Development Appraisals

Question 1

What is the difference between s106 and cil

Answer 1

S106 agreements address site specific mitigation required to make a new development acceptable in planning terms. Whilst CIL addresses the broader economic impacts of the development

Cil payments are made within 60 days of commencement date where as s106 payments are usually paid in instalments as the development progresses

Question 2

What is CIL

Answer 2

Community infrastructure levy which is placed on new developments in the area to contribute to the infrastructure needed to develop the area

Paid by a price per meter on net additional floor space. Self build social housing and charitable developments are excempt

Cil is paid within 60 days of commencement date

Question 3

What is section 106

Answer 3

Section 106 forms planning obligations set by the council which are legally binding.

Can include making so many affordable houses,
Having so much green space
Or contributing money to flood mitigation etc.

S106 payments are usually made in instalments

Question 4

What is part L in Development

Answer 4

Sets standards for buildings energy efficiency and carbon emissions.

Question 5

What is first fix and second fix in construction

Answer 5

First fix refers to after the building is wind and watertight. First fox involves structural work such as putting up stud walls, framing, cables and pipes and is done before any plasterwork

Second fix involves finishing touches after plastering, which involves connecting sinks and baths to pipes, putting on skirting boards, switches and other decorative features. Includes painting

Question 6

What is a development appraisal

Answer 6

A calculation used to establish the viability/profitability of a proposed development based upon the clients inputs.

It can assume a site value or calculate a site value

Question 7

What is a residual site valuation

Answer 7

Based on the concept that the value of a property with development potential is derived from the value of the property after development less cost of taking the development including a profit for the developer

Question 8

What software do you use for development appraisals

Answer 8

I personally use aprao to conduct my development appraisals I am aware there are other software systems out there such as argus

Question 9

What costs do you deduct from GDV for. A development appraisal

Answer 9

Build costs
Professional fees
Planning fees
Market,letting and disposal costs
Contingency
Finance costs
Site specific costs such as demolition
Profit

Question 10

What is sensitivity testing

Answer 10

Due to the lag from when a valuation is undertaken to when the development is complete. Market factors may change I therefore produce a sensitivity analysis which may show how profit will change if average build costs or GDVs rise or fall.

Question 11

What is contingency

Answer 11

A future event or circumstance that cannot be predicted with certainty such as additional construction

Question 12

How do you work out your contingency rate

Answer 12

Based on the risk of the development, typically between 5-10%

Question 13

How do you calculate gdv of a development

Answer 13

Usually use the market approach and comparable method of valuation to apply a rate psf to the development

Question 14

How would you reflect planning requirements in your development appraisal

Answer 14

I would take into account an appropriate level of s.106 costs, that I would find from the relevant planning authority. This would also be deducted form GDV

Question 15

How do you estimate the total construction cost of a development

Answer 15

I would look to use BCIS to ascertain what cost levels are on nearby schemes in the area.

Question 16

Where would you get your finance rate for a development appraisal from?

Answer 16

Firstly I would check with the client as they may have a specific loan facility and be able to borrow money at a certain rate. Which i would then use.

If not provided I would use a typical finance rate of 10%

Interest should also be calculated to cover the time period from the purchase of the land, construction and sale void to the completion of the loan

Interest is usually calculated on a rolled-up basis meaning that the developer will pay it back in one go once he has exited the loan. Usually upon sale of the development

Question 17

What is debt funding vs equity funding

Answer 17

Debt funding is lending money from a financial institution

Equity funding is using your own money or selling shares in a company to finance the development

Question 18

What is a typical LTV rate

Answer 18

60% of GDV or 80% of construction costs

Question 19

Difference between residual and development appraisal

Answer 19

A development appraisal will typically give you profitability where as a residual appraisal will give you the value of the land

A residual will give you a market value and therefore you would need to use market led costs, either from BCIS or if the clients costs appear reasonable or they have gone to the market to actively obtain costs.

