Development Appraisals (L3C) Flashcards
1
Q
What is viability?
A
Viability is defined in the PPG 010 as ‘Looking at whether the value generated by a development is more than the cost of developing it. This includes looking at the key elements of GDV, costs, land value, landowner premium and developer return.
- If FVA shows landowner and developer returns are not enough to satisfy the benchmarks, the development typology is unviable at the level of developer contributions being tested.
- Residual land value compared to benchmark
- Assess whether new use is more valuable than EUV
2
Q
Name some key documents for development
A
- RICS Valuation of Development Property (1st ed, 2019) Guidance Note
- RICS Financial Viability in Planning: Conduct and Reporting (1st ed, May 2019) Professional Statement
- RICS Guidance Note: Assessing Viability in Planning under the NPPF 2019 for England (1st ed, March 2021)
3
Q
What is the definition of Development Property?
A
The IVS defines development property as an “interest where redevelopment is required to obtain highest and best use or where improvements are being contemplated or in progress at the valuation date”.
4
Q
What is the definition of Development?
A
“The carrying out of building, engineering, mining or other opportunity in, on, over or under land, or the making of any material change in the use of any building or other land”
5
Q
In what instance would you use a development appraisal?
A
When need to calculate the profit of a client’s proposed development, or offer advice on a proposed development, or for viability purposes.
6
Q
What is the difference between a residual valuation and a development appraisal?
A
A residual valuation = start with profit target, finding residual land value, based on market inputs to establish site value.
Development Appraisal = start with fixed land cost, working out the profit. Assessing the profitability of a scheme, based on client inputs and market assumptions
7
Q
How is residual land value calculated?
A
GDV - (build costs and profit) = Residualised Land Value
8
Q
What are the main costs in a residual valuation?
A
- Build costs
- Professional fees
- Statutory costs
- Marketing costs
- Legal costs
- Purchasers’ costs
- Agency fees
- Contingency
9
Q
What is typically included in professional fees
A
- input as a % of construction costs
- Architect (usually highest proportion of fees)
- Quantity surveyor
- Structural engineer
- Mechanical/electrical engineer
- Project manager
- VAT is always payable on professional fees
10
Q
What are the main components of a residual valuation?
A
- GDV
- Build cost
- Professional fees
- Statutory costs
- Marketing costs
- Legal costs
- Purchasers’ costs
- Agents fees
- Contingency
- Profit
- Residual land value
- Timescales
- Sensitivity analysis
11
Q
What is the profit erosion?
A
The period within which the profit from the development is eroded after completion due to holding charges (i.e. interest charges, building insurance, security, utility charges)
12
Q
What is IRR?
A
A time-weighted measure of return
- The annual rate of growth an investment is expected to generate
- The higher the IRR the better. If you wanted the improve the IRR, reduce timescales
- IRR for a small site - typically 30%
- The larger the site, the lower the IRR as far away from getting the money and being in a positive position.
13
Q
What is an S-curve?
A
- Pattern of cash flow I assume the construction costs follow within Argus Appraisal
- Represents assumption of how costs are spread across the construction period, with the majority expected during the middle of the construction period
- Purpose = to reflect when monies will be spent
- The interest is expected to follow the same pattern across this period.
14
Q
What are limitations of residual valuations?
A
- The use of assumptions, not real costs
- Assume 100% debt finance - not realistic
- Small changes to inputs can have a large impact on profit / residual land value
- RICS Guidance Note: Valuation of Development Property 2019: you should cross-check with the comparable method.
15
Q
How would you determine build costs?
A
- Using BCIS all in tender indices
- BCIS uses GIA as basis of measurement, excludes VAT, contingency, fees, external works and facilitating works
- Consult a building surveyor to find an up-to-date estimate of costs.
16
Q
How could I make build costs more specific using BCIS?
A
- Rebase to county instead of LPA
17
Q
What are weaknesses of BCIS?
