Development Appraisals Flashcards
What are the basic elements of a development appraisal?
Gross development value minus total costs including a fixed land value equals developers profit.
What is the difference between a development appraisal and a residual appraisal?
The calculation contains the same elements, but in a development appraisal the outcome is profit whilst in a residual appraisal it is the land value. Development appraisals reflect client-specific assumptions, whereas for residual appraisals I use market assumptions.
How did you appraise X development site?
I was instructed to provide current market value for the site, so I produced a residual site valuation. I calculated the Gross Development Value, from which I took away the costs associated with the development, in order to produce a residual land value.
What do the costs include?
Costs associated with development include build costs, professional fees, marketing fees and the developer’s profit.
What are professional fees made up of?
Architect – 5%, Structural engineer – 1.5%, Quantity surveyor – 1%, Project manager – 2%, M&E engineer – 1.5%, CDM principal design and contractor – 0.5%. Planning consultant and assumption for additional fees assoc. with obtaining planning (e.g. Heritage consultant etc).
How did you get your build costs?
My client supplied the build costs, which had been prepared by their cost consultant. These were prepared independently by a qualified Quantity Surveyor, and I checked them with a colleague in Building Consultancy who agreed that they were reasonable. I therefore adopted these in my appraisal.
How else could you get build costs?
I could use BCIS, which provides average build costs for different types of property based on samples of tender documents. These can be filtered for the region and development type.
Are there any problems with BCIS?
In London BCIS is not very applicable as it is very heterogeneous and doesn’t take into account site specific constraints and circumstances. For example, large basements, piling, party walls and restricted access. BCIS also doesn’t include contingency, externals and abnormal costs.
How did you arrive at your GDV?
I used the comparable method of valuation to come to an opinion of value for the proposed units. I produced a unit by unit pricing schedule with reference to the proposed plans and area schedule. In order to value the affordable housing element I talked to my colleagues in the affordable housing team, who use a discounted cashflow model to value the affordable housing.
What are purchasers costs?
I included purchasers costs of 6.8% on the commercial element. This is made up of stamp duty at 5%, legal and agency fees at 1.5%, plus VAT.
Why 4.99% stamp duty?
The stamp duty payable relates to the existing use of the property. Commercial SDLT has 0% up to £150k. 2% between £250k and 5% over £250k.
How would you appraise a large development?
I would use phasing to cashflow the build and revenue of the development.
How do you decide what finance rate to use?
I discuss finance with my colleagues within the capital advisors team to see what banks are currently lending at (LIBOR plus premium). This represents a blended rate for different types of finance including senior debt and mezzanine finance. It also includes entry and exit fees.
What amount of development is usually equity funded?
The higher amount of equity funding the greater the risk to the developer. Current lending restrictions mean that loan to value ratio is in the region of 50-60%, reducing the amount of senior debt. However, developers can then seek mezzanine funding over this level.
What impact would it have if your client said they had mezzanine funding?
Mezzanine funding is usually lent at a higher interest rate so I would increase the finance rate in my appraisal.
How do Banks set their interest rates?
With reference to the Bank of England base rate and Libor, which is the London inter-bank lending rate. They will then apply a premium to this.
What Loan to Value ratio would you expect?
Loan to value ratios have been reduced following the financial crisis. The LTV would differ depending on the lender and the borrower, however I would expect a maximum of approximately 65%.
What are the main methods of financing a development?
- Senior debt – partial funding from banks
- Mezzanine finance – stretch finance using a secondary source to reduce equity input
- Equity finance – profit share with an equity partner
- Joint venture – reduce risk, deliver scheme with a partner through an SPV
- Forward fund – secures funding for project delivery and asset is usually transferred to funder at completion
Why would you use PoC rather than Profit on GDV?
Costs tend to be more certain and stable than GDV in London.
Are there any other methods of measuring return?
IRR – which stands for the internal rate of return.
What does the IRR measure and when would you use it?
It is essentially an annualised return on an investment and is used to compare investment or development opportunities which have different timescales to determine which will be the most profitable (discount rate required to reach a Net Present Value of zero). Based on the principle that money is worth more today then it is in the future
What IRR would you expect?
If a scheme was completely equity funded then circa 10%. If there was a high level of debt funding then 17-20%.
