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Development Appraisals Flashcards

1
Q

What is the purpose of a development appraisal and a residual valuation?

A

A development appraisal is a tool to financially assess a development scheme
One can be used to assess a residual site value
Can also be used to assess the profitability of a proposed scheme and it’s sensitivity to changing inputs, or assessing the viability of different uses, rents, yields or financial contributions, such as s.106/CiL

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2
Q

What is a residual valuation, and the methodology used?

A

Definition
* A specific valuation of a property holding to find the market value of the site based on market inputs
Methodology
* SITE VALUE = GROSS DEVELOPMENT VALUE – TOTAL DEVELOPMENT COST – PROFIT

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3
Q

What is a development appraisal, and the methodology used?

A
  • Provides guidance as to the viability / profitability of the proposed development
  • Based on a clients inputs.
  • It can assume a site value or calculate a site value
  • PROFIT = GROSS DEVELOPMENT VALUE – TOTAL DEVELOPMENT COST – SITE VALUE
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4
Q

Are residual valuations and development appraisals Red Book compliant valuations?

A

Both forms CAN be used as a Red Book valuation – Red Book exemptions relate to the purpose NOT the methodology
All inputs are taken at the date of valuation
It is a growth IMPLICIT form of valuation

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5
Q

What is Gross Development Value, and how would you calculate it?

A
  • Market Value of completed proposed development at today’s date/valuation date
  • Use plans if needed and measure on CAD (take measurements if you can)
  • Valued at current date assuming present values and market conditions
  • Comparable method of valuation used to determine rents and yields
  • All Risk Yield used
  • A rent free/incentive period and marketing void can be assumed if appropriate
  • Purchaser’s costs are usually deducted for commercial property valuations
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6
Q

What are the Total Development Costs?

A
  1. Site Preparation
    – demolition, remediation works, landfill tax, provision of services, site clearance, levelling, fencing and provision of services
    - Obtain contractor’s estimates for these works
  2. Planning Costs
    – Town and Country Planning Act 1990 s.106 payments, CIL, s.278 payments, planning application and building regulation fees, planning consultant cost, environmental impact assessment cost, other specialists report costs
  3. Building Costs
    – Estimate total cost of building works
  4. Professional Fees
    – 10-15% plus VAT of total construction costs for the professional fees of architects, M&E consultants, structural engineers, etc
    – lower percentage appropriate for a large projects
    - Does depend on size of building contract with a reduced level of fee agreed for large contracts
    - Architects are usually the largest proportion of total fees
    - Remember CDM Coordinator costs
  5. Contingency
    – 5-10% of total construction costs depending upon level of risk and market conditions
  6. Marketing Costs & Fees
    – assume a realistic marketing budget (use evidence/quotes)
    - Cost of an EPC and NHBC warranty (for residential scheme)
    - Normal sale fee circa 1-2% of GDV and normal letting fee around 10% of initial annual rent
  7. Developer’s Profit
    – percentage of GDV OR total construction cost – circa 15-25% dependent upon risk
    - GDV more frequently used as a base for residential use
    - If scheme low risk (pre-let/sold) a lower return may be required
    - % of profit required has recently risen given current risky market conditions
  8. Finance
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7
Q

What is a section 106 payment?

A

Town and Country Planning Act 1990
Legal agreement for planning obligations to gain planning consent.
Enforceable by LPA
Goes towards
1. Affordable housing
2. Infrastructure costs
3. New schools
4. Open spaces
4. etc

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8
Q

What is a section 278 payment?

A

A payment made for highway works – Town and Country Planning Act 1990

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9
Q

What is Community Infrastructure Levy (CIL)?

A

Used by LPA’s for off-site payments from developers to raise funds for infrastructure necessary to support development in the area

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10
Q

What do you understand about Affordable Housing?

A

Housing for those whose incomes are insufficient to allow them to buy or rent a home on the open market
Local planning policy will set out the required percentage of affordable housing required for new residential development
It can be in the form of social or intermediate housing
Social – housing rented by a Registered Social Landlord (RSL)
Intermediate – shared ownership housing (‘staircasing’ housing)
There is a form of allocation for occupiers within the public sector for social or intermediate housing= key worker housing

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11
Q

What are the sources of information on build costs?

A
  • Client information
  • RICS Building Cost Information Service (BCIS) usually based on GIA basis – monthly updates from QS/BS sources and recent contract prices/tenders agreed – Light blue website!
  • Building Surveyor estimate
  • Quantity Surveyor estimate/bill of quantities/cost estimate
  • Spons Building Costs book
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12
Q

How are interest rates determined in development finance?

