Module 9: Cost/Benefit Analysis

Question 1

State and compare the factors in subdivision development financing, under inflation and recession pressures, and their effect on the regulatory agencies

Answer 1

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

Question 2

List and describe the participants in the development process

Answer 2

Long term land owners
Speculators - short term owners, very profit oriented
Developers, promoters, realtors
Construction companies
Engineers
Regulatory agencies
Politicians
Piurchasers

Question 3

Describe characteristics and motives in development process: Long term land owners

Answer 3

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)

Question 4

Describe characteristics and motives in development process: speculators

Answer 4

Short term ownership, redevelopment, quick turnover, profit motivated (directo conflict with established land owners who oppose change)

Question 5

Describe characteristics and motives in development process: developers, promoters, realtors

Answer 5

Short and long term objectives
Profit motivated but ALSO CREDIBILITY
Out of town developers are seen as a threat by the community

Question 6

Describe characteristics and motives in development process: construction companies

Answer 6

Short term
Normal business profit
Long term
Reputation to ensure growth

Question 7

Describe characteristics and motives in development process: engineers

Answer 7

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

Question 8

Describe characteristics and motives in development process: regulatory authorities

Answer 8

Long term
Promote and ensure orderly development
Ensure adequate servicing
Provide for future extensions of services
Assess long term needs of the community

Question 9

Describe characteristics and motives in development process: politicians

Answer 9

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

Question 10

Describe characteristics and motives in development process: purchasers

Answer 10

Short term

Low initial cost

Long term

Demand for services such as fire protection, schools and recreational facilities
Become long term land owners

Question 11

Broad sources of conflict? Potential sources for conflict alleviation?

Answer 11

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

Question 12

General conflicts. Who are in short term? Long term? Concerns?

Answer 12

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

Question 13

Development Financing: Some important key points regarding development

Answer 13

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

Question 14

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?

Answer 14

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

Question 15

Emphasis on time dependent on?

Answer 15

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

Question 16

What does the financial analysis answer?

Answer 16

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

Question 17

Who are the two parties involved in total process (excluding developers, lawyers, banker and accountant)?

Answer 17

Municipality and developers consultant (engineering firm for residential development); they are the developer’s representative

Question 18

Characteristics of development costs

Answer 18

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

Question 19

Cash flow analysis for project is subject to what?

Answer 19

Amount of available investment funds
Current and projected interest rates
Anticipated return on investment

Question 20

Some of the development costs associated with the Servicing Agreement with Municipality

Answer 20

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)

Question 21

General Types of Development Costs

Answer 21

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)

Question 22

When is the financial feasability study completed?

Answer 22

Preliminary investigation Phase

Potential profit must be established as this is the go/no-go decision time

Question 23

When is financial viability analysis made? What else contributes to final financial analysis beyond immediate costs?

Answer 23

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

Question 24

What does initial review determine? What do you look at?

Answer 24

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

Question 25

What does evaluation of rising/falling market conditions reveal? How to determine total construction cost?

Answer 25

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

Question 26

Missed opportunities

Answer 26

Potential development lands sold before their potential is realized; then developed by others. Learn from this. Evaluate your land thoroughly

Question 27

Ball Park values

Answer 27

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

Question 28

Steps for evaluating raw land values for development properties

Answer 28

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

Question 29

What are profit margins, revenues and potential dependent on? Three general types?

Answer 29

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

Question 30

What can you provide to reduce the cost and work of a consultant hired to determine the costs of a development?

Answer 30

Legal description and civic address of property
Realistic development proposal and lot layout
Related servicing requirements
Completed checklist
Photographs of site and surrounding roads

Question 31

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?

Answer 31

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

Question 32

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.

Answer 32

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