A
- Often taken from public sector development - reduced spec
- Need to account for exclusions within the data
- Offers guidance, but specific costs of a project can vary
- Larger housebuilders tend not to submit data, so costs are inflated
- Limited data
- Time lag
18
Q
What is a sensitivity analysis and what are the different types?
A
- A risk analysis technique, used to present potential outcomes in changes to key variables
3 types:
- Simple sensitivity analysis of key variables i.e. sales values, construction costs (upwards and downwards increments)
- Scenario analysis: changes scenarios for the development content i.e. changing the phasing of the scheme or its design
- Monte Carlo simulation: using probability theory using software such as ‘Crystal Ball’
19
Q
How are outputs shown from sensitivity analyses?
A
Effect on land value or profit amount
20
Q
Where would you enter CIL/S106 costs into an appraisal?
A
- Statutory/LA section of Argus Developer. Also enter in accordance with CIL Liabiltiy notice (CIL typically paid at commencement of development) and S106 agreement (in line with triggers)
21
Q
What length of warranty do new build properties typically have?
A
10 years
22
Q
What is NHBC?
A
NHBC is the UK’s leading independent standard setting body and provider of warranty and insurance for new homes
Offers:
- First 2 years = defects insurance period i.e. faulty products
- Years 3-10 = structural insurance period
23
Q
What assumption do you usually make for development finance?
A
It depends, but typically I put 6% debt finance into my appraisals. I assume 100% of finance will be debt finance and generate a general market facing finance rate to allow for comparison purposes and not accounting for developer-specific discounts
24
Q
What are the main methods of finance?
A
- Debt finance - taking a loan
- Equity finance - selling shares, JV or own money
25
What are the main forms of developer finance?
- Senior debt - first level of borrowing (takes precedent over mezzanine funding)
- Mezzanine finance - additional money required over normal LTV - private equity)
26
When could a developer borrow at a lower rate?
If have a finance agreement with banks or the development is lower risk, therefore they may be offered a lower interest rate.
27
How do you input affordable housing in your appraisals?
- In cash flow, typically use 'golden brick' method to reflect typical income flow from the RP where usually expect a % of the receipt to be paid up front at the start of construction, sometimes with an element in the middle of the construction period (depending on length of development period) and the remainder on practical completion.
28
How would you calculate finance for borrowing for a site purchase?
On a straight line basis, using compound interest over length of development period
29
How would you calculate finance for borrowing for a construction?
Assume total construction costs (incl. fees) using S-curve calculation
30
How would you calculate finance for borrowing for holding costs?
On a straight line basis, using compound interest from completion of construction until disposal
31
Do you typically use profit on cost or profit on GDV?
Profit on cost - this is reflective of the risks associated with the development and a market facing input I would typically expect given the requirements of developers on similar development projects.
This is less variable than GDV, making it easier to draw comparisons.
32
What level do you usually put your contingency in at?
- It depends, 5% reflects an average level of risk and a buffer for unknown costs.
- I would increase this if the development presented higher risk eg shortage of materials, or speculative/in early stages of planning.
- Smaller scheme might have slightly higher % due to not translating into as much as a larger scheme.
33
What are some typical site abnormals?
1. Ground contamination
2. Ground retention required
3. Piled foundations required
4. Allowances for flooding
34
What is the benchmark land value?
EUV + premium (typically 10%-15% to incentivise development)
35
What finance rate do you usually apply?
Typically, 6% - includes Bank of England Base Rate (0.1%), cost of borrowing and arrangement fees.
(Base rate, entry fees, exit fees & risk - what the bank want to get in return for lending)
36
What are different ways of calculating the finance rate?
3 ways:
1. Bank of England Base Rate plus premium
2. Might be provided in client's loan terms
3. The LIBOR (London Inter Bank Offer Rate) plus premium (variable lending rate between banks for a 3 month borrowing term)
37
What are the main reasons a developer needs finance for?
1. Site purchase
2. Construction costs & associated costs
3. Holding costs to cover void until site disposed of
38
What is the loan to value ratio?
