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RICS APC - Spring 2024 > Development Appraisals > Flashcards

Development Appraisals Flashcards

1
Q

What is a Development Appraisal?

A
  • A tool to assess financial viability of a scheme
  • Used to establish value/viability/profitability/ feasibility
  • Can assume site value or calculate site value
  • A valuation is a possible output
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2
Q

What is CIL?

A
  • Community Infrastructure Levy is charge which can be levied by Local authorities on new development to fun infrastructure
  • Introduced by the Planning Act 2008 / Community Infrastructure Levy 2010
  • Charges obtained from charging schedule based on a sqm rate and net floorspace
  • Applies to most new development of over 100sqm
  • Relief / exemptions: residential annexes, self-built, affordable housing
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3
Q

CIL vs S106

A
  • Scope: CIL covers all infrastructure necessary to support development in an area. S106 cover only items specific to scheme (legal test)
  • Charging: CIL based on fixed charging schedules. S106 based on negotiation
  • Affordable Housing: Can only be secured in a S106
  • Viability: CIL is tested at a district wide level at evidence gathering stage. S106 viability is undertaken on a scheme by scheme basis
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4
Q

What is S106?

A
  • Planning obligations / Developer contributions
  • Section 106 of the Town and Country Planning Act (1990)
  • Mechanism to make development proposals acceptable in planning terms
  • Site specific mitigation of impact of development
  • No fixed charging schedules
  • Agreement has to be entered into before planning permission is given
  • Legal test (NPPF & CIL regs 122/123): necessity, direct relationship and proportionate to scale of development
  • E.g. schools, public space, community facilities, affordable housing
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5
Q

How can Development Appraisals be used in valuing developments

A
  • To determine a Residual land valuation (‘RLV’)
  • Most common purpose of a ‘RLV’ valuation is to find the market value of the site based on market inputs.
  • At one moment in time at valuation date for a particular purpose
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6
Q

How do you calculate a Residual Land Value?

A

Revenue less costs

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7
Q

What is a sensitivity analysis?

A

A sensitivity analysis is a method of risk analysis

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8
Q

What does sensitivity analysis involve?

A

It involves identifying the key variables and testing the impact changes in key variable would have on scheme viability.

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9
Q

What factors effect sensitivity?

A
  • Market conditions
  • Planning Regulations
  • Construction costs
  • Finance terms
  • Market demand
  • Risk
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10
Q

What variables might you change and why in a sensitivity analysis?

A
  • First step is to identify the critical variables/inputs in the project that impact profitability through trial and error.
  • Critical variables could include sales values, build costs, finance rates.
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11
Q

What is viability?

A

it underlines whether a development or project would make financial sense

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12
Q

What are the benefits of a development appraisal?

A

They enable the stakeholders to assess the projects feasibly by analysing revenue streams, estimating costs and forecasting profits.

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13
Q

Why is important to explain the assumptions made?

A

Because the results could be flawed and not trusted by the stakeholder if not noted

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14
Q

What RICS professional statements or guidance notes on Development Appraisals are you aware of?

A

RICS Valuation of Development Property (2020)

Assessing Viability in Planning (2019)

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15
Q

How can a development appraisal be used in valuing developments?

A

As it provides a valuation based on a potential return on investment.

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16
Q

What is a Monte Carlo simulation?

A

This is a computer-generated simulation used to model outcomes

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17
Q

Tell me about your understanding of RICS Financial Viability in Planning/Valuation of Development Property.

A

RICS Valuation of Development Property (2020)
- This guidance provides a framework for assessing the financial viability of development projects in the context of planning applications.

Assessing Viability in Planning (2019)
- This guidance often referred to as the Red Book, sets out the standards and requirements for valuing development properties, ensuring consistency, transparency, and professionalism in property valuations.

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18
Q

What is an S curve?

A

its a graphical showing of a cumulative data

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19
Q

Tell me about your due diligence when undertaking a development appraisal.

A

it involves research against particular inputs or assumptions. Using the comparable method, I check what has been provided to me from consultants.

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20
Q

How do you calculate developer’s profit?

A

its calculated as a percentage of the GDV value.

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21
Q

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

A

Residual valuation is used to determine the value of the land based on the projected value.

Development appraisal provides a profit output after gathering the GDV and removing the total costs.

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22
Q

What are the common output metrics?

A

Profit on GDV
Profit on NDV
Profit on Costs
IRR

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23
Q

If you do not have site specific figures, how would you account for professional, legal and marketing fees?

A

using comparable developments, benchmarking or past project data.

24
Q

What do we mean by special assumptions?

A

They are specific to the projects circumstances but are not standard

25
Q

What is a discount rate?

A

The rate, or rates, of interest selected
when calculating the present value of some
future cost or benefit.

26
Q

What’s the difference between a DCF development appraisal and a ‘normal’ development appraisal?

A

A DCF (Discounted Cash Flow) development appraisal differs from a “normal” development appraisal primarily in its approach to cash flow analysis.

In a DCF appraisal, future cash flows are discounted back to their present value using a discount rate to reflect the time value of money.

