations as part of granting the planning permission - afforsable housing, providing something back

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3
Q

What are the differences between CIL and S106?

A

・CIL is a charge is which is paid - based on LA rate and additional sq ft
・S106 is a planning obligation for those applications which will cause a significant impact - open space, affordable housing

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4
Q

How can a development appraisal be used in valuing developments?

A

・Can be used to establish GDV, costs and profitability / viability of a scheme

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5
Q

What is a Monte Carlo simulation?

A

・A technique for measuring the impact of one or more variables on the outcome of a valuation

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6
Q

What is a sensitivity analysis?

A

・Changing varaibles such as costs, GDV or finance by % rates in order to see the impact this has on either land value or profitability

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7
Q

What is a sensitivity analysis?

A

・Changing varaibles such as costs, GDV or finance by % rates in order to see the impact this has on either land value or profitability

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8
Q

How do you carry out a sensitivity analysis?

A

By changing variables and seeing the outcome this has on the output

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9
Q

In a sensitivity, What variables might you change and why?

A

・Build costs, finance, GDV

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10
Q

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

A

・Affordable housing must be included for developments over 10 dwellings - AR or SO.
・ Usually inputted as a % of MV

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11
Q

What is an S curve?

A

・Illustrates typical way that finance is drawn down over time for a development project
・Little at the start, most at the middle, little at the end

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12
Q

What sources of information do you use when undertaking a development appraisal?

A

・GDV - Rightmove Plus, agent verification
・Costs - BCIS or quanitity surveyor’s report

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13
Q

How do you calculate GDV/NDV/finance costs/project costs/project timescales etc?

A

・GDV = Value of completed development
・NDV = Value of completed development - sale costs
・Finance Costs = Typically on half build costs for construction period, on construction and finance for void period
・Project costs = Professional fees (10%), purchaser costs (5%)
・Project timescales = planning (6 months), construction (9-18 months), void (6-9 months)

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14
Q

How do you calculate developer’s profit?

A

・GDV - Costs + Land Value = Profit

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15
Q

What other metrics can you produce from a development appraisal?

A

・Profit
・Profit as a % of GDV or Costs
・Viability

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16
Q

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

A

・RLV - Used to calculate the residual value
・DA - Used to calcuate profit output

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17
Q

Tell me about software you have used.

A

KEL

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18
Q

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

A

KEL - often the finance costs can be more expensive than would be anticipated

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19
Q

What is profit on cost/profit on GDV?

A

・% of profit metric on cost or GDV - often used by developers as a measurement of performance for a proposed development

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20
Q

What is internal rate of return?

A

・Metric used to estimate profitability of potential investments / developments

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21
Q

What is viability?

A

Investigating whether something will survive - will a development make sense financially

22
Q

What is a Financial Viability Assessment (FVA)?

A

・Evaluate the financial health of a development - ensure that It won’t lose money

23
Q

Why would an FVA be carried out?

A

Developers often use FVAs to challenge the level of affordable housing imposed by the LA

24
Q

What are the key viability benchmarks?

A

・RLV
・Profit

25
Q

What are the key inputs and outputs of an appraisal?

A

・GDV, GDC, Land Value

26
Q

What happens if a scheme is deemed financially unviable for a developer?

A

・They may have to re-hash the scheme, lower the level of affordable housing, lower the purchase price (if applicable) or completely walk away from the site if no solution is available to make it viable

27
Q

What are the main forms of finance available to developers?

A

・Development finance
・Buy to let
・Bridging
・Residential development finance
・Commercial development finance

28
Q

What are lenders’ current requirements in relation to gearing?

A

・A general classification describing a financial ratio that compares some form of owner equity (or capital) to funds borrowed by the company
・Gearing ratios are important financial metrics because they can help investors and analysts understand how much leverage a company has compared to its equity. Put simply, it tells you how much a company’s operations are funded by a form of equity versus debt
・High Gearing Ratio: The company has a larger proportion of debt versus equity (higher than 50%)
・Low Gearing Ratio: The company has a small proportion of debt versus equity (lower than 25%)

29
Q

What is mezzanine finance and how is it priced?

A

・Hybrid of debt and equity financing that gives the lender the right to convert the debt to an equity interest in the company in case of default
・Secured by a second charge (junior debt) therefore higher LTV and more expensive (around 12%)

30
Q

What information do lenders generally require regarding a property before agreeing to lend?

