Development Appraisals Questions

Question 1

What is the difference between a development appraisal and a residual land valuation?

Answer 1

Development appraisal is a tool used to assess the financial viability or profitability of a development scheme (based on client inputs).

A residual land valuation is used to establish the value of the land and ultimately what a developer can afford to pay for a particular site (based on market facing inputs).

Question 2

What is the basic methodology behind a residual valuation.

Answer 2

• GDV
• Less site prep costs (contractors plan) planning costs (CIL, S.106 app) building costs.
• less pro fees (10-15% plus VAT) architects, project managers etc.
• less contingency (5-10% dependant on risk)
• less marketing costs and fees
• less finance costs (SONIA, rate client borrow, Base rate plus premium, comps
• Less developers profit

Question 3

You say you are aware of an appraisals sensitivity to minor changes what do you mean by this and what can you do about it?

Answer 3

Small changes in inputs can have significant affect on the output of the appraisal. For example higher build costs will likely mean a smaller profit if GDV was the same in two scenarios.

You can reflect different GDV, finance and build costs in a sensitivity analysis.

Question 4

Why are the different types of sensitivity analysis?

Answer 4

1. Simple sensitivity - change key variables such as GDV, finance and build cost.
2. Scenario - change timing / scheme / phase
3. Monte Carlo simulation - crystal ball software.

Question 5

You mention construction costs, where do you get that information form?

Answer 5

BCIS
QS
BS
Comparable schemes

Question 6

You have mentioned CIL and S.106 costs what are these?

Answer 6

CIL - Community Infrastructure Levy are offsite payments from developers to raise funds for infrastructure to support development in the area.

S.106 agreements - are site specific agreements that are legally binding between developer and local authority as part of the granting of planning permission.

Question 7

What is the difference between CIL and S.106?

Answer 7

CIL - For all infrastructure necessary to support the development.

S.106 - only justifiable if necessary to make the development acceptable in planning terms.

CIL - cannot be used to secure affordable housing

S.106 - can be used to secure affordable
Housing

CIL - tariff based charging system on net additional floor space of scheme.

S.106 - agreed by negotiation

CIL - tariff system must cover whole area

S.106 - site specific charge (case by case basis)

Question 8

What are Section 278 agreements?

Answer 8

These relate to highways, however the appraisals I have been involved in are small scale pub / resi developments where this has not been applicable

Question 9

What sort of rates are you using at the moment for finance?

Answer 9

7%

Question 10

Where do the rates for finance come from?

Answer 10

Can come from SONIA or Bank of England Base Rate plus premium to reflect interest rate that is available.

Rate client can borrow (check first)

Question 11

Will who the developer is reflect interest rate?

Answer 11

Yes PLC likely to pay less interest in comparison to small scale house builder.

Question 12

What methods of finance are available?

Answer 12

Equity - sale of shares, JV, own money used.

Debt - borrowing from back or other lending institutions.

Question 13

What are your example for development appraisals?

L2 Residual - Turton, Lancashire (3 x conversion and 4 new build at rear)

L2 Dev Appraisal - Goring, Oxfordshire (plot) 6 houses.

L3 Dev Appraisal - Hemel Hempstead retain or develop restaurant. 9 houses

L3 - Residual - Rusper, West Sussex - continuation of 4 houses to the terrace.

Question 14

For your Turton, Lancashire example how does BCIS take into account costs for listed buildings?

Answer 14

This was a mistake in my submission and I was thinking of another example at the time.

In this particular instance I consulted a BS for costings as BCIS only applies to traditional basic buildings not listed.

Question 15

L2 Turton - what sort of level of basic build cost would you apply for conversion of listed building and how did you compare this to nee build?

Answer 15

This would depend and not be specific across the board - however in this instance I used a £150psf conversion rate and a £200 psf new build rate.

Question 16

L2 Turton - Are there any other areas of the appraisal you may adjust other than build costs when dealing with a listed building?

Answer 16

Riskier - increase contingency

Planning costs - input from heritage consultant.

Mode in depth plans - increase in architect costs

Question 17

L2 Turton - What did you assume in terms of planning costs for your appraisal of the listed pub?

Answer 17

We currently have an ongoing project with our planning where we are advising a pub clients on value creation from alternative uses on pub sites.

We have a flat rate of £15k for this type of property 3k per discipline and 5 per app.

Planning, transport, ecology / trees. Heritage consultant.

Question 18

L2 Goring - how did you reflect the lack of planning in your development appraisal?

• Inputted planning costs
• Inputted timescales to achieve planning (2 months for minor but added additional
  1 month)
• Moved contingency out to reflect additional risk

Question 19

L2 Goring - what sort of timescale did you assume for planning? Was this a major or minor application

Answer 19

This was a 6 unit scheme and was a minor application - timescales are typically 8 weeks.