- Ratio expressing value of the loan in proportion to the value of the property
- Typically LTVs are 60% of value
39
What is a new build premium?
Typically 10-15% to account for a property being brand new and never been lived in and the fact it has a NHBC Warranty for 10 years.
40
How do Land Registry record new build prices?
On a net price, as developers often add incentives such as kitchen appliances/carpets etc for free.
- Developers need to complete disclosure of incentives form to Land Reg.
41
What unit values did you enter into your appraisal for Trinity School, Hartford?
- 2 beds at £300psf
| - 3 beds at £325psf
42
What did you put in for the build costs for your case study?
I put in £160psf all in for all of the units. I knew there would be a slight discount for the conversion units, but I wanted to be more on the conservative side.
43
How did you find your comparable evidence for Trinity School?
- Spoke to local agents
- New build and second hand comps (Rightmove and LandInsight)
- Applied premium to reflect increase in property prices over past year - Land Registry House Price Index and Halifax House Price index for the area.
44
Do you know how Land Registry records new build prices?
- Land Registry report on the NET sales price – often with developers they will through in incentives such as free kitchen appliance etc
- Complete a disclosure of incentives form to Land Reg
45
Why do new builds gain premium prices?
To reflect the fact they're brand new and haven't been lived in before (typically 10-15% premium)
46
What is the Red Book definition of GDV?
- There is no red book definition
- Defined in RICS Valuation of Development Property (1st edition October 2019)
- The aggregate market value of the proposed development, assessed on the special assumption that the development is complete on the date of valuation in the market conditions prevailing on that date.
47
Why do you compare land on an Open Market Plot basis?
* Simple way of drawing comparison between sites
* Each borough has a different level of affordable housing
* More consistent plot value rate
* The private plots is where the money really is – so more of a like for like basis
48
What were your professional fees for Trinity School?
5% - this is lower than normal to reflect the fact full planning permission has been granted.
49
What neighbouring uses could cause issues for a development site?
Industrial
50
what is net developable area?
* The area that can be developed – typically 65%
| * If not stated, can often gauge from masterplan
51
What does net developable area include?
The net developable area includes those access roads within the site, private garden space, car parking areas, incidental open space and landscaping and children's play areas (where these are to be provided).
52
How did you input your affordable housing for Aylsham?
35% Shared Ownership
65% affordable rent
Assumed blended rate of 55% OMV
33% AH scheme (policy compliant)
53
How did you input the commercial unit at Longstanton into your appraisal?
Comparable evidence
MR of £20psf
Void and rent free periods
1,125sq ft
54
What does the NPPF say about viability assessments?
* Where up-to-date policies have set out the contributions expected from development, planning applications that comply with them should be assumed to be viable
* It is up to the applicant to demonstrate whether particular circumstances justify the need for a viability assessment at the application stage
* The weight to be given to a viability assessment is a matter for the decision maker, having regard to all the circumstances in the case, including whether the plan and the viability evidence underpinning it is up to date, and any change in site circumstances since the plan was bought into force
* All viability assessments, including any undertaken at the plan-making stage, should reflect the recommended approach in national planning guidance, including standardised inputs, and should be made publicly available
55
What does RICS Professional Statement: Financial Viability in Planning: Conduct and Reporting (1st ed, 2019) do?
• Sets out 14 mandatory requirements that inform the practitioner on what must be included within financial viability assessments and how the process must be conducted
56
If didn’t have Argus – how would you apply finance costs in your appraisal?
* Typically developers do not need access to all the capital at once due to the S Curve nature of costs within a development scheme, that allow for costs to start at a low level, and rise through the construction process.
* The interest on the finance will normally be on a rolled up, compound interest basis, that will provide for the full amount of financing needed throughout the development.
* As not all of the money will not need to be drawn down on at once the interest rate payable will start low and will increase with the more borrowing.