Conversely, a “normal” development appraisal may use simpler cash flow techniques without discounting future cash flows, providing a more straightforward analysis of costs and revenues over time.

27
Q

How can you ensure your cash flow shape is accurate?

A

Ensure thorough data collection, realistic cost estimation, accurate revenue projections, precise timing, sensitivity analysis, and regular updates for an accurate cash flow shape.

28
Q

What do we mean by project viability versus project feasibility?

A

Project Viability: refers to the likelihood that a project will achieve its intended objectives and generate a satisfactory return on investment.

Project Feasibility: assesses whether a project is technically, financially, and operationally possible.

28
Q

How would you reflect the additional costs involved in building on contaminated and/or brownfield land?

A

you would typically include an allowance for remediation costs.

28
Q

How do you account for affordable housing commitments in a development appraisal?

A

By valuing a % of units as an affordable product.

29
Q

When inputting sales values, what measurement basis do you use?

A

NIA (sqft/sqm)

30
Q

Give me a limitation to argus developer.

A

It can be very expensive to purchase and maintain.

31
Q

What is profit on cost/profit on GDV?

A

Profit on Costs: The profit of the project expressed as a percentage of total development costs.

profit on GDV: The profit of the project expressed
as a percentage value.

31
Q

What is internal rate of return?

A

The rate of interest (expressed as a
percentage) at which all future project
cash flows (positive and negative) will be
discounted in order that the net present
value (NPV) of those cash flows, including
the initial investment, be equal to zero. IRR
can be assessed on both gross and net of
finance

31
Q

What are the main forms of finance available to developers?

A

Mezzanine finance
Equity Finance
Senior Debt Finance
Joint Ventures
Crowdfunding
Private Equity
Government Grants

32
Q

What is a Financial Viability Assessment (FVA)?

A

An assessment undertaken to determine the fiancial position of a scheme. It would underline planning policies, development proposals and the financial position.

33
Q

What is viability?

A

Viability means whether the project makes enough money to be worth doing.

34
Q

What is site value for a scheme-specific FVA?

A

the site value refers to the worth or monetary value of the land proposed for development within the project.

34
Q

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

A

Revisions of the appraisal will be undertaken

Negotiate with relevant stakeholders to underline the issues of the site.

Withdraw.

35
Q

How do you decide what financing rate to use?

A

It would depend on the current market rates and projects risk.

36
Q

How do you make sensible assumptions about the development programme? Who might you consult?

A

Consult the managers, contractors and other industry professionals involved.

Ensure the assumptions are based on realistic timelines, considering factors like construction complexity, site conditions, and regulatory requirements.

37
Q

What usually impacts a client’s financing rate?

A

the base rate

38
Q

What is mezzanine finance and how is it priced?

A

Mezzanine finance is a form of hybrid financing that combines debt and equity components.

Mezzanine finance is priced based on the risk profile of the project and the financial condition of the borrower.

39
Q

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

A

Lenders require detailed information about a property before agreeing to lend, including property details, valuation reports, financial statements, environmental assessments, title documents, legal papers, insurance proof, borrower’s credit history, and project feasibility for development projects.

40
Q

What is the difference between senior debt and equity finance?

A

Senior debt: Loans from banks secured against the property, with fixed repayment terms.

Equity finance: Selling ownership stakes, investors share risks and rewards, no fixed repayment terms.

41
Q

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

A
  • Fluctuations in property prices
  • Interest rates
  • Demand for certain types of developments
42
Q

Explain what the Golden Brick means in relation to VAT.

A

Golden Brick allows developers to save money on VAT, as they can recover VAT on their construction costs while avoiding VAT on the sale price of the completed property.

43
Q

What is BNG?

A

Biodiversity Net Gain

Biodiversity Net Gain (BNG) ensures development projects increase biodiversity compared to pre-development levels.

44
Q

What % improvement in biodiversity value should development deliver?

A

Development projects should aim to deliver a minimum of 10% improvement in biodiversity value compared to pre-development levels, as per the UK Government’s Biodiversity Net Gain (BNG) requirements.

45
Q

Explain how the Residential Property Developer Tax works.

A

The Residential Property Developer Tax is a levy on profits over £25 million per year from UK residential property development, set at a flat rate of 4%.

46
Q

What rate is the Residential Property Developer Tax at?

A

4%

47
Q

What is profit on costs?

A

The profit of the project expressed as a
percentage of total development costs

48
Q

What is profit on GDV?

A

The profit of the project expressed
as a percentage of the project’s value

49
Q

What is Development yield?

A

The rental income divided by the actual
cost incurred in realising the development.
This can be based on either current or
future estimates of the rental value of the
completed development.

50
Q

What is Hope value?

A

An element of market value in excess of the
existing use value, reflecting the prospect
of some more valuable future use

51
Q

What is Internal rate of return (IRR)

A

The rate of interest (expressed as a
percentage) at which all future project
cash flows (positive and negative) will be
discounted in order that the net present
value (NPV) of those cash flows, including
the initial investment, be equal to zero. IRR
can be assessed on both gross and net of
finance

RICS APC - Spring 2024 (39 decks)

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