3-OPTIONAL-DEVELOPMENT PROPERTY Flashcards
(465 cards)
1
Q
What is acquisition/disposal cost?
A
The cost associated with the acquisition or disposal of property, usually including legal and agent fees, as well as any purchase or sales taxes.
Acquisition/disposal costs are critical for understanding the total investment involved in property transactions.
2
Q
What does alternative use value refer to?
A
Value in alternative use.
This concept evaluates the potential value of a property if used for a different purpose.
3
Q
What is the building costs index?
A
An index relating to the cost of building work, based on cost models of the ‘average building’ that measure changes in costs of labour, materials, and plant.
It helps contractors estimate project costs accurately.
4
Q
Define cash flow in the context of development.
A
The movement of money by way of income, expenditure, and capital receipts and payments during the development.
Understanding cash flow is essential for managing the financial health of a development project.
5
Q
What is a comparable property transaction?
A
A property used in the valuation process as evidence to support the valuation of another property.
Comparable transactions help establish a fair market value through market comparison.
6
Q
What is discounted cash flow?
A
A method of valuation explicitly setting out the inflows and outflows of an investment/development.
It is closely related to Internal Rate of Return (IRR) and Net Present Value (NPV), which are essential for investment analysis.
7
Q
What are developer contributions?
A
Obligations often tied to the grant of development permissions providing a benefit to the community, either generally or in a particular locality.
These contributions can include infrastructure improvements or funding for community services.
8
Q
What is a development appraisal?
A
A financial appraisal of a development, normally used to calculate either the residual site value or the residual development profit.
It can also be used to calculate other financial outputs related to the project.
9
Q
What is development profit?
A
The amount by which, on completion or partial completion of a development, the estimated income of a development exceeds the total outlay.
10
Q
What does development risk refer to?
A
The risk associated with the implementation and completion of a development, including post-construction letting and sales.
11
Q
How is development yield calculated?
A
The rental income divided by the actual cost incurred in realizing the development.
12
Q
What is the initial development yield?
A
The development yield calculated over the entire project, defined as the stabilized income divided by the total construction cost (excluding interest and fees).
13
Q
What is a discount rate?
A
The rate, or rates, of interest selected when calculating the present value of some future cost or benefit.
14
Q
What does existing use value mean?
A
See Value in existing use.
15
Q
What is gross development value (GDV)?
A
The aggregate market value of the proposed development, assessed on the assumption that the development is complete on the date of valuation in the market conditions prevailing on that date.
16
Q
How is gross development value estimated using an income capitalization approach?
A
Normal assumptions should be made within the market sector concerning the treatment of purchaser’s costs.
17
Q
What does the gross external area refer to?
A
The aggregate external area of a building or footprint, taking each floor into account, measured with reference to the appropriate code of measuring practice.
18
Q
What standards should be referred to for more information on gross external area?
A
International Property Measurement Standards (IPMS).
19
Q
What is the Gross internal area?
A
Measurement of a building on the same basis as gross external area – but excluding external wall thicknesses.
Net sales area is the gross internal area of a residential dwelling subject to certain inclusions and exclusions. Refer to International Property Measurement Standards (IPMS).
20
Q
What does ‘Highest and best use’ refer to?
A
The use of the property that would produce the highest value of the asset. It must be physically possible, financially feasible and legal.
Refer to International Valuation Standards (IVS) 104, paragraph 140.
21
Q
What are Holding costs?
A
The cost involved in owning a site or property, which may include:
* interest on finance used to acquire the asset
* maintenance costs
* any taxes payable by the owner
22
Q
Define Hope value.
A
An element of market value in excess of the existing use value, reflecting the prospect of some more valuable future use.
This term is not specifically recognised by International Valuation Standards (IVS) or RICS Valuation – Global Standards 2017 (Red Book Global Standards) but is a well-used phrase in practice in some jurisdictions.
23
Q
What is the Interest rate in a development appraisal?
A
The rate of finance applied in a development appraisal, which can vary within a project for different levels of senior and mezzanine finance.
