DEVELOPMENT APPRAISALS

Question 1

What is a Monte Carlo simulation?

Answer 1

A Monte Carlo simulation is a method of using random sampling to estimate complex outcomes and assess uncertainty in a model or process.

Question 2

Tell me about planning/costs/GDV/individual site elements in relation to a development appraisal?

Answer 2

In a development appraisal, “Individual Site Elements” refer to site-specific factors such as location, size, topography, and existing infrastructure. These elements affect both the costs of the project and its Gross Development Value (GDV).

Question 3

Tell me about your understanding of:

Valuation of Development Property 2019

Answer 3

Provides standards and guidance for financial viability assessments in development property, ensuring consistency and transparency in the valuation process.

Question 4

Talk me through the key inputs when undertaking a development appraisal.

Answer 4

Land value: The cost of acquiring the land for the development.
Development costs: Expenses related to construction, design, planning, and legal fees.
Residual value: The estimated value of the completed development after deducting costs.
Developer’s profit: The anticipated profit margin for the developer.

Question 5

Which construction industry inflation indices can you use?

Answer 5

Construction Price Index (CPI)

Question 6

What is IRR?

Answer 6

It’s a financial metric that measures the profitability of an investment. It’s the discount rate at which the net present value (NPV) of an investment becomes zero.

In other words, it’s the rate at which the investment’s expected cash inflows equal its initial cash outflows (breaks even).

Question 7

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

Answer 7

DCF development appraisal provides a more in-depth analysis of cash flows, using discounting and calculating NPV & IRR, while normal development appraisal offers a broader overview with less detailed cash flow analysis.

Question 8

What is a discount rate?

Answer 8

Rate used to discount future cash flows to present value

Accounts for time value of money and risk

Higher discount rate = lower present value

Question 9

What is mezzanine finance and how is it priced?

Answer 9

An addition over and above the initial senior debt loan.

Priced higher as more risk

Question 10

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

Answer 10

Development plans

Planning permission

Projected income and expenses (appraisals)

Environmental impact

Contracts

Question 11

What is the difference between senior debt and equity finance?

Answer 11

Senior debt is a loan with a fixed return and priority over equity claims. (like a mortgage)

Equity finance is the process of raising capital by selling ownership shares in a company, giving investors partial ownership rather than requiring repayment like a loan. (like dragons den)

Question 12

Explain what the Golden Brick means in relation to VAT.

Answer 12

The Golden Brick is a term used in the UK to describe a VAT-exempt property. Housing associations take on units when construction starts.

Question 13

Tell me about a development appraisal you have carried out. What was the background to your development appraisal here?

Answer 13

I have completed many development appraisals, in particular for FVAs. I have just completed a development appraisal for an FVA for a site in Harrow. This was an assessment to consider whether a new development could contribute affordable housing.

Question 13

What tools do Natural England provide to help developments achieve biodiversity net gain (BNG)?

Answer 13

Biodiversity Metric - Primary tool which calculates the number of units.

Also provides an offsite marketplace where biodiversity cannot be delivered on site.

Question 14

Tell me about a development appraisal you have used to advise on the acquisition/disposal of a development site

Answer 14

Urmston, valuation of development land to inform the acquisition. Carefully considered all inputs to the appraisal.

Question 15

Tell me about an example of when you have provided reasoned advice on an appropriate source of development finance.

Answer 15

We typically do not act for developers sourcing general funding from banks but I have bene involved with with completing businesses cases for grant funding applications.

Question 16

Pollington, Goole

How did you go about establishing the costs of remediation?

How do you establish the planning policy context and what was this?

What alternative development approaches did you need to consider to inform your advice and how did you go about this?

Did you advise on planning risk or build this into your development appraisal?

Answer 16

Remediation costs were provided by a specialist remediation contractor appointed by the client.

Planning policy context was reviewed, and informed by the planning consultant. The site was allocated for mineral safeguarding.

Our instruction from the client was to provide advice on whether the residential development proposed would fund the remediation.

The client had appointed a planning consultant.

Question 17

St Cuthberts, Carlisle

What was the status of this project at your instruction?

Explain your role and methodology.
How did you establish the search area for developments included?

Explain your advice regarding building regulations.

How was your advice utilised by the client?

Answer 17

The project was in the overall master planning stages as the council developed their framework.

the role was to evaluate the economic viability of the sites and determine their potential contributions to Section 106 (S106) for community infrastructure.

We completed market research in the immediate area.

Our advice was that the sites would struggle to pay the full sum, and along with other policy requests, we provided scenario testing to show how it was possible. The advice was utilised to help the council understand if the S106 contributions could be asked for.

Question 18

What is NPV

Answer 18

NPV (Net Present Value) is the difference between the present value of cash inflows and the present value of cash outflows, over a given time period.

Question 19

What is a development yield?

Answer 19

Measure of the profitability of a development project. It’s expressed as a percentage and represents the annual return on investment (ROI).

Annual Net Income / Total Dev Costs x 100 = Dev Yield

Question 20

Differences between development yield and IRR?

Answer 20

Development Yield is a simpler measure of profitability based on rental income, while IRR provides a more comprehensive analysis that considers the time value of money and can be applied to more complex projects.

Question 21

What are purchasers costs?

Answer 21

Typically Agency, Legal and Stamp Duty.

Question 22

What are the thresholds for stamp duty?

Answer 22

Refer to the HMRC online stamp duty calculator.

Various thresholds for values and tenure.

Question 23

What are the mandatory requirements in an FVA

Answer 23

Objectivity, impartiality and reasonableness statement

No incentive fees

Transparency of information

Conflict Checks

Approaches to BLV

Sensitivity Analysis

Question 24

What are the bandings for Stamp Duty?

Answer 24

Up to £250,000 = Zero

£250,001 to £925,000 = 5%

£925,001 to £1.5 million) = 10%

The remaining amount (the portion above £1.5 million) = 12%

Question 25

Pollington

How did establish the viability - what measures were used to show the residential development as a requirement?

How was profit established?

Answer 25

The site was heavily contaminated, the viability assessment was in place to access whether residential development could subsidise remediation.

We utilised the profit margin established in the local plan viability assessment.

Question 26

Pollington

What was the benchmark land value? How was this assessed?

Answer 26

The BLV was assessed on an EUV basis.

In this specific case, we applied a nominal BLV of £1 - this was becasue the site was so contaminated, it was a liability. It required a large sum of money to decontaminate, there was no value and thefefore no premium attaached.

Question 27

Can you talk me through the circularity issue with regards to viability?

Answer 27

High land prices not always taking into account planning obligations.

Obligations reduces the developer’s profits.

They then argue that they need to reduce the amount of affordable housing.

This process can inflate land values because developers anticipate that they can get relief from certain obligations by proving a lack of viability, which then justifies higher land prices.

Question 28

How do you calculate the GDV of affordable housing tenures?

Answer 28

Affordable Rented – The rental values are based on the local housing allowance for the type of unit in the locality. Then capitalised.

Shared Ownership – Modelled on an initial 40% equity sale with the retained equity being the subject of a rental charge which is equivalent to 2.75% per annum.

We often will apply simple transfer values based on consultation with RPs as to their effective equivalent.

Question 29

FVA Long Whittenham - what was the benchmark land value, how was this assessed?

Answer 29

In this particular case we considered both the EUV and the AUV.

The EUV was agricultural use, 10k an acre, we then attempted to establish the premium by running policy compliant RLV. The premium can be calculated by the difference between these.

In this case the RLV was negative, and therefore the scheme couldn’t support AH.

AUV was effectively the same as this as the development was in line with the allocation.