A

・Valuation of the property
・Ensure surveys and legal due diligence are undertaken
・How the borrower will pay back the loan and interest in agreed timeframe

31
Q

What is the difference between senior debt and equity finance?

A

・Senior debt - Providers expect to have their investments repaid in full and receive interest
・Equity finance - Providers have an ownership stake in infrastructure company or project, not paid a set amount. The return on equity investment is paid after all operating expenses and all scheduled payments to debt providers are made. If there is a shortfall in cash, equity investors may be required to increase their investment, and if there is failure of the company or project, equity providers can lose all of their investment

32
Q

What is a charge?

A

・A legal charge allows a lender to secure the money they have lent to an individual or company

32
Q

Tell me about an external factor which influences the appraisal process.

A

・Economy - Interest rates (finance)

33
Q

Explain what the Golden Brick means in relation to VAT.

A

・A mechanism that enables a developer to complete a sale of VAT elected land to a Registered Provide (RP) before practical completion of the affordable housing dwellings and for that sale to be treated as a zero-rates supply for VAT purposes rather than a standard rated supply

34
Q

What is BNG?

A

・Biodiversity net gain ( BNG ) is a way to contribute to the recovery of nature while developing land. Biodiversity net gain (BNG) is an approach to development, and/or land management, that aims to leave the natural environment in a measurably better state than it was beforehand
・Minimum 10% gain
・Environment Act 2021

35
Q

Explain how the Residential Property Developer Tax works.

A

・A new (2021) tax of work 4% which will apply to the largest residential developers on the profits they make on UK residential developments

36
Q

Tell me about a sensitivity analysis you have carried out.

A

84 Manor Road, Wallington
・Used sensitivity analysis to show how volatility in build costs and interest rates could affect offers

37
Q

Haling Park Road - How did you establish your GDV?

A

・I established GDV through the use of Rightmove plus and calling agents
・I compared the evidence and adjusted appropriately

38
Q

Haling Park Road - How did you obtain your build costs?

A

・I obtained build costs from the BCIS, using the mean quartile

39
Q

Haling Park Road - What other costs did you deduct?

A

I deducted costs for CIL, build costs, purchaser costs, professional fees

40
Q

What level of profit did you assume and why?

A

20% on GDV as the norm for that type of development

41
Q

What was the uplift in value and how was that used to negotiate the premium?

A

・Slight uplift in value provided and I understood they took the appraisal and report to the negotiations

42
Q

Hersham Road - How did you factor in demolition costs?

A

・Quantity surveyor provided build costs which included demolition

43
Q

Horsham Road - Where did you obtain your CIL costs from?

A

・Local Authority website and the increase in sq ft the development would produce

44
Q

What was the viability of the development?

A

・Showed a profit on GDC of 20%

45
Q

Tell me about how you have used a sensitivity analysis to produce a reasoned analysis of risk.

A

84 Manor Road, Wallington
・Used sensitivity analysis to show how volatility in build costs and interest rates could affect offers

46
Q

Brighton Road - What was the existing use of the site and how did this factor Into your appraisal?

A

・Existing use was a trade counter with yard - factored the demolition costs and CIL
・Land value / purchase price

47
Q

Brighton Road - Tell me what advice you gave your client during this instruction.

A

・I advised the client that on the basis of the proposed scheme, the development and acquisition of the site is viable for a purchase of £3.5m
・I did also provide a sensitivity, showing different levels of affordable housing

48
Q

Portland road - What changes had occurred since the original development appraisal?

A

・Build costs increased significantly

49
Q

Portland road - What advise did you give on what profit would be required?

A

・I advised that during that time and volatility of the market a profit of 22% on cost would be required

50
Q

Portland Road - How did your client enhance the scheme to make it more profitable?

A

・Split the dwellings intosmaller 2Bs to provide more units

51
Q

Could you confirm if you re-ran the appraisal after this enhancement and how that changed the profit?

A

・Existing and 2x new 3B houses = Profit at £700,000 = 14.68% Profit on Cost
・New scheme of existing and 3x 2B houses = Profit at £750,000 = £19.40% Profit on Cost

APC (8 decks)

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