A

Choice of interest rate can include:
SONIA rate - Sterling Overnight Index Average
Bank of England Base Rate: plus premium
Rate at which the client can borrow money
A swap rate agreed with the developer’s bank
*Take into account any arrangement fee

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13
Q

What three stages of development could the developer require finance?

A
  1. Site Purchase (to include purchaser’s costs)
  2. Total Construction Costs and Associated Costs
  3. Holding Costs – these cover voids until disposal of scheme (empty rates, s/c, interest charges)
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14
Q

How would you calculate the finance required for the site purchase?

A
  1. Calculated on STRAIGHT LINE basis over the length of the development period – rolled up method (compound interest)
  2. Assumes 100% debt finance
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15
Q

How would you calculate the finance required for the construction period?

A

Assume total construction costs (including fees) over half of development period using S CURVE calculation
S Curve – Principle is that as the payment of construction costs adopts the profile of ‘s’ shaped curve over length of development project, the usual assumption is to HALVE the interest that is borrowed for all of build period
- Purpose of ‘s’ curve is to reflect more accurately the incidence of costs when monies are drawn down

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16
Q

What are the main methods of development funding?

A

Debt Finance – lending money from a bank of other funding institution
Equity Finance – selling shares in a company or joint venture partnership or own money used

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17
Q

How would you calculate the finance required for holding costs?

A

Calculate from completion of construction to disposal on a STRAIGHT LINE basis using compound interest

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18
Q

What is the current Loan to Value ratio (LTV)?

A

Used to be around 70% but due to current lending restrictions now considerably lower – in region of 60%

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19
Q

What is Senior Debt funding?

A

The first level of debt borrowing and it takes precedent over any secondary/mezzanine funding

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20
Q

What is Mezzanine funding?

A

This is additional funding from another source for the additional monies required over the normal LTV lending

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21
Q

What are Swaps and Swap Rates?

A

Swaps – a form of derivative hedging rate for interest rates
Swap Rate – the market interest rate for fixed rate, fixed term loans

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22
Q

When is VAT payable?

A

On all professional fees

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23
Q

What is the profit erosion period?

A

The length of time it will take for the development profit to be eroded by holding charges following the completion of the scheme and cause the profit from the scheme to be completely drawn down = loss making!
I.e. interest charges

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24
Q

What are the disadvantages of the residual valuation methodology?

A
  • Importance of accurate information and inputs
  • Does not take into account the timing of cash flows
  • Very sensitive to minor adjustments
  • Implicit assumptions hidden and not explicit (unlike a DCF)
    *Always cross-check with a comparable site valuation if possible
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25
Q

What is a sensitivity analysis?

A

Required for key variables such as GDV, build costs and finance rate in order to show a range of values

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26
Q

What are the 3 forms of sensitivity analysis?

A
  1. Simple Sensitivity Analysis of Key Variables – yield, GDV, build costs and finance rate
  2. Scenario Analysis – change scenarios for the development content/timing/costs i.e. phasing the scheme, modifying design
  3. Monte Carlo Simulation – using probability theory using software such as Crystal Ball
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27
Q

What are ‘Rights of Light’?

A

The right to light of a building arises after 20 years uninterrupted enjoyment of light without 3rd party consent
If right to light is infringed, an injunction can be granted or damages awarded

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28
Q

What are three types of development land?

A

Green Field – clear site, no past use, difficult to get planning permission
Brown Field – previously used, may need to clear the site, possible contamination, easier to get planning
Combination of above

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29
Q

What is the difference between outline and full planning permission?

A

Outline – developed to establish if development proposal is acceptable in principle

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30
Q

As a developer, what factors would you be sure to consider when considering a development?

A

Property Market – supply and demand, economic cycle
Location
Access & Transport
Amenities
Supply Competition – from other developments

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31
Q

What is the typical development programme?

A

Pre-construction – site assembly, planning, removing covenants and easements, impact reports, investigations
Construction – site preparation and main building period
Post-construction – period of completion until fully let/sale or refinance of completed development

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32
Q

What do you need to consider when undertaking the site preparation?

A

Environmental issues, removal of hazards, archaeological investigations, H&S regulations, demolition

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33
Q

How do you account for loan to value ratios?

A

Apply 100% debt and then apply an interest rate (circa 6%)

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34
Q

What is forward sale?

A

To purchase a development at the end of construction at a fixed price based on today’s yield

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35
Q

What is forward funding?

A

The investor provides finance at a lower rate than might be achievable in the current market in return for a softer yield when the investor purchases the development

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36
Q

What is an option agreement?

A

The land owner sells the option to develop on the land to a developer who has X amount of years to act upon the option

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37
Q

How do you measure a development site?

A

You inspect the perimeter and then use Promap to establish the size (acreage)

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38
Q

Where did you get the finance costs from?

A

I spoke with the developer to establish whether they could get a specific finance rate
Spoke with a colleague in the CJ in-house development team to ascertain what rate I should apply

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39
Q

Why does the finance cost differ from developer to developer?

A

Risk factors, the status of developer (independent vs. large developer), available equity, LTBV ratio

40
Q

How do you account for risk in a development appraisal?

A

Profit on cost – % of GDV or total construction cost
Contingency
*Never in the yield

41
Q

Do you need planning permission for demolition?

A

In most cases you will not need planning permission– unless LA has made an article 4 direction restricting
Need to apply for a formal decision on whether council wishes to approve details of how you wish to demolish
Listed Buildings – no planning application but may need Listed Building Consent
Conservation Areas – may need planning permission

42
Q

What is a ‘deleterious material’?

A

Can degrade with age and cause structural problems to the building i.e. High alumina cement, woodwool shuttering, calcium chloride

43
Q

When inspecting a development site, what would you be looking for?

A

Evidence of contamination – chemicals, oils, oil drums, subsidence, underground tanks, bare ground, dead vegetation, landfill

44
Q

What creatures would you not want to see on a development site?

A

Bats, Lesser Spotted Newts – any animal which is protected

45
Q

If your appraisal produced a negative value, would you report this value to your client?

A

Yes

46
Q

How much does it cost you to submit a planning application?

A

Dependent on location and extent of scheme – use Planning Portal’s online fee calculator

47
Q

What measures of profitability are there?

A

IRR, Profit on Cost, Profit Erosion Period, Rent Cover

48
Q

What’s the methodology for a residual site valuation?

A

Gross development value
- Market value of completed proposed development at today’s date / date of valuation
- Use plans if needed to measure on CAD
- Valued at current date assuming present values and market conditions
- Comparable method of valuation used to establish rents and yields
- All risks yield used
- An allowance of a rent period or tenant’s incentives and marketing void can be assumed
- Purchasers costs are usually deducted from commercial property valuations

49
Q

How is the developers profit calculated?

A
  1. % of GDV or total construction costs - say around 15% - 20% depending upon risk
  2. GDV more frequently used as a base for residential use
  3. If scheme low risk (pre-let / sold) a lower return may be required
  4. The % of profit required has recently risen given the current riskier market conditions
  5. Other methods to calculate the profit requires is to base it on the return upon capital employed.
  6. Deduct the TDC from the GDV to establish the site value having allowed for normal purchaser’s costs
  7. Cross check the site value with a valuation of comparable site values if possible
50
Q

What’s overage?

A

Arrangement made for the sharing of any extra receipts received over and above the profits originally expected as agreed
Can be shared between vendor / landowner and developer in pre-arranged apportionment.

51
Q

What is overage sometimes referred to as?

A

Claw back

52
Q

What is a Development Property, as defined in the RICS Guidance Note ‘Valuation of Development Property’ 2019?

A

Development property is defined as “interests where redevelopment is required to achieve the highest and best use, or where improvements are either being contemplated or are in progress at the valuation date”. This may include;
* The construction of buildings
* Previously undeveloped land which is being provided with infrastructure
* Improvement / alteration of existing builds
* Land allocated for development in a statutory plan.

53
Q

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

A

Dev appraisal – establishes viability/profitability of proposed development using client’s inputs
Residual – establishes market value of site using market inputs

54
Q

What is a residual valuation?

A

Establishes market value of a site using market inputs

55
Q

What is purpose of a residual site valuation?

A

To find market value of the site based on market inputs, at one moment in time, based upon simple residual valuation or DCF method, taken at date of valuation

56
Q

What is the methodology for residual site valuation?

A

GDV – Total development costs (inc. dev’s profit) = residual amount to purchase land

57
Q

How do you calculate the GDV?

A

Market value of proposed development at date of valuation, use comparable method to establish rents and yields

58
Q

What are the different costs involved in total development costs?

A
  • Site preparation
  • Planning costs
  • Building costs
  • Professional fees
  • Legal fees
  • Contingency
  • Marketing costs and fees
  • Agent’s fees
  • Developers profit (possibly) – 15-20% on cost/GDV
  • Finance
59
Q

What is involved in site preparation costs?