How would you calculate IRR?
Essentially I would find the discount rate which resulted in a net present value of zero. I could do this through linear interpolation, creating two cashflows and applying a different discount rate to each - one that resulted in a positive net present value and one that resulted in a negative net present value
How do you come to your demolition costs?
I would advise the client to have a demolition survey carried out, however if this was not appropriate I would seek advice from a colleague in building surveying. In my experience demolition costs tend to range between £3-5 psf.
How would your approach to an appraisal vary on a PD scheme?
I would strongly advise my client to appoint a QS to prepare a cost plan as the build costs for PD schemes can be very variable depending on the condition of the building and how well it lends itself to conversion.
Are there any problems with using Argus Developer software?
Argus developer is useful as it is a very quick method of running a development appraisal. However, it does make certain assumptions which cannot be controlled.
What types of sensitivity analysis are there?
- Sensitivity analysis
- Scenario analysis
- Monte Carlo
Is it realistic to not include reservation fees and deposits within your cashflow before PC if you’re assuming off plan sales?
Yes as in most circumstances the deposit will be paid to the developer’s solicitor and held by them until completion. The only circumstance where the deposit is paid to the developer is when they are registered with NHBC as NHBC insure the deposit in the event the developer becomes insolvent and does not complete.
What is NHBC?
NHBC stands for the National House Building Council. They offer warranties on new homes, which are required by most mortgage lenders. Developers who sell properties with NHBC warranties must adhere to the NHBC standards of construction, and the site will be inspected at key stages to check compliance. For the first 2 years the developer will be liable for fixing any defects, and for the next 8 years the NHBC will fix defects for structural and weather proofing parts
What is contained within the RICS valuation paper no 12 valuation of development land 2008
outlines the following: how to assess development potential, valuing using the comparable method, residual method, assessing the land value and reporting the valuation
What does BCIS stand for and what does it look like
The Building Cost Information Service
it has news on the home page and the contents down the left hand side where the analyses section can be found to determine the build cost categories.
How would you promote the site within the local plan?
There are two key elements to land promotion:
Submit evidence to the council showing why the development you are proposing is actually needed.
Demonstrate why your site is suitable for the type of development that is needed.
How would you end a protected tenancy?
Landlord serves a s25 notice outlining the grounds of s30
Or s26 notice which ends existing lease and requests a now one
Tenant leaves on vacant possession or serves a s27 notice
The key sections of the 54 act?
23 - business tenancy 24 - tenancy ends 24a - interim rent 25 - LL end current tenancy 26 - tenant end current tenancy and request new one. 27 - tenant end tenancy 28 - re gear 29 - order by Cory for new tenancy 30 - grounds for opposition 37 - compensation 38 - health warning
How can you oppose a new lease?
A) breach of repair B) delay in paying rent C) other substantial breath D) suitable alternative accommodation. E) uneconomic sun division F) demolition G) owner wishes to occupy over 5 years
<14 years 1x rateable value
>14 years 2x rateable value
Important L&T acts?
54 - gives security of tenure
27 - mean LL not unreasonably withhold consent
88 - adds to the 27 act and not to delay
95 - privity of contract
What is outlined within RICS GN Financial Viability in Planning 2012
Describes key features of development viability and why they are used in planning
Development Management
How to assess viability
Good overview of competency
how else could you assess development land?
Cash flows - setting out the year on year expenditure to show the scheme profit.
What RICS guidance is there for CPO?
RICS GN Surveyors Advising in respect of CP and statutory compensation UK 2017
fees must be agreed prior to work starting
Procedure for confirming CPO?
Acquisition of Land Act 1981 CPO drafted and confirmed CPO is made and notice is served Period of objections CPO eventually confirmed after inquiry.
What impact did Housing and Planning Act 2016 and Neighborhood Planning Act 2017 have on the CPO process?
Aimed at speeding up CPO Giving longer notice to occupiers acquiring authority makes CPO SoS is required to publish timetables CPO can be exercised by GVD (General vesting Declaration) or Notice to treat.
What is outlined in the RICS Professional Standards and Guidance - Valuation of Property October 2019?
Establishing the facts Assessing the development potential Valuation: the market approach Valuation: the residual method. Risk analysis and residual profit - sensitivity Reporting the valuation