24
Q
What does Internal rate of return (IRR) represent?
A
The rate of interest (expressed as a percentage) at which all future project cash flows (positive and negative) will be discounted in order that the net present value (NPV) of those cash flows, including the initial investment, be equal to zero.
25
True or False: IRR can only be assessed on gross finance.
False
## Footnote
IRR can be assessed on both gross and net of finance.
26
What is the market comparison approach?
Assessment of appraisal inputs and outputs by reference to comparable transaction evidence, which can include land, values and costs.
## Footnote
This approach is used for determining the value of a property by comparing it with similar properties that have recently sold.
27
How is market rent defined in International Valuation Standards (IVS) 104?
The estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and a willing lessee on appropriate lease terms in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
## Footnote
This definition emphasizes the fair market conditions under which a lease agreement is made.
28
What does market risk refer to?
The uncertainty resulting from unknown future changes in the economy and financial and property markets, irrespective of the property being developed.
## Footnote
Market risk is a broader category that encompasses various uncertainties affecting property values.
29
Define market value as per International Valuation Standards (IVS) 104.
The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
## Footnote
Market value is a critical concept in real estate appraisal and investment analysis.
30
What are net cash flows?
The cash flows generated by the project, assessed both gross and net of taxes and both gross and net of finance costs.
## Footnote
Net cash flows are a key indicator of a project's financial performance.
31
What is net development value (NDV)?
The gross development value (GDV) minus assumed sale costs.
## Footnote
NDV is used to evaluate the profitability of a development project.
32
Define net internal area (NIA).
The usable space within a building measured to the internal finish of structural, external or party walls, excluding certain areas such as toilets, lift and plant rooms, stairs and lift wells, common entrance halls, lobbies and corridors and car parking areas.
## Footnote
NIA is important for understanding the actual usable space available in a property.
33
What is net present value (NPV)?
The sum of the discounted values of a net cash flow including all inflows and outflows, where each receipt/payment is discounted to its present value at a specified discount rate.
## Footnote
Where the NPV is zero, the discount rate is also the internal rate of return (IRR).
34
What does the net present value (NPV) method assess?
It finds the sum of money representing the difference between the present value of all inflows and all outflows of cash associated with the project by discounting each at a specified discount rate.
35
What is opportunity cost?
The return or benefit foregone by pursuing an alternative action.
## Footnote
See also Optionality.
36
What does optionality refer to?
The right but not the obligation to pursue a particular course of action, such as sell, hold/retain or develop a property.
37
What is an outturn model?
A development appraisal that has been adapted to project various inputs, usually both in respect of values and costs.
38
What is the purpose of oversailing licences?
It allows a structure – a crane, for example – to overhang public or privately-owned property.
39
What are pre-lets and pre-sales?
Agreed lettings with occupiers or sales of part or the whole of the development prior to commencement or during the development.
40
How is profit on cost expressed?
As a percentage of total development costs.
41
What is the relationship between NPV and IRR when NPV is zero?
The discount rate is also the internal rate of return (IRR).
42
Fill in the blank: The net present value method is used in _______ analysis.
[discounted cash flow]
43
True or False: Optionality is the obligation to pursue a particular course of action.
False
44
What is the profit of a project expressed as a percentage of the project’s net development value (NDV)?
Profit on value
## Footnote
This metric helps assess the financial success of a project relative to its overall value.
45
What does property- or project-specific risk refer to?
The uncertainty attached to the intrinsic development of a site or property in addition to the general market risk
## Footnote
This risk affects the overall viability and profitability of a project.
46
What is involved in projections of values and costs?
Projecting from a base rent, sales value or cost to reflect estimated outturn levels in an appraisal
## Footnote
This process is crucial for accurate financial forecasting.
47
What does the term 'residual appraisal' refer to?
See Development appraisal
## Footnote
This method evaluates the potential profitability of a development project.
48
What is the residual method of valuation?
