Module 9: Cost/Benefit Analysis Flashcards
State and compare the factors in subdivision development financing, under inflation and recession pressures, and their effect on the regulatory agencies
Time
Interest rates
Inflation means more costs for construction, materials, employees. Rising prices
Interest also has effect on development cost (borrowing?)
Recession = falling market prices of lot at selling point
Increased pressure on regulatory agencies to complete work quickly and efficiently
List and describe the participants in the development process
Long term land owners
Speculators - short term owners, very profit oriented
Developers, promoters, realtors
Construction companies
Engineers
Regulatory agencies
Politicians
Piurchasers
Describe characteristics and motives in development process: Long term land owners
Enjoy using the land and neighbourhood
Equity buildup (net worth of property)
Neighbourhood stability (quality of homes and value)
Resistance to change (rezoning)
Want better services (schools, recreation, hospital, libraries)
Describe characteristics and motives in development process: speculators
Short term ownership, redevelopment, quick turnover, profit motivated (directo conflict with established land owners who oppose change)
Describe characteristics and motives in development process: developers, promoters, realtors
Short and long term objectives
Profit motivated but ALSO CREDIBILITY
Out of town developers are seen as a threat by the community
Describe characteristics and motives in development process: construction companies
Short term
Normal business profit
Long term
Reputation to ensure growth
Describe characteristics and motives in development process: engineers
Short term
Profit as business
Economic stability, maintain employment
Long term
Attract clients by efficient design, obtain results and approval for developments
Maintain a record of quality work
Credibility with approval agencies
Describe characteristics and motives in development process: regulatory authorities
Long term
Promote and ensure orderly development
Ensure adequate servicing
Provide for future extensions of services
Assess long term needs of the community
Describe characteristics and motives in development process: politicians
Short term
Re election
Their initial involvement in politics may have been a singular issue
Long term
Pride in community
Pride in achievement
Maintaining the nature and character of the community
Describe characteristics and motives in development process: purchasers
Short term
Low initial cost
Long term
Demand for services such as fire protection, schools and recreational facilities
Become long term land owners
Broad sources of conflict? Potential sources for conflict alleviation?
Broad
Long vs short term objectives
Objectives of various parties to community development
Alleviation
Legislation governing land development
Resolve differences, properly provide required controls while allowing development to take place in an orderly manner
General conflicts. Who are in short term? Long term? Concerns?
Short term
Speculators and developers, promoters, realtors, construction industry and purchasers
Keep costs to a minimum
Benefits to a maximum
Mostly monetary evaluation
Time is money
Long term
Long term land owners, regulatory agencies, owners/users
Long term benefits require long term planning
Direct costs (profit/loss) are not considered
Just take time to properly plan for long term needs and benefits
Development Financing: Some important key points regarding development
Timeframe of development always varies
Established from prior experiences from similar projects
Housing is subject to supply and demand like any other product
Time and input is needed from many agencies
Question of demand is not easily predicted
Usually trend in market is at a steady pace and well monitored
However, an unpredicted change in pace may afford the opportunity to improve the project profit or avoid an unnecessary loss
Two basic market conditions and their characteristics? Impact of various parameters that influence the financial viability of a development project? Four components that determine economic viability of proposed development?
Basic market conditions
Rising market
Increased demand and limited supply; market prices can rise rapidly
Inflationary period
Rising prices
Optimism and eagerness
(Provided interest rates remain relatively constant, or rise slightly, an increase in market price will mean additional profit
In this case, unforeseen delays, incompetence, or rezoning difficulties might result in IMPROVED profit margins (favourable outlook)
So, pressure is on regulatory agencies to provide speedy approvals is reduced in this case)
Falling market
Declining market price, However, due to market conditions, importance of each is in REVERSE ORDER. There will be a point in time when there is no profit
Same cost components are in effect
Land purchase price (This is now the primary question)
Development costs
Market price (Falling or maybe fixed)
Profit margin - shrinking?
