Development Appraisals (Level 1) Flashcards
What does the RICS Guidance Note Valuation of Development Property (2019) apply to and what does it set out?
- Applies to all valuations of development property
- Should be read and applied in conjunction with RICS Valuation – Global Standards 2022
- Key message is that one method of valuation is seldom appropriate
- This guidance note supplements the guidance set out in IVS 410
What does the RICS Professional Statement Financial Viability in Planning: Conduct and Reporting (2019) set out?
- sets out mandatory requirements on what must be included within financial viability assessments and how the process must be conducted
- recognises the importance of impartiality, objectivity and transparency when reporting on such matters
What is the purpose of RICS Guidance Note Assessing Viability in Planning Under NPPF 2019 for England (took effect 1st July 2021)?
- guidance note is intended to help professionals working in planning and development to apply the government’s national planning policy for England
- provides guidance on Financial Viability Assessments (FVAs) in plan-making and decision-taking contexts
What is a development appriasal?
A financial appraisal of a development property. It is normally used to calculate either the residual site value or the residual development profit, but it can be used to calculate other outputs.
What is a development yield?
The development yield calculated over the entire project. It is defined as the stabilised income divided by the total construction cost (excluding interest and fees)
What is Gross Development Value?
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.
What is Net Development Value?
The GDV minus assumed sale costs
What is the Net Present Value?
The sum of the discounted values of a net cash low including all inflows and outflows, where each receipt/payment is discounted to its present value at a specified discount rate. Where the NPV is zero, the discount rate is also the internal rate of return (IRR)
What is Internal Rate of Return?
The rate of interest (expressed as a percentage) at which all future project cash flows (positive and negative) will be discounted in order that the net present value (NPV) of those cash flows, including the initial investment, be equal to zero
What is a development property?
A development property is defined in IVS 410 as:
‘interests where redevelopment is required to achieve the highest and best use, or where improvements are either being contemplated or are in progress at the valuation date’ this includes:
a. the construction of buildings
b. previously undeveloped land which is being provided with infrastructure,
c. the redevelopment of previously developed land,
d. the improvement or alteration of existing buildings or structures,
e. land allocated for development in a statutory plan
f. land allocated for a higher value use or higher density in a statutory plan.
What is CIL?
- CIL stands for Community Infrastructure Levy it is a charge that LPAs set on new development to fund new infrastructure, facilities and services
What is CIL charged on and when is it payable?
- CIL is charged on the GROSS Floor Area of a new development
- Payable within 60 days of development commencing
What is a S106 agreement?
a legal agreement between Local Authorities and developers; these are linked to planning permissions and can also be known as planning obligations
What is the purpose of a S106 agreement?
A section 106 agreement is designed to mitigate the impacts of a development proposal, by obtaining concessions and contributions from the developer
When is a S106 agreement negotiated?
A S106 is negotiated after the granting of planning permission and is a requirement before development can commence. A s106 runs with the land, are legally binding and enforceable
What are the differences between CIL and S106?
- CIL is a set rate dependent on Use Class and the Gross Floor area of a development, S106 Agreements are negotiated with the LPA
- CIL is used to fund infrastructure on a broader basis across the charging area whereas S106 Agreements cover site specific issues and regulation
- CIL is payable within 60 days of development commencing whereas S106 monies are typically paid in instalments at key stages during construction these are negotiated within the agreement
How can a development appraisal be used in valuing developments?
It is normally used to calculate either the residual land value or the residual development profit, but it can be used to calculate other outputs such as IRR
What are the different elements of a development appraisal?
- GDV
- Construction Costs - Cost of building the development
- Development Costs - Any other additional costs to development that aren’t included in the construction cost
- Planning Costs
What are the standard assumptions within a development appraisal for the following:
- Construction contingency
- Finance costs
- Professional fees
- DM fees
- Developer’s Profit
- Construction Contingency = 5-10% of total construction cost
- Finance Costs = 4-10% of GDV
- Professional Fees = 10-20% of construction cost
- DM Fees = 4-6% of GDV
- Developer’s Profit - dependent on metric and risk profile of the developer (IRR 10-20%, Profit on Cost 15-20% of development costs)
