Residual Method

Question 1

What is the residual method?

Answer 1

The residual method of valuation is used to assess the value of land in an undeveloped state but with development potential.

Question 2

When is the residual method used?

Answer 2

When it is not possible to value by comparison

Question 3

A residual valuation can be expressed as a simple equation

Answer 3

(Value of completed development) - ( development costs + developers profit) = land value

Question 4

Who is BCIS owned by?

Answer 4

RICS

Question 5

Once the development is complete it will have a market value.

Answer 5

The market value can be calculated by:
. Direct capital comparison
. The investment method
. The profits method ( car park, cinema)

Question 6

What is a ransom strip?

Answer 6

A strip of land that gives access to the development land. It has ransom value

Question 7

What is the ransom strip valued at?

Answer 7

It is usual for it to be valued at one third of the increase in value of the development land resulting from the access however it may be to a percentage, I would check with the QS

Question 8

What is included within the development costs?

Answer 8

. Demolition 
. Cost of construction 
. Construction fees
. Cost of finance
. Contingency 
. Agents / legal fees
. Acquisition costs
. Stamp duty Land Tax

Question 9

What is the measurement value on BCIS?

Answer 9

On a GIA basis

Question 10

How do you calculate the developers profit?

Answer 10

The developer would typically tell us what percentage they would want. Mostly 20% but social housing providers have set 15% previously. Once we know the expected developers profit we build this into the equation. National house builders generally work to 20%

Question 11

A contingency is included within the calculation based on a short period, when does the contingency percentage go up?

Answer 11

The contingency increases with the level of uncertainty

Question 12

Stamp duty is classed as commercial when including within a development

Answer 12

Up to £150,000 - 0%

The next £100,000 (£150,001 to £250,000) - 2%

The remaining amount Above £250,000 - 5%

0% on first £150,000
2% on next £100,000
5% above £250,000

Question 13

What is the definition of residual?

Answer 13

Remaining amount after the greater part or quantity has gone

Question 14

Describe how you have carried out ( or would carry out) a residual valuation?

Answer 14

I worked out the value of the completed development and subtracted the development costs and developers profit which left me with the market value residual

Question 15

What costs did you deduct in your residual valuation?

Answer 15

. Site clearance/ demolition 
. Contamination 
. Construction fees
. Cost of finance
. Contingency 
. Agents/legal fees
. Acquisition costs

Question 16

What are the usual acquisition costs of a development site?

Answer 16

. Agents fees
. Legal fees
. Non-recoverable VAT
. Stamp duty/Land Tax

Question 17

What is ransom value?

Answer 17

The value attributable to a ransom strip

Question 18

What is a section 106 agreement?

Answer 18

A private agreement made between the local authorities and developers and can be attached to a planning permission to make acceptable development which would otherwise be unacceptable in planning terms.

Question 19

What fees will have to be taken into account when considering the land?

Answer 19

• price to be paid for the land
• Professional fees and potentially stamp duty land tax (SDLT)
• agents fees
• legal fees
• interest on money borrowed
• planning permission fees

Question 20

What other considerations would need to be taken into account?

Answer 20

• VAT if not recoverable
• phases developments
• inflation
• additional interest if delays expected in the disposal

Question 21

What would be used to calculate a residual valuation?

Answer 21

Excel or specialist software such as Kel or Argus

Question 22

What Guidance is available?

Answer 22

The RICS Information Paper 12 VALUTION of Development Land

Question 23

When would you suggest the residual method?

Answer 23

When a suitable scheme of development or refurbishment is established

Question 24

What assumptions can be made on a residual valuation?

Answer 24

• planning permission might reasonably be assumed. Must state in valuation

Question 25

When can the comparative method be used for evidence?

Answer 25

. Where there is evidence of similar transactions
. When sites out of the area have the same office rental or values and residential has the same rental or value
(Indirect comparisons)
. The variability in development sites is often greater therefore skill and attention should be taken to adjust for differences.
. If value can be established by comparison it is still sensible to check with the residual method

Question 26

What is the main weakness of the residual method as highlighted by tribunals?

Answer 26

• not market tested

Question 27

When is VAT included/excluded?

Answer 27

Residential development is likely to be NET of VAT (excluding VAT)

If the developer is not selling the freehold then they will opt to take tax and then recover later.

An exception would be a hospital or school that would be gross of VAT (including VAT)