A residual is based on the valuers inputs and is for a practical purpose

A development appraisal will be based off costs provided by the client

Question 20

What are the main weaknesses of the residual method of valuation

Answer 20

Extremely sensitive to minor adjustments

High quality of information for the inputs is essential

Does not consider timing of cash flows

Should always be cross checked against comparable sites when possible

Question 21

Why are purchases costs deducted from an appraisal

Answer 21

Purchasers costs are deducted from GDV as a purchaser would need to pay these when buying the finished product. This will provide the NDV

Question 22

How would you reflect potential contamination costs in the valuation of a brownfield site

Answer 22

Talk to an expert in the field to obtain a cost to deduct, otherwise I could increase contingency or even soften the yield used to obtain by GDV

Question 23

What is a section 278 payment

Answer 23

Used for highway works

Question 24

whats included in Professional fees and how much are they

Answer 24

Usually 10-15% and consist of architect fees, building surveyors, project managers

Question 25

What is mezzanine funding in development

Answer 25

Additional funding for additional monies required over the usual LTV ratio. Charged at a higher interest rate for a shorter period

Question 26

When do you need most of the costs for a development? What is an S-Curve

Answer 26

An s-curve shows when developers usually require the funding.

At the beginning of the development there isn’t much borrowing as not all the money will need to be drawn down at once

In the middle as construction progresses more borrowing commences and can become quite steep.

Once the development is complete borrowing tails off again until you have sold your development and paid off the loan

In theory it evens itself out!

And we just apply a rolled up interest at a set rate for a set period

Question 27

What are the three forms of sensitivity analysis

Answer 27

Simple sensitivity ananlysis- analysis of key variables such as GDV, build cost, yield and finance rate (usual)

Scenario analysis- change scenarios for the development such as timings/costs or even modifying the design

Monte Carlo simulation- using probability theory such as crystal ball software

Question 28

Development property definition

Answer 28

Interests where redevelopment is required to achieve the highest and best use.

Or where improvements are either being contemplated or are in place as of the valuation date

Question 29

Are you aware of any RICS guidance on valuing development property

Answer 29

RICS Professional Standard: valuation of development property, 2019

Question 30

What is overage

Answer 30

Often referred to as clawback,

Basically an arrangement made for sharing extra profits over a set profit expected which is agreed in a pre-agreed formula. Shared between vendor and developer usually

Question 31

residual Level 2 bungalow valuation

Answer 31

Alwoodley Leeds,

New build premium and bungalow premium factored into rate psf.
Provided sensitivity analysis showing impact on profit levels and site value should gdvs rise and build costs rise or fall.

Is a development appraisal not a residual as used clients build costs

Question 32

Nunthorpe dev appraisal lvl 2

Answer 32

4 large dwellings development appraisal for agency purposes he wanted to know what the site was worth so I conducted a residual valuation to calculate land value.

Was just involved in the valuation and was not involved in the marketing. Valuation for internal purposes

Question 33

Part complete scheme dev appraisal lvl 3

Answer 33

Crossgates in east Leeds

Part-built scheme, development appraisal sensitivity analysis. Advised client to proceed with caution as build costs were rising at the time and gdvs were expected to fall give recent increase rate rises

Question 34

Residual valuation batley

Answer 34

Residual valuation for loan security purposes for a block of flats in batley 12 x apartments. Came through a secondary lender in close brothers

Customers coatings too low so I provided my figure as MV1 and provided a special assumption of MV2 showing an increase in value using the customers costings.

Question 35

why did you advise that the markets are uncertain atm in relation to build costs and GDVs

Answer 35

GDVs were predicted to fall due to increasing interest rate rises affecting buyer affordability and price of materials are increasing affecting raising build costs

Question 36

what are build costs for residential dwellings

Answer 36

roughly 140-200 psf depends on development detached more expensive

Question 37

what are build costs for industrial units

Answer 37

roughly 80-100 psf