Development Appraisals - Level 1 Flashcards
What is CIL?
Used by LPAs for off-site payments from developers to raise funds for infrastructure necessary to support development in the area
PAs are able to make a charge if they wish on most types of development using a charging schedule based upon the square metre of additional floor space
Aim of CILs is to reduce the considerable negotiations required to complete a S.106 agreement and standardise and speed up he planning approach with viability testing
An Assumption of Liability Notice (ALN) has to initiate CIL procedures
Affordable housing continues to be covered by S.106 agreements not CILs
What is S106?
Introduced under the Town and Country Planning Act 1990
These are planning obligations which are set out in a legally binding agreement enforceable by the LPA and are site specific impact related only
The agreement has to be entered into before the planning consent is granted
Only justifiable within the three legal tests of necessity, having a direct relationship to the development, and fair and reasonably related in scale and kind of development
They relate to various forms of community gain and can be either specific works or the payment of a financial contribution to the LPA
What are the differences between CIL and S106?
CIL:- For all infrastructure necessary to support the development
S.106:- 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
CIL:- Cannot be used to secure affordable housing
S.106:- Can be used to secure affordable housing
CIL:- A charging schedule must cover the whole area
S.106:- Site specific charge
CIL:- Tariff based charging system based on the increase on floor area of the scheme
S.106:- By negotiation
CIL:- Viability is tested at district-wide level at the evidence gathering stage then charges are mandatory
S.106:- Viability testing undertaken on a case by case basis
Developers cannot be double charged by CILs and S.106 agreements for the same item but both charges can be levied for different items
How can a development appraisal be used in valuing developments?
A development appraisal is a tool to financially assess the viability of a development scheme
One can also be used to establish a residual site value
They can also be used to assess the profitability of a proposed scheme and its sensitivity to changing inputs, or assessing the viability of different uses, rents, yields or financial contributions such as CIL / S.106
Tell me about planning costs in relation to a development appraisal?
Town and Country Planning Act 1990 Section 106 payments - a legal agreement for planning obligations (e.g. affordable housing, infrastructure costs, new school etc) to gain a planning consent
Community Infrastructure Levy is charged by most LPAs
Local planning policy will set out the required percentage of affordable housing required for a new residential development in the form of social, intermediate and key worker housing
Section 278 payments for highway works
Planning application and building regulation fees
Costs of a planning consultant
Cost of any specialist reports required by the LPA
What is a Monte Carlo simulation?
One of three forms of sensitivity analysis that uses probability theory or software such as ‘Crystal Ball’
Modelling technique used to analyse the impact of uncertainty and risk
What is a sensitivity analysis?
Required for key variables such as GDV, build costs and the finance rate, to show range of values
Three forms of sensitivity analysis:
1. Simple sensitivity analysis of key variables - such as yield, GDV, build costs and finance rate
2. Scenario analysis - change scenarios for the development content / timing / costs, such as phasing the scheme or modifying its design
3. Monte Carlo simulation - using probability theory
Tell me about your understanding of RICS Financial Viability in Planning/Valuation of Development Property
Comprises 14 mandatory requirements which chartered surveyors must observe when carrying out financial viability assessments in a planning context. Surveyors and firms need to ensure the terms and conditions of their instruction can allow compliance.
Tell me about your understanding of incorporating affordable housing into development appraisals
Local planning policy will set out the required percentage of affordable housing required for a new residential development in the form of social, intermediate and key worker housing
What is an S curve?
The principle of the S curve is that as the payment of construction costs adopts the profile of an S shaped curve over the length of the development projects, the usual assumption is to halve the interest that would be borrowed for all of the construction period
The purpose of the S curve is to reflect when monies tend to be drawn down
Tell me about your due diligence when undertaking a development appraisal?
- Legal - such as title deeds, planning permissions and lease agreements
- Planning - assess planning history and likelihood of obtaining planning permission and any conditions or restrictions that may apply
- Environmental risks or liabilities
- Financial viability
What sources of information do you use when undertaking a development appraisal?
- Site inspection and analysis of surrounding area
- Local planning policies and guidelines
- Comparable market evidence
- Cost data for construction
- Financing options and interest rates
- Environmental assessments
- Legal and regulatory compliance requirements
How do you calculate GDV / NDV / finance costs / project costs?
GDV:
Total built area x resale or rental value per unit
NDV:
GDV less (construction costs + cost of land acquisition + finance costs + contingencies)
Finance:
-SONIA interest rate benchmark replaced LIBOR at the end of 2021
- Assumes 100% debt finance
- Finance for borrowing the money to purchase the land is calculated on a straight line basis using compound interest over the length of the development period
- To calculate the finance require for the construction period, assume total construction costs (including fees) over half of time period using an S curve calculation
How do you calculate developer’s profit?
Percentage of GDV or total construction cost - say around 15%-20% depending upon risk
GDV more frequently used as a base for residential use
If scheme low risk (or pre-let/sold) a lower return may be required
The percentage of profit has recently risen given the current riskier market conditions
Other methods to calculate the profit required is to base it on the return upon capital employed
Deduct the Total Development Cost from the GDV to establish the site value having allowed for normal purchasers’ costs
Cross check the site value with a valuation of comparable site values if possible
What other metrics can you produce from a development appraisal?
- GDV
- NDV
- IRR
- Profit on Cost
- Breakeven Sales Price
- Residual Land Value
- Development Yield
- Payback Period