* During site preliminaries there aren’t many outgoing costs and therefore your borrowing will be low.
* As time progresses into the construction phase your costs will increase particularly when the frames of your buildings are being put up etc. This may mean that the increase in borrowing is quite steep.
* Once your development is near complete and it is just the marketing your costs of finance will the tail off until you have sold your development and paid off your loan.
* You would typically look at it that you would only need to pay full interest for half of the proposed development, as interest payments will be very low and the start and then will be high in the second half. It in theory evens itself out!
57
What do you account for within your build costs?
Substructure (standard foundation solution) and superstructure (internal fabric, roof structure, curtilage)
- Garages = separate item
- Prelims (typically 10%) = separate item (heras fencing, portaloos, H&S, compound etc)
- Externals (typically 10-15%)= road/site works, landscaping
58
What percentage of professional fees did you allow for at Longstanton?
- 9% - didn't have benefit of planning permission.
59
What are the limitations of using software such as Argus for an appraisal?
- Key assumptions and calculations remain hidden - user reliant on information put in being correct.
60
What is overage?
Arrangement made for sharing any extra receipts received over and above profits expected in pre-agreed formula
61
What is the purpose of the RICS Valuation of Development Property Guidance Note (2017)?
- To be read in conjunction with Red Book
| - Guide valuer in approach to development property valuations
62
What is the purpose of the RICS Financial Viability in Planning: Conduct and Reporting Professional Satement (2019)?
- Sets out mandatory requirements that inform the practitioner on what must be included within financial viability and how the process must be conducted
- In response to dissatisfaction expressed among some stakeholders in the sector about the standards to which viability assessments are being produced
- Cover page: model of urban area with river and trees
63
In terms of profit levels, would you differentiate between the profit you adopt in your development appraisal on affordable housing vs that of private housing? If you were to do a 100% private scheme vs 100% affordable, would your profit level be the same?
Affordable housing – developer will sell to a RP – derisks that element of the scheme as just handing over to RP – tends to be 6% or lower % associated with that and as soon as complete, will get a chunk of cash that goes into your cash flow. Higher risk associated with market units you will have to sell yourself vs lower risk of affordable units.
64
Do you add any additional allowances over your base BCIS costs?
Externals (10-15%) & Prelims (typically 10%)
Cross check externals on £/sqm basis
Provided with total sqm of road by developer or rough estimate of area of road from plans. If not happy with where the costs are, I could refer to an internal consultant.
65
How would you spread your build costs on a scheme?
- Represents assumption of how costs are spread across the construction period, with the majority expected during the middle of the construction period
- Purpose = to reflect when monies will be spent
66
What two ways can you express risk in your appraisal?
In contingency and developer’s profit
67
What profit level would you adopt on affordable housing?
Developer will sell to a RP – derisks that element of the scheme as just handing over to RP – tends to be 6% or lower % associated with that and as soon as complete, will get a chunk of cash that goes into your cash flow. Higher risk associated with market units you will have to sell yourself vs lower risk of affordable units.
68
Would you always apply a 55% discount to OMV for affordable housing?
No, could vary in different LPA areas due to different tenure mixes and value areas
69
Are you aware of the RICS and Government Guidance for Viability assessments?
National Planning Practice Guidance on Viability – talks about existing use values, alternative use values etc.
ALSO
RICS Financial Viability in Planning: Conduct and Reporting (1st ed, May 2019) Professional Statement
70
What does the Government Guidance say about appropriate benchmark land values
Benchmark land values should:
1. be based upon existing use value
2. allow for a premium to landowners (including equity resulting from those building their own homes)
3. reflect the implications of abnormal costs; site-specific infrastructure costs; and professional site fees
71
What is the EUV?
Existing use value (EUV) is the first component of calculating benchmark land value. EUV is the value of the land in its existing use. Existing use value is not the price paid and should disregard hope value.
72
What is the premium in a viability assessment?
