Level 3 - Development Appraisals Flashcards
And what measurement basis do you calculate your bill costs?
GIA basis
How do you work out your contingency rate?
Typically this range is between five and 10% dependent on risk.
What is the contingency?
Contingency is there in case of any unpredictable issues that arise such as additional construction costs.
How do you reflect for letting void?
This could be reflected in the cash flow at the end of the construction process.
Alternatively you can reflect it within the yield.
How would you measure and industrial site?
I haven’t had any experience with industrial however I believe you can measure it using ProMap.
How do you calculate the gross development value (GDV)?
It would depend on what type of development it was however, for an office building I would gather compatible evidence of rental values and capitalise this at an appropriate market derived yield.
Where would you take account of planning costs?
This would be accounted for as additional costs.
What finance rate did you use in your development appraisal?
Follow up question: Where did you get this finance rate from?
6%
I ascertained this rate from my client as it is the rate at which they could borrow money.
I spoke with one of my directors who had recently worked on a similar project and informed me that 6% was an appropriate rate to use.
Alternatively you could look at current 10 year swap rates (1.4% approximately)and add a percentage for risk.
How did you calculate professional fees?
Professional fees tend to range between 10 to 15% plus VAT of construction costs.
In this case the professional fees were calculated at 12.5%
A lower percentage would be appropriate for larger projects.
What professional fees are normally included?
Architect CDM consultant M&E consultant Structural engineer Environmental consultant Project manager
Where does the information provided by BCIS come from?
This is an RICS service. Updates are obtained monthly from recent contract prices/tenders agreed.
What is the methodology of a residual site valuation?
Gross development value
Less total Development cost
Less developers profit
= Residual site value
GDV – TDC – developers profit = Residual value
How do you calculate the profit of a development?
Gross development value
Less total development costs
Less residual value
= profit
GDV – TDC – residual value = profit
What is overage?
Overage is an pre agreed arrangement made between the vendor and the developer for the sharing of profits received over and above the profit originally expected.
What is a typical LTV (loan to value) ratio?
Typically in the region of 60%.
It used to be towards 70% however lenders are now more risk averse.
What are the main forms of development finance used by developers?
Debt funding – money from a bank/financial institution
Equity funding – selling shares in a company, JVs or using your own money.
What does a developer typically borrow money for?
Site purchase
Construction costs
Holding costs
How do you calculate the finance for land purchase?
On a straight line basis compounded over the length of the development period.
How do you calculate the finance required for the construction period?
You based this on an S curve. This assumes total construction cost over half the time period.
Usual assumption is to halve the interest.
Reflects more accurately when monies are drawn down.
What are three levels of debt?
Senior debt
Secondary funding
Mezzanine funding
How is interest calculated on development finance?
On a rolled up basis
i.e. Added to the loan as the project proceeds
What is sensitivity analysis?
This is required to analyse key variables such as GDV, build costs and the finance rate.
Slight changes in key variables can have a large impact on the profitability of a development.
What forms of sensitivity analysis are there?
Simple sensitivity analysis
– On key variables (rent, Build costs, yield and finance rate)
Scenario analysis
– On variables such as content/timing/costs
Probability analysis
– Probability theory (oracle crystal ball software)
What is a profit erosion period?
The length of time it takes for the development profit to be eroded by holding charges following completion.
What other methods of finance are there?
Joint ventures
2+ parties join together to develop
Forward sales
Scheme is presold to an investor/occupier
What planning costs would you consider in your appraisal?
Depending on the size/type of the proposed scheme I would take into consideration:
- Section 106 payments
- C I L charges
- Section 278 payments
- Planning application
You say you’ve read the RICS valuation information paper no 12.
When was this published?
Can you tell me what this covers and some of the key points?
It was published in 2008.
It was an RICS information paper on the valuation of development land, but has now been withdrawn.
It provides useful guidance for valuers on the whole process of valuing development land from Establishing the facts through to Reporting the valuation.
It also provides guidance on:
- Assessing development potential.
- Using the residual and comparable methods.
- Assessing land value.
What is C I L?
C I L is the community infrastructure levy.
This sets out payments made by developers to LPAs to raise funds for local infrastructure.
Payments are based upon the SQM or the additional SQM of floor area.
Payments are established via a charging schedule and are non negotiable.
What is included in the preconstruction period?
This could be:
Site assembly Obtaining vacant possession Planning Agreeing architectural designs Soil investigations
What is included in the construction period?
Decontamination
Demolition
The main build
What is reflected in the post construction period?
Letting voids
Rent free periods
Sale/letting
What is a CDM co-ordinator?
This has now been replaced by The principal designer.
This is someone who will monitor the H and S of the entire process of a development.
What is an environmental impact assessment?
This is a report which is required prior to planning permission being granted which assesses the environmental effects of a proposed development.
What act governs the section 106 agreements?
Town and country planning act, 1990
What regulations govern CILs?
Community infrastructure regulations, 2010. (Updated 2015)
What impact would there be on your development appraisal if you were undertaking it on behalf of a charity looking to purchase the property?
I’ll take into consideration that there would be no SDLT payable.
What is BCIS?
The building cost information service, created by the RICS.
It’s gathers information from recent construction projects and from relevant contractors.
Why would you use Excel instead of Argus?
For better accuracy
No hidden calculations
No hidden assumptions
What macro economic factors are you aware of that have the potential to impact on the feasibility of a development?
Brexit
This has led to uncertainty
– rents have softened
– incentives have increased
– voids have increased
– yields have hardened (currency advantage)
What national planning guidelines are you aware of?
The National planning policy framework.
What forms of sensitivity analysis are you aware of?
Simple sensitivity analysis
- Analysis of key variables
Scenario analysis
- changing key parts of a scenario
- i.e. Content or timing
Simulation analysis
- Testing probability (crystal ball software)
What would you say are some key variables of a development appraisal?
Yields
Build costs
Finance rate
Rent
Are there any exemptions from CIL?
Minor developments are exempt
100 m² or less
How is C I L calculated?
This is calculated using a charging schedule.
The payment is based on the m² of additional floor area
What is an AVM?
An automated valuation model
– Argus
What are the limitations of an AVM?
Cost
Some assumptions are hidden
Some calculations are hidden
– hard to determine where something has gone wrong.
What is an IRR?
And IRR is the discount rate which is required in order to achieve an NPV of 0.
What are some typical development costs that you include in your appraisals?
Site preparation (demolition) Planning costs Build costs Professional fees Contingency Marketing Letting/disposal fees Developers profit Finance VAT
What would you typically include in your professional fees?
Professional fees typically range from 10 to 15% plus VAT.
Includes:
Architect M&E consultant Structural engineer CDM coordinator Planning/environmental consultant Quantity surveyor
What fees would you typically associate with the disposal?
Agent fee – 1%
Legal fee – 0.5%
What fees would you typically associate with a letting?
Agent fee – 10%
Legal fee – 5%
What would you typically include with acquisition costs?
Stamp duty
Agent fee
Legal fee
Survey/planning
What are section 278 payments?
Payments for highway works
What is a development appraisal?
It is used to assess the value, viability, profitability or suitability of a development scheme and typically uses clients inputs.
What is a residual valuation?
It is used to establish the value of a site at one moment in time using market inputs.
What is the difference between a residual valuation and a development appraisal?
A residual valuation establishes the value of a site at one moment in time using market inputs, where as a development appraisal establishes the viability, suitability or profitability of a development scheme typically using client inputs.
Are you aware of any update to the Valuation Information Paper 12?
The advice has been replaced by IVS 410.
What is mayoral CIL?
What is the charge rate?
Mayoral sale was introduced to help fund crossrail.
The charger rate is £50 psm
Where would you get your build costs from?
BCIS (Building cost information service)
Information sourced from recent construction projects.
The client (in-house QS)
Alternatively, I would speak to a 3rd party specialist such as a building surveyor.
How funding effects valuation
forward sales at 60% of FMV
Lending from bank 5.8%
JV’s?