(Time is very important
Delays are damaging
Must always find ways to reduce costs
Alot of pressure on regulatory agencies and politicians
Higher land use densities to offset high cost of land)\
Impact of various parameters
Two broad indirect factors
Time
Interest rates
Money usually has to be borrowed to finance project intul serviced lots have been sold
Four components
Land purchase costs (initial undeveloped land)
Slow to decrease in value, even if the massive overprice in inflationary periods was unrealistic (little pressure for long term owners to sell their land)
Development costs to complete project
Varies slightly based on supply and demand of contractors, consultants, goods and materials
Major factor is interest charges on borrowed money
Market value of the finished project
Profit margin
see https://docs.google.com/document/d/1jbN6v_ltEghnV0cErV7YsDD-0ogLwSPQjVJEphtJ1wM/edit
Emphasis on time dependent on?
Current and projected market conditions
Location of property
Established urban area
Conceptual plans have been established
Environmental concerns addressed
Most external parameters have been defined
New urbanized areas
Must address conceptual plans, environmental concerns and external parameters
Requires meetings with regulatory agencies to get agreements
see https://docs.google.com/document/d/1jbN6v_ltEghnV0cErV7YsDD-0ogLwSPQjVJEphtJ1wM/edit
What does the financial analysis answer?
Estimate of time
Any serious extension of individual components may result in a chain reaction, with additional interest payments
Commitment of funds
Borrowing of money
Purchase price of site
Estimated time for lot sales
Who are the two parties involved in total process (excluding developers, lawyers, banker and accountant)?
Municipality and developers consultant (engineering firm for residential development); they are the developer’s representative
Characteristics of development costs
One of the four basic cost components
It covers costs and fees
Relatively fixed costs, with minor variations
Addressed in accordance with development timetable
Does not include land purchase price, option payments, time of the raw land purchase
Cash flow analysis for project is subject to what?
Amount of available investment funds
Current and projected interest rates
Anticipated return on investment
Some of the development costs associated with the Servicing Agreement with Municipality
Payment of outstanding taxes,
development cost charges (impost fees),
admin fees,
subdivision processing fee,
construction work by municipality (connection of water mains to existing system),
street signing charges,
construction inspection fee,
guaranteed securities (varies across municipalities and projects)
General Types of Development Costs
Rezoning Application
Subdivision Application
Professional Planner
BC Land Surveyor
Professional Engineer/Manager
BC Hydro
Servicing Agreement with Municipality
Lawyers
Construction
Lot Sales
General Additional payments (Interest payments on borrowed funds
Special studies and reports required by authorities
Specialist consultants (geotechnical, architectural)
Return to investors, over and above interest costs
Owners overhead costs, operating an office, etc)
When is the financial feasability study completed?
Preliminary investigation Phase
Potential profit must be established as this is the go/no-go decision time
When is financial viability analysis made? What else contributes to final financial analysis beyond immediate costs?
Before any applications are made
Applications are NOT a final commitment, but can be an unneeded expense
Financial analysis
Interest in adjacent lands
Potential development of adjacent lands
Possible cost sharing for major servicing requirements
Political, social and economic factors
Local community capabilities of absorbing potential lots
What does initial review determine? What do you look at?
You look at the 4 basic components
Will determine
Market value
current/projected lot values
Raw land
Current asking price
Development charges
Evaluate municipal charges/fees
Development costs
Construction and servicing costs
Estimated consulting and legal expenses
Investment and carrying costs
Profit
Potential or desired profit margin
What does evaluation of rising/falling market conditions reveal? How to determine total construction cost?
Reveals
What raw land prices you are prepared to pay
How long you could afford to carry the development before it becomes unprofitable
Where cost savings can be made
Construction cost
Experience and knowledge of the local municipal services in area
Determine offsite servicing needs
Determine municipal charges
space/park and road widening needs
Then you can estimate cost per lot
Missed opportunities
Potential development lands sold before their potential is realized; then developed by others. Learn from this. Evaluate your land thoroughly
Ball Park values
Raw lands remain unsold due to unrealistic high price (set by someone who doesnt know true value of land)
They do it like “over the phone” estimates; list at prices just to see who bites
Must thoroughly research characteristics of land to sell at right price
Steps for evaluating raw land values for development properties
Property zoning
Identify zoning
Know the bylaws attached to zone
Min lot sizes?
Frontages?
Side yards?
Policies on relaxation by approving officer?
Existing structures/vegetation
Is house worth saving?