A valuation/appraisal of a development based on a deduction of the costs of development from the anticipated proceeds
## Footnote
The residual is typically either development profit or land value.
49
What is meant by residual site value/residual land value?
The amount remaining once the gross development cost of a project is deducted from its gross development value (GDV) and an appropriate return has been deducted
## Footnote
This value indicates the potential worth of a site post-development.
50
How is return (on capital) defined?
The ratio of annual net income to capital derived from analysis of a transaction and expressed as a percentage
## Footnote
This metric is essential for investors to evaluate profitability.
51
What does risk adjusted return refer to?
The discount rate as varied to reflect the perceived risk of the development
## Footnote
This adjustment helps in making more informed investment decisions.
52
What is sensitivity analysis?
A series of calculations resulting from the residual appraisal involving one or more variables (rent, sales values, build costs, etc.) that are varied to show the differing results
## Footnote
This analysis helps understand how changes in key inputs affect project outcomes.
53
What does simulation in financial appraisal consider?
The probability of outcomes given certain variances applied to key inputs within the financial appraisal through a stochastic process
## Footnote
This method quantifies the level of variation in the valuation based on input variation.
54
What are speculative developments?
Developments that are generally commenced prior to any agreed sales or lettings
## Footnote
These projects carry higher risk due to uncertain demand.
55
What is stabilised income?
The sum of the rental income, additional rent revenue and turnover (percentage) rent, assessed for one year from the earliest lease start date.
## Footnote
Stabilised income provides a snapshot of expected income from a property over a specific period.
56
Define standing investments.
Properties that are income-producing, usually with a tenant in occupation.
## Footnote
Standing investments are typically stable and provide consistent income.
57
What is target profit?
The level of acceptable profit considering the risk of the particular project, normally expressed as an individual sum.
## Footnote
Target profit helps in assessing the viability of a project.
58
Explain target/required return.
The level of commercially-acceptable return considering the risk of the particular project expressed as a periodic rate of return.
## Footnote
This metric is crucial for investors to evaluate potential investment opportunities.
59
What does the tender price index indicate?
An index relating to the level of prices likely to be quoted at a given time by contractors tendering for building work.
## Footnote
The tender price index helps in forecasting construction costs.
60
What is included in the total construction cost?
All costs of base construction and construction breakdown from project start to the earliest lease start date.
## Footnote
This total is essential for budgeting and financial planning.
61
Define total development cost.
The total cost of undertaking a development excluding profit and land.
## Footnote
This figure is critical for assessing the financial feasibility of a development project.
62
What is a turnkey development?
A type of development in which the property is constructed and fitted out by the landlord/owner to a fully operational standard.
## Footnote
Turnkey developments allow operators to commence trading immediately, assuming all necessary licenses or registrations have been obtained.
63
What does vacant possession refer to?
The attribute of an empty property, which can legally be exclusively occupied and used by the owner or, on a sale or letting, by the new owner or tenant.
## Footnote
Vacant possession is important for ensuring the new owner or tenant can utilize the property without restrictions.
64
What is value change?
The amount of growth or decline in the capital or rental value of elements of the project, normally projected for the purposes of the valuation/appraisal.
## Footnote
Understanding value change is vital for investment analysis and property valuation.
65
What is the definition of 'Value in alternative use'?
The market value, or any other appropriate basis, with the special assumption of an alternative use to the existing use or permitted highest and best use.
## Footnote
This concept considers how a property could be valued if it were used differently than its current or most profitable use.
66
What does 'Value in existing use' refer to?
The market value, or any other appropriate basis, assuming the property continues in its existing use with no expectation of that use changing in the foreseeable future.
## Footnote
This valuation approach maintains the current use of the property without anticipating any changes.
67
What is the 'Weighted average cost of capital'?
The minimum return a company should earn in respect of an asset by reference to relative weight of equity and debt within its capital structure. This may be stated by the client.
## Footnote
WACC is a critical metric for assessing investment decisions and financial performance.
68
How is 'Yield' defined in the context of property?