The premium (or the ‘plus’ in EUV+) is the second component of benchmark land value. It is the amount above existing use value (EUV) that goes to the landowner. The premium should provide a reasonable incentive for a land owner to bring forward land for development while allowing a sufficient contribution to fully comply with policy requirements.
73
What are the Tests for S106? (CIL Reg 122 which is now replicated in the NPPF)
a) necessary to make the development acceptable in planning terms;
b) directly related to the development; and
c) fairly and reasonably related in scale and kind to the development.
74
How did you calculate the CIL on your case study site?
CIL is applied to the net additional floorspace i.e. discounting any existing floorspace from the proposed development floorspace where the existing space has been lawfully occupied for at least 6 consecutive months in the last 3 years
75
In schemes where affordable housing is provided is it CIL liable?
Yes – you would need to apply for social housing relief for the floorspace that is attributable to the affordable housing
76
What CIL reliefs and exemptions are available
charitable and social housing relief, minor development, self-build exemption, exceptional circumstances relief
77
What indices do you use to index CIL rates?
The RICS Community Infrastructure Levy index is required by the Community Infrastructure Levy (Amendment) (England) (No.2) Regulations 2019.
The annual index, developed with the Ministry of Housing, Communities and Local Government (MHCLG), is intended to be used for updating the CIL charging schedules published by local authorities.
78
What ways could a LPA challenge vacant building relief?
The occupancy test of six months in the last 3 years applies to CIL but is not identified under the VBC
79
What floor area do you apply your BCIS costs to?
GIA
80
What range of professional fees is reasonable?
5 - 15% depending on site and stage it was at
81
What two ways can you express risk in your appraisal?
Contingency
| Developer's profit
82
How would you spread your build costs on a scheme?
(looking for you to tell me about S curves and how build costs are accumulated on a scheme)
83
What profit level would you adopt on affordable housing?
A lower level of profit to reflect lower risk.
84
Would you always apply a 55% discount to OMV for affordable housing?
It could vary in different LPA areas due to different tenure mixes and value areas
85
What does the Government Guidance say about appropriate benchmark land values (see NPPG on Viability Viability - GOV.UK (www.gov.uk) Paragraphs: 013, 014, 015, 016 and 017)
BLV should:
1. Be based upon existing use value
2. Allow for premium to landowners
3. Reflect the implications of abnormal costs; site specific infrastructure costs and professional site fees
There may be a divergence between benchmark land values and market evidence: plan makers should be aware that this could be due to different assumptions and methodologies used by individual developers, site promoters and landowners
86
How did you calculate the CIL on your case study site?
CIL is applied to the net additional floorspace i.e. discounting any existing floorspace from the proposed development floorspace where the existing space has been lawfully occupied for at least 6 consecutive months in the last 3 years
Net additional new build floor space x CIL Rate x Inflation Index
87
In schemes where affordable housing is provided is it CIL liable?
yes – you would need to apply for social housing relief for the floorspace that is attributable to the affordable housing
88
What CIL reliefs and exemptions are available
Charitable and social housing relief, minor development, self-build exemption, exceptional circumstances relief
89
Vacant building relief – what ways could a LPA challenge VBR
(See NPPG on Planning Obligations - Paragraph: 028 Reference ID: 23b-028-20190315 Planning obligations - GOV.UK (www.gov.uk)) The occupancy test of six months in the last 3 years applies to CIL but is not identified under the VBC.
90
You mentioned you use Argus to undertake a development appraisal. What would you have done if you didn’t have Argus?
a
91
If you were out of the office, with your client, ToBs are on the way and they asked you what you thought the value of the site was?
a
92
How does a local authority decide what to spend CIL money on?