Is structure located to permit subdivision
Will existing home degrade surrounding lot sales?
Costs or municipal policies related to locating houses
How high are clearing costs
Will trees enhance lot sales?
Existing services. Check both sides of development too what was provided for adjacent developments. Take photos
Roads
Type of surface?
RoW width; widenings needed?
State of repair?
Municipal designation (arterial, collector, local)
Adjacent improvements
Water services
Is municipal water available
Size and type of existing mains
Is current system adequate?
Are wells required? Depth? Cost for drilling?
Sanitary disposal
Location and size of existing sewers
Extensions required? Permitted?
Will area be sewered in the future?
Topsoil depth? (for septic approval)
Storm drainage
Are any in the area
Ditches
Culvert sizes
Storm sewers, size, type
Natural water courses
Current problems
Any concerns involving Federal and Provincial Fisheries
Electrical
Existing power available?
Poles or underground?
Existing street lights and type?
Policy on extensions?
RoW over property?
Development potential (planning)
Get knowledge of municipal development proposals
Preliminary planning studies, development control plans, road network plans, development area boundaries
Gives you an idea of the view of planning officials before determining a development pattern
Development policies (engineering)
Determine engineering requirements relevant to various types of potential development. They vary zone to zone
Get information from the municipal engineering departments and probably need consulting from an engineer
Development costs
Projected costs for completing development
servicing/upgrading
Municipal fees and charges
Consultants
Financing
Marketing and sales
Gross revenues from development
Be realistic
Be modest
Project the selling price of lots, current market value with projected supply/demand
Realistic marketing program
Length of time to complete and sell similar sized developments under the same conditions
Development profits
At developers discretion
Profit margin should be reasonable but sufficient to cover also unexpected expenses
What are profit margins, revenues and potential dependent on? Three general types?
Dependent on
Risk factor
Types
Basic value
Minimal risk
Basic value applies to parcels of land equal or smaller than the minimum size of parcel permitted in current zone
This basic value can exceed value of raw land for development purposes
Potential value
Moderate risk
Apples to parcels of land greater than twice the minimum area and twice the minimum frontage permitted in current zone
They have basic value together with potential value for development without a zoning change
If suitably zoned, development has potential to be less time consuming, simpler approval mechanism
Speculative value
High risk
Indications that property is considered for development, but needs zoning change. Parcels then have speculative value as well as basic value
Potential for time delays and inherent speculation
So, consider these values. Bottom line: if all else fails, what loss can the project be terminated at straight resale
see https://docs.google.com/document/d/1jbN6v_ltEghnV0cErV7YsDD-0ogLwSPQjVJEphtJ1wM/edit
What can you provide to reduce the cost and work of a consultant hired to determine the costs of a development?
Legal description and civic address of property
Realistic development proposal and lot layout
Related servicing requirements
Completed checklist
Photographs of site and surrounding roads
The regulatory authorities do not have a ‘profit’ outlook on the development of land but can dramatically affect the profitability of a proposed development. Should concessions be made to developers in ‘tough’ times? Why or why not?
Concessions in engineering standards and regulations surrounding the safety and efficient planning of neighbourhoods should not be enacted
Market conditions may reverse back to rising market
Poor use of land will exacerbate problems in land use in the future
Environmental conditions of much of BC (snow, heavy rain, forest fires) mean that regulations surrounding these have tangible benefits; ignoring them can result in disaster
Important concession could be the reevaluation of zoning of property
Allow higher density of lots!
However, the time table should be reduced in any way possible
Focus planning division on evaluating incoming applications
Provide additional services that should help financial feasibility assessments
Low interest loans
Based on the reference material given, state the major effects of a delay in the subdivision approval process in terms of the overall development timetable and financing.
Timetable can have different effects based on the market condition
Longer time could mean more profit as lots can be sold for more
Could also mean less profit if the market is falling
Could reach point of zero profit
Time has effect on interest rates
How much money had to be borrowed?
Will interest rate change?
Time has effect on development costs (inflation, demand for services). May go up or down.
Engineering firm is on the job for the most time
Extra time in development may mean more development cost in the form of keeping engineering firm on retainer?
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May miss a marketing opportunity or an entire marketing year
