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Residual/Development Appraisal > Level 1 > Flashcards

Level 1 Flashcards

1
Q

What is the Residual method of valuation?

A

It seeks to establish the residual land value of a development site, after having accounted for the total costs of construction, using market-facing assumptions.

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2
Q

What is the formula for Residual valuations?

A

GDV - Costs - Profit = Residual Land Value

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3
Q

What is a Development Appraisal?

A

A tool to financially assess the viability of a proposed development scheme, using client inputs.

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4
Q

What is the formula for Development Appraisals?

A

GDV - Costs - Land Value = Developer’s Profit

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5
Q

Are you aware of any RICS guidance/standards relating to development appraisals?

A

RICS GN ‘Financial Viability in Planning’ (Sep-19)

RICS GN ‘Valuation of Development Property’ (1st ed. Oct-19)

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6
Q

What are the costs involved in a development?

A
  • construction costs
  • professional fees
  • planning fees/obligations
  • bank fees
  • letting/sale costs
  • contingency costs
  • finance costs
  • cost of purchasing land *
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7
Q

What are professional fees?

A

(10-15% +VAT of total construction costs)

  • architects
  • M&E consultants
  • QS
  • PM
  • Structural engineers
  • CDM Principal Designer Costs
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8
Q

How do you determine building costs?

A
  • consult build consultancy team
  • use BCIS
  • SPONS
  • QS estimate/bill of quantities/cost estimate
  • client information
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9
Q

Where does the BCIS get its information from?

A

Tenders from construction projects in the market - averages (market-facing)

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10
Q

What are contingency fees?

A

(5-10% of construction costs)
Costs to reflect any uncertainty/risks associated to the development (i.e. from movements in build costs/ERVs/ investment market/investor appetite etc)

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11
Q

What costs are associated with planning?

A
  • S106 obligations
  • Community Infrastructure Levy
  • Costs of planning application / building regs
  • Costs of environmental impact assessment/ other specialist reports
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12
Q

What is a S106 obligation?

A

Under the Town and Country Planning Act 1990, Section 106 payments are planning obligations that are negotiated between the LA and the developer, in order to make the scheme acceptable in planning terms (legal agreement btw developer and LA planning dept)

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13
Q

What are examples of s106 obligations?

A
  • affordable housing provision
  • financial contributions to provide infrastructure/affordable housing
  • restriction/condition on the development/land use
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14
Q

What is a Community Infrastructure Levy?

A

A tariff-based planning tool, used by local authorities to raise funds from developers to contribute towards local infrastructure development incl. railways, schools, parks, flood defences, hospitals etc.

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15
Q

What is the aim of CIL?

A

To reduce the negotiations required in s106 agreements, and to standardise and speed up the planning approach with viability testing

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16
Q

Can a developer be required to comply with both s.106 obligations and pay CIL?

A

Developers cannot be double charged by CIL / S106 agreements for the same item, but both charges can be levied for different items.

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17
Q

What are the new changes to CIL requirements?

A

As of Sep-19 CIL Regulations require all Local Authorities to provide an annual report on how much money has been collected from s106 and CIL payments, and where this money has been spent.

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18
Q

What are the main differences between S106 and CIL?

A

CIL is:

  • for all infrastructure necessary to support the development
  • can’t be used to secure affordable housing
  • tariff-based charging system that covers the whole area, and is based on the increase in net floor area
  • viability is tested at district-wide level at the evidence gathering stage, then charges are mandatory

S106 is:

  • only justifiable if necessary to make the development acceptable in planning terms
  • must be reasonable and in relation to scale of dev.
  • can be used to secure affordable housing
  • site-specific charge
  • by negotiation
  • viability testing is undertaken on a case by case basis
19
Q

What are the costs involved in site preparation?

A
  • demolition
  • remediation works
  • landfill tax
  • provision of services
  • site clearance
  • levelling
  • fencing
  • contractor’s estimate of works
  • environmental impact assessment
20
Q

How is finance calculated?

A

All developments are assumed to be 100% debt financed.
Choice of interest rate can include:
- LIBOR (London Inter Bank Offer Rate) - the variable lending rate between banks for a 3-month borrowing term + the premium to reflect IR which is available
- BoE Base Rate + premium
- Rate at which client can borrow at

21
Q

What are the 3 elements of finance which the borrower needs to finance?

A
  1. Site Purchase
  2. Total Construction Costs
  3. Holding Costs
22
Q

What is the S-curve?

A

The s-cure model reflects the principle that the debt is drawn down at different stages of the development cycle (assuming the land has already been purchased).

23
Q

How is developer’s profit calculated?

A

A percentage of GDV Or total construction costs

PoGDV - 10-15%
PoC - 15-20%

24
Q

What influences the required level of profit?

A

Risk - where a development is less risky (more inputs are constant e.g. pre-lets/sale), a lower return may be required (And vice versa)

25
Q

How does market uncertainty affect developer’s required profit/return?

A

In riskier markets the developer requires more of a return to ‘cover’ the uncertainty

26
Q

What is return on capital employed?

A

This measures profit based on the amount of money used

27
Q

What are the main methods of development finance?

A
  1. Debt finance (lending from bank/funding institution)

2. Equity finance (capital outlay - usually JV partnerships/forward sales)

28
Q

What is mezzanine funding?

A

Additional funding for additional monies required over the normal LTV lending

29
Q

How is interest calculated?

A

On a rolled-up basis. i.e. added to the loan as the project proceeds

30
Q

What is an overage agreement?

A

An arrangement made where any additional profit (above the expected return) is shared between the vendor/landowner and developer, in a pre-arranged apportionment.

31
Q

What is claw-back?

A

This is the same as an overage agreement.

32
Q

What does a profit erosion period relate to?

A

The length of time it takes for the development profit to be eroded by the holding costs (empty rates/ interest repayments etc) following completion, to the point where the scheme is loss-making.

33
Q

When do you pay VAT in a development?

A

VAT is payable on all professional fees.

34
Q

What are the limitations of residual appraisals?

A
  • importance of accurate info and inputs
  • residuals do not consider the timing of cashflows
  • very sensitive to minor adjustments
  • implicit assumptions (unlike DCF)
  • always cross check with comps where possible
35
Q

What are the different types of sensitivity analyses?

A
  1. Simple sensitivity analysis
  2. Scenario analysis
  3. Monte Carlo simulation
36
Q

What is a sensitivity analysis?

A

Stress testing changes in key inputs (build costs, ERV, yield, finance rate), to determine how this impacts the output (land value/profitability)

37
Q

What is a scenario analysis?

A

Scenario testing (changing timing/costs/development design etc) to determine how this impacts the output (land value/profitability)

38
Q

What is Monte Carlo simulation?

A

Complex modelling where multiple inputs are changed, using probability analysis (using software like Crystal Ball)

39
Q

What is massing analysis?

A

This is testing changes in site density and building heights, incorporating matters such as rights of light etc.

40
Q

What are the different parts of the development process?

A
  1. SITE PREP/ PRE CONSTRUCTION
    - Demolition
    - Site clearance
    - Remediation works
    - Landfill tax
    - Provision of services
    - Levelling
    - Fencing
  2. PLANNING
    - Planning consultant fees
    - Planning apps
    - Building regs
    - Environmental impact assessment
    - CIL/s106/s278
  3. CONSTRUCTION
    - Build costs
    - Professional fees (10-15%)
    - Contingency (5-10%)
  4. POST CONSTRUCTION
    - Marketing costs and fees
    - EPC
    - Sale fee (1-2% of GDV)
    - Letting fee (10-15% of MR)
    - Holding costs
41
Q

What are the different brackets for stamp duty?

A

0 - £150,000 = 0%
£150,001 - £250,000 = 2%
£250,001 + = 5%

42
Q

What is SDLT?

A

A tax payable in England and N. Ireland on a resi property, or purchase of land costing more than £125k (or more than £40k for second homes).

  • it applies to freehold and leasehold properties
43
Q

What are you looking for specifically on inspection of a development site?

A
  • location (proximity to town centre/road network)
  • infrastructure
  • topography / site levelling
  • signs of contamination
  • any abnormals (site access/conditions)
  • infrastructure
  • archaeological interests
  • flood risk
  • surrounding uses

Residual/Development Appraisal (1 decks)

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