Yield can be applied to different commercial elements of a project, for example, office, retail, leisure, etc. It is usually calculated as a year’s rental income as a percentage of the value of the property.
## Footnote
Variations of yield include capitalisation or cap-rate, all-risks yield, equivalent yield, income yield, and initial yield.
69
Fill in the blank: Yield is usually calculated as a year’s rental income as a percentage of the _______.
[value of the property]
70
True or False: Value in alternative use assumes the property will continue in its existing use.
False
71
List the variations of yield mentioned.
* Capitalisation or cap-rate
* All-risks yield
* Equivalent yield
* Income yield
* Initial yield
72
What standard must be read in conjunction with the principles set out in this professional standard?
RICS Valuation – Global Standards 2017 (Red Book Global Standards)
## Footnote
This includes the International Valuation Standards (IVS), particularly IVS 410.
73
What takes precedence if updates to the Red Book Global Standards occur after the publication of this professional standard?
The updates to the Red Book Global Standards
## Footnote
Valuers must be aware of any changes.
74
What is the aim of this professional standard in relation to IVS 410?
To address the most pressing issues in more detail to facilitate practical implementation
75
What must the basis of valuation for development property agree with?
IVS 104 and VPS 4
76
What influences the assumptions made in the valuation of development property?
The purpose of the valuation
77
What must be reported in accordance with VPS 3 and VPS 4?
Site-specific assumptions or special assumptions concerning the proposed or anticipated development
78
How is a development property defined in IVS 410?
'Interests where redevelopment is required to achieve the highest and best use'
## Footnote
This includes various types of land and development activities.
79
List the types of interests included in the definition of development property according to IVS 410.
* Construction of buildings
* Previously undeveloped land with infrastructure
* Redevelopment of previously developed land
* Improvement or alteration of existing buildings
* Land allocated for development in a statutory plan
* Land allocated for higher value use or higher density in a statutory plan
80
What terms are interchangeable in this professional standard?
Development property and development land
81
What types of projects can development projects vary from?
* Single or multiple residential projects
* Industrial estates
* Shopping centres
* Other retail developments
* Offices
* Mixed-use developments
82
What does IVS 410 paragraph 20.2 provide?
A non-exhaustive list of different purposes for which a valuation of development property might be required
83
Name some purposes for which a valuation of development property might be required.
* Advice on financial reporting
* Loan security
* Acquisition
* Sale
* Valuation of options
* Assessment of taxes and valuations required within litigation
84
Fill in the blank: The definition of development property includes land allocated for a _______.
[higher value use or higher density in a statutory plan]
85
What is a key difference between a valuation for acquisition and an appraisal by a developer?
There may be differences in purpose, but several overriding principles are relevant to both types of valuations.
86
What complex issue affects the valuation of property development?
Valuation variation caused by the nature and timing of the valuation.
87
How does valuation variation impact development property values over time?
It increases volatility and introduces more possible options for landowners and developers.
88
What challenges do existing methodologies face in property development valuation?
They have difficulty accounting for valuation variation and its implications.
89
From which perspective does this professional standard address development property valuation?
A global perspective.
90
What context should valuations always be undertaken within?
The institutional framework of the country or region where the property is located.
91
What is the aim of this professional standard regarding development property valuations?
To guide the valuer in complex valuations with high variation and optionality.
92
What type of markets do development property valuations often relate to?
Specialised markets.
93
What does PS 2 set out concerning the valuer's qualifications?
Mandatory requirements concerning appropriate experience, knowledge, and skill.
94
When is this RICS professional standard effective?
Three months from publication.
95
How is a development property defined?
An interest where redevelopment is required for the highest and best use, or where improvements are being contemplated or in progress at the valuation date.
96
What is the first step in the valuation of development property?
Understanding the valuation process
## Footnote
This includes knowing the overall approach and methodology.
97
What does the taxonomy of the approach to the valuation of development property include?
Instructions and terms of engagement, site investigations, data collection, handling, interpretation and application to the valