Development appraisals Flashcards
What is a Monte Carlo simulation?
Also called the Monte Carlo simulation, this mathematical technique is used to estimate the possible outcomes of an uncertain event
Tell me about your understanding of RICS Financial Viability in Planning
‘Financial viability in planning: conduct and reporting’ comprises fourteen mandatory requirements which chartered surveyors must observe when carrying out financial viability assessments in a planning context. The effective date of this professional standard is 1st September 2019.
Tell me about your understanding of RICS Valuation of Development Property. 2019
The aim is to provide guidance to valuers on how to value development properties, which are often complex, sensitive and incorporate optionality.
It should be read in conjunction with RICS Valuation – Global Standards 2017 (Red Book), which incorporates IVS 410 – Development Property.
The Guidance Note explores the due diligence required for development property valuations, ensuring that appropriate assumptions and special assumptions can be made.
It also discusses how to assess development potential, including seeking advice from external specialists, e.g. planning consultants.
Finally, it looks at the four main options for development property, which are likely to influence the valuation approach and outcome. These are to develop, develop in phases, sell or dispose, and defer or wait.
What is an S curve?
it relates to the shape produced by the typical flow of costs on a property development project
GDV vs NDV?
GDV (Gross Development Value): Represents the total market value of a development project, including all units and assets, without accounting for costs.
NDV (Net Development Value): Represents the value of a development project after deducting all associated costs, including construction, financing, and other expenses, providing a more realistic estimate of profit.
What is profit on cost/profit on GDV?
Profit on Cost: This is the profit earned on a development project as a percentage of the total project costs, including construction, financing, and other expenses.
Profit on GDV: This is the profit earned on a development project as a percentage of the Gross Development Value (GDV), which is the total market value of the completed project.
What is internal rate of return?
The Internal Rate of Return (IRR) is a financial metric used to assess the profitability of an investment or project. It represents the annualized rate at which an investment breaks even, generating a net present value (NPV) of zero. In short, IRR tells you the annual percentage return an investment is expected to yield over its lifespan, considering both the initial investment and future cash flows.
What is a Financial Viability Assessment (FVA)?
A Financial Viability Assessment (FVA) is typically required for residential planning applications, to assess the level of affordable housing and other developer contributions a site can viably support.
What are the key viability benchmarks?
Benchmark LV - EUV + premium
Benchmark profit
What is site value for a scheme-specific FVA?
EUV + reasonable premium - to assess benchmark land value
A residual valuation of the proposed scheme assumed given planning is also done (market value)
Where market value is great - it’s viable
where market value is lower than BLV - site is unviable and AH can be flexed
When undertaking a Local Plan or CIL FVA, how is site value defined?
Site Value should equate to the market value assuming that the value has regard to development
plan policies and all other material planning considerations and emerging policy/CIL charge changes
What are the main forms of finance available to developers?
Bank Loans and Mortgages: Traditional bank loans, including development loans and commercial mortgages, are common sources of financing for developers.
Development finance: is a short-term funding option, usually for between 6-24 months. It is designed specifically to assist with the purchase costs and build costs associated with a residential or commercial development project.
Private Equity: Developers can seek equity investments from private individuals or investment firms to fund their projects.
Mezzanine Financing: Mezzanine loans or financing bridges the gap between senior debt (bank loans) and equity, providing additional capital.
Bridge Loans: Short-term bridge loans can provide quick financing to cover gaps in funding until long-term financing is secured.
What are lenders’ current requirements in relation to gearing?
Between 25% and 50%: A gearing ratio within this range is typically considered optimal or normal for well-established companies. Lower Than 25%: Gearing ratios that fall under this value are typically considered low-risk by both investors and lenders. - CHECK
What is mezzanine finance and how is it priced?
Mezzanine finance is a form of financing that sits between equity and traditional debt in terms of risk and priority of repayment. It is typically used to fund real estate development projects and other high-risk ventures. Mezzanine finance is priced through a combination of interest rates, fees, and often includes an equity component. It is more expensive than traditional debt due to its higher risk profile but offers greater flexibility for borrowers.
What information do lenders generally require regarding a property before agreeing to lend?
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