A

Demolition, remediation works, landfill tax, provision of services, site clearance, levelling, and fencing – obtain contractor’s cost plan for these works (case specific £150-200)

60
Q

What is included in planning costs?

A
  • s.106 payments – agreement for planning obligations (e.g., affordable housing, infrastructure costs, new school etc)
  • CIL (Community Infrastructure Levy)
61
Q

How are building costs sourced?

A

Sourced from client info, architects and builders price book, surveyor estimates

62
Q

What are professional fees?

A

10-15% plus VAT of total construction costs for prof fees for architects, M&E, project managers, structural engineers, CDM principal designer costs

63
Q

What is contingency?

A

10-15% of construction costs depending on level of risk

64
Q

What are marketing costs and fees?

A

Realistic marketing budget (use evidence/quotes), cost of EPC, normal sale fee of 1-2% of GDV and normal letting fee c.10% of initial annual rent

65
Q

What are typical levels of agents’ fees?

A

1% for sale, 10% for letting

66
Q

What are the 3 elements of finance?

A
  1. Site purchase
  2. Total construction and associated costs
  3. Holding costs to cover voids until disposal of scheme
67
Q

How do you work out developer’s profit?

A

GDV – total development costs to establish site value, allowing for normal purchasers’ costs

68
Q

What are the different types of debt finance?

A
  1. Senior debt – typically 6% - first level, takes precedent over mezzanine
  2. Mezzanine finance – typically 8-9% - additional funding over normal LTV – private equity
69
Q

What are the limitations of residual valuations and financial modelling?

A
  • Importance of accurate information and inputs
  • Does not consider timing of cash flows
  • Sensitive to minor adjustments
  • Implicit assumptions hidden and not explicit (unlike a DCF)
  • Always cross check with comparable site valuation if possible
70
Q

How do you value marriage value?

A
  1. Value both individually
  2. Value merged interest
  3. Difference is marriage value
71
Q

What is hope value?

A

Value arising from any expectation that future circumstances affecting the property may change

71
Q

What does the Charities Act 2011 state?

A

Charities must:
* Obtain a written report from a qualified surveyor on the proposed sale
* Properly market the site/property
* Be satisfied that they have gained the best terms possible

72
Q

What is a ransom strip?

A
  • A piece of land which controls the access to another piece of land
  • 15% - 50% of uplift in value
  • Negotiated
  • Stokes v Cambridge 1961 – 1/3 in value
73
Q

What are the typical purchasers’ costs?

A
  • SDLT – at prevailing rate
  • Agent’s fees – 1% of purchase price + VAT
  • Solicitor’s fees – 0.5% of purchase price + VAT
74
Q

What does WAULT stand for and what does it do?

A

Weighted average unexpired lease term to first break or lease expiry

Judges the value of contracted rents in a property, or more commonly, a portfolio of properties.

75
Q

What is included in RICS PS Financial Viability in planning conduct and reporting 2019?

A

Helps valuers challenge planning viability assessments:
* Reporting
* Process requirements
* Benchmark land value
* Legislation
* The development plan
* No performance related fees
* Must have sensitivity analysis

75
Q

What are the calculations for working out finance?

A
  • Bank of England Base rate – 0.10%
  • 6-month SONIA (Sterling Overnight Index Average) – 0.05%
  • 10-year guilt – 0.275%
  • Transition from LIBOR to SONIA – FCA considers it will no longer be necessary to persuade or compel banks to submit to LIBOR
76
Q

What is the RICS Guidance Note on Viability?

A

Financial Viability in Planning 2012:
* Viability in a national planning policy context
* National planning policy framework
* CIL regulations
* Use of viability appraisals
* Appraisal framework
* Definition of site value
* How to use viability assessments to aid professional judgement
* What to include in a viability assessment

77
Q

What does S106 of Town and Country Planning Act 1990 state?

A
  • Flexible tariffs based on policy
  • E.g., for developments of more than 15 hours, 40% must be affordable housing
  • Calculate it by speaking to planning/residential team and LA and compare to similar schemes
  • Necessary to make development acceptable in planning terms
  • Related to development
  • Fair and reasonable in scale and kind
78
Q

What are the main differences between CIL and s.106 Planning Obligations?

A

CIL
* For all infrastructure necessary to support the development
* Cannot be used to secure affordable housing
* A charging schedule must cover the whole area
* Tariff based charging system based on the increase on floor area of the scheme.
* Viability is tested at district-wide level at the evidence gathering stage the charges are mandatory.