However after consulting with our firms planning team they advised 12 weeks was appropriate due to a back log with the authority (Worthing borough council)

Question 20

L2 Goring - if this was a major application how would that differ?

10 dwellings or more - typically around 13 weeks for determination.

Question 21

L2 - Goring

What S.106 costs did you assume?

Answer 21

£10k per unit from comparable evidence.

Question 22

L2 Goring - How did you treat affordable housing?

Answer 22

This was a minor application and not subject to affordable housing as it was under the threshold.

1000 Sq M or 10 units plus

Question 23

L2 Goring: Were there any buildings on site? How did/would this impact your CIL calc?

Answer 23

No buildings. If there was then CIL only
Applicable to net gain in floor space.

If occupied for 6 months within the last 3 years can also be discounted.

Question 24

L2 - Goring

What KPIs were you looking at?

Answer 24

Profit and IRR

Question 25

L2 Goring: What was the IRR here and what is typically expected for this type of development?

Answer 25

20% and would expect 20% to 25%

Question 26

What is IRR?

Answer 26

The rate of return in which all future cash flows need to be discounted to produce a NPV of zero

Question 27

What is net present value?

Answer 27

Sun of the discounted cash flows of a project

Question 28

What is NPV used for?

Answer 28

Can show if an investment gives a positive return against a target rate of return.

Positive NPV = exceeded investors target rate.

Negative NPV = not achieved investors target rate.

Question 29

L3 - Hemel Hempstead

We’re there any planning constraints that would prevent demo of the restaurant? How did you reflect this in your appraisal.

Answer 29

The property had satisfied the marketing period for change of use and there was a viability argument for the restaurant and our planning team felt development was likely.

We did however add additional timing to our planning costs (2 months) and moved out the contingency to reflect risk. Also factored in a viability report into planning costs from licensed leisure surveyor.

Question 30

L3: Did you consider the conversion of the existing new build as well as demo and development?

Answer 30

Our planning team advised the configuration of the building would prove difficult for conversion therefore we considered retaining and demolishing.

Question 31

L3 - Rusper, West Sussex (residual)

What impact would the location of the listed building have on the proposed development scheme in terms of planning risks.

Answer 31

I had to consider the curtadlidge of the building and the setting (if you could see pub in setting).

If there was structures on the site that predated 1948 you would assume they were curtalige listed.

However investigations highlighted now additional buildings just the listed. This doesn’t preclude development just requires sensitive design and quantum suppressed. Increased build costs. Contingency.

Question 32

L3 Rusper: Was there any perceived risk associated with the existing use and the proposed development I.e. resi next to a pub?

Answer 32

• There was protection of the public house as it was viable and trading well
• Not unusual for resi and pubs to be cohabiting.
• Existing terrace already no real risk in regard to use only the listed element which we factored in contingency.

Question 33

L3 Rusper - How did your uncon and STP values differ?

Question 34

What does the Argus developer screen look like?

Answer 34

Assumptions - profit on cost,
Profit %, finance, residual land cost only etc.

Timescales

Unit sales (put in type of dwelling / amount and size, build costs, sale price, contingency, legal fees, pro fees etc,

Question 35

What are the limitations of Argus developer?

Answer 35

It is unrealistic and not reflective the day to day market as it assumes 100% debt.

It is also requires a good level of training in order to be able to use and insufficient training can cause problems and therefore limit the accuracy and quality of advice to your client if not used correctly.

Question 36

What was the council for your L2 Turton example?

Answer 36

Blackburn with Darwen Borough Council

Question 37

What was the local authority for your L2 Goring example?

Answer 37

Goring Borough Council

Question 38

What was the local authority for your Hemel Hempstead example?

Answer 38

Dacorum Borough Council

Question 39

What was the local authority for your L3 Rusper example?

Answer 39

Horsham District Council

Question 40

Is CIL indexed?

Answer 40

Some local authorities will provide an updated CIL rate each year.

However many don’t - therefore you would take the rate from when the local authority adopted CIL and work out the difference using between then and todays date using the all in tender price index from BCIS and apply this rate to the scheme.

Question 41

What was your advice to the client on your Hemel Hempstead example?

Answer 41

I advised that demolition of the exiting building would result in a larger developable area.

I advised that a scheme of 9x3 bed houses would likely secure planning consent.

I advised on the viability argument of the development scheme - the public house was only achieving around 6% profit on turnover. Significant capital investment required.

Advised on profit levels

GDV

Question 42

What was your advice to the client on the Rusper example?

Answer 42

I advised on the market value of the site.

I advised that 4 terraces was suitable as this fell below the affordable threshold.

I advised on the moving of the pub car park to allow for more space for development.