Regulation 123 list
93
How does CIL interact with a s106 agreement? Can you have both?
a
94
Could you outline some of the limitations of using Argus and Excel for development appraisals?
a
95
On your Longstanton example, how did you value the commercial GDV? What method of valuation did you use?
a
96
You reviewed a s106 agreement to calculate the s106 contributions payable. Was there any indexation? How did you carry that out?
a
97
Aylsham: you said you prepared a delivery assessment, can you just explain what that is and how you went about that?
a
98
You mentioned using some industry-standard parameters, can you outline what some of those were?
a
99
For Aylsham you looked at the EUV, what is the definition of the EUV?
a
100
With regards to affordable housing. If you were to try to negotiate affordable housing below the threshold, how would you go about that?
a
101
Have you ever undertaken a viability study? What does this entail? What is the RICS Guidance you would have referred to? What is the conduct guidance you would have guidance to?
What is the status of the RICS Guidance?
a
102
What is the requirement for you in terms of independence and integrity when undertaking a viability assessment for a client as set out in the guidance?
Undertaking an FVA is a complex process requiring significant expertise and knowledge. Gaming of
the process – one stated reason for the UK government’s new NPPF and PPG – can happen under these
circumstances. The complexity of this guidance reflects the complexity of the process and the need to
ensure objectivity and professional integrity in the viability process.
103
How does that relate to your fees?
a
104
How would you appreciate risk in a development appraisal? You mentioned in your case study you were more cautious
Developers profit and contingency
105
If you had a site with high remediation costs, albeit these are not verified, how would you appreciate that in your appraisal? Why in the contingency?
a
106
In terms of build rates, what are you currently seeing at the moment? Is that your all in build rate?
Approx £140-£150 psf prime rate and about £180-190 all in.
107
In terms of assessing your externals and prelims, what do prelims include?
a
108
How would you calculate the cost of a road?
Do you have any idea roughly how you might assess the cost of a road if you were unable to verify this internally or from an independent source? What figure would you put it in at?
a
109
How do you assess your level of profit? Do you use IRR?
a
110
Who does use IRR? What does IRR tell you?
a
111
What is CIL
a
112
Is CIL applicable to all of your appraisals?
a
113
Do you calculate CIL against the affordable hosing area?
a
114
If you had a 50 unit scheme, what is your likely construction period going to be in your appraisal to deliver it?
a
115
What would you typically include in the disposal fees in an appraisal?
a
116
Tell me a bit more about marketing, agent and legal fees. How do you assess them when building your financial model?
a
117
What are they a percentage of?
a
118
How do you determine legal and professional fees?
atg
119
How can the wider market, national regulation, and the economy affect a development appraisal?
k
120
In your example at Longstanton? You say that you calculated these section 106 costs. How did you do this?
kgv
121
What are the different performance metrics to assess an appraisal? Which do you look at?
gkv
122
You mentioned that this was an apartment block, how tall is it? How did you calculate the build cost?
ilhn
123
How did you get around the limitations of BCIS?
haehg
124
What are the different types of agency? What’s the difference between having sole selling rights and being the sole agent?
haeh
125
What actually is the bank of england base rate?
Rate that banks lend money to each other (0.1%) - if they can borrow at 0.1%, they will charge more for people to borrow. If costs more for them to borrow, they will charge more for people to borrow.
126
What is a tender price index?
They measure the movement in prices agreed between clients and contractors at 'commit to construct' normally when the tender is accepted. These indices are typically used for adjusting estimates and budgets to different dates. The BCIS All-in TPI is the most widely used example.
127
What is the RICS CIL index based on?
RICS, with the support of the Ministry of Housing Communities and Local Government (MHCLG), have developed an annual index for the purposes of keeping the levy rate responsive to market conditions.
The index is based on the BCIS All-in Tender Price Index (BCIS TPI). Details of the calculation of the RICS CIL index and the BCIS TPI are given below.
128
If a site didn't have a s106 agreement, how could you estimate the costs?
In Cambridgeshire, S106 costs tend to be around £10-15k per plot. I could double check this by looking at recent consented schemes and reviewing their S106 agreements.
129
What does guidance on viability say about fees?
Viability - fees can't be performance related to give complete impartiality
Viability team - would consult them on any questions relating to viability assessment.