S. 106 Planning Obligations
* Only justifiable if necessary to make the development acceptable in planning terms, directly related to the development and reasonable in relation to the scale of the development
* Can be used to secure affordable housing.
* Site specific charge
* By negotiation
* Viability testing undertaken on a case by case basis

79
Q

What is included in RICS GN the valuation of development property 2019?

A
  • Defines development property as ‘interests where redevelopment is required to achieve the highest and best use, or where improvements are either being contemplated or are in progress at the valuation date’
79
Q

What is the cash flow approach?

A
  • Period by period cash flow
  • Good to accurately reflect timing of payments
  • Outcome of each period carried forward to next period
  • Final period gives profit
  • Use simple calculations for each period
  • Horizontal method – calculation across rows
  • Good for breaking down overall costs and allowing for different payment pattern
  • Shows timing of maximum deficit
  • Useful to arrange finance
  • Can be a basis for a budget
  • Use an excel spreadsheet or bespoke software
80
Q

What is the current legislation for Permitted Development rights?

A

It is The Town and Country Planning (General Permitted Development) (England) Order 2015 which has been amended several times (latterly in 2021)

80
Q

What is found in a site appraisal?

A

Specifics:
* Extent of the site
* Shape of the site and ground contours
* Flood risks
* Sizes and height of any existing buildings
* Height of adjoining properties
* Efficiency of existing building
* Issues which may produce excessive costs e.g., party wall, boundary, and rights of light issues
* Geotechnical conditions
* Contamination risk
* Availability and capacity of infrastructure
* Evidence of other head or occupational interests in the property
* Physical evidence of the existence of rights of way, easements, encumbrances, overhead power lines, open water courses, mineral workings, tunnels, filling, tipping etc
* Preliminary legal investigations (for instance, underground utility easements, restrictive covenants, rights of way etc)
* The presence of archaeological features or human remains
* Evidence of waste management obligations
* Water or mineral extraction rights

80
Q

What are different analyses?

A
  • Sensitivity analysis – reappraisal with one factor altered
  • Scenario analysis – complex model where multiple features change using models
  • Massing analysis – analysis based on site density and building heights incorporating mattes such as Rights to Light
  • SWOT analysis – strengths, weaknesses, opportunities, and threats
80
Q

What is best practice with development appraisals?

A
  • Avoids reliance on a single approach or method of assessing the value of the development property
  • Requires risk analysis to be used too so that changes to inputs which might affect the valuation can be assessed and various scenarios can be modelled
80
Q

What is Permitted Development rights?

A

For some forms of development, planning permission is not required and there are now many permitted development rights for change of use.

80
Q

How is finance calculated?

A
  • Interest on finance is rolled up and paid back, along with all other costs, at end of development period on a compound basis
  • During a void period, interest is payable on all costs so any extensions to this time period will significantly increase the amount of loan finance incurred
  • A lender will charge interest at the bank base rate for lending plus a return for risk:
    o Magnitude of risk premium will depend on the status of developer, the size and length of loan and the amount of collateral the developer intends to contribute
  • Detailed cash flow projections are essential once the project is under way in order to incorporate changes in revenue and costs, and particularly so for phased developments
  • Interest accrued on money borrowed to purchase the site, construct the property, and hold over any void period is calculated separately
  • S curve repayment model = quick & easy, half the interest rate or half the period to reflect staggered draw down
81
Q

What basis of measurement are BCIS Cost Estimations provided against?

A

For commercial and residential property they are provided in £/m² on a Gross Internal Area (GIA) basis.

82
Q

Have you actually been onto BCIS? How Does it Work?

A

It is the Building Cost Information Service which is an online database where you can select schedule of rates – the most common schedules I use are:
- BCIS Alterations and Refurbishment
- BCIS Major Works Estimating Prices
- BCIS Minor Works Estimating Prices

83
Q

What is a Golden Brick?

A

The last brick you last lay in order to start the sale of the affordable units

84
Q

What is benchmark land value?

A

The minimum value at which it is considered that the landowner has received a competitive return.

85
Q

What is the aim of CIL (Community Infrastructure Levy)?

A

Reduce the considerable negotiations required to complete S.106 agreement and standardise and speed up planning approach to viability testing

86
Q

How is CIL charged?

A

On a tariff that relates to the size of change to the size of a development based on net floor space

87
Q

What is affordable housing covered by?

A

S. 106 agreements, not CIL

88
Q

What is the current interest rate?

A

5%

89
Q

What is the current inflation rate?

A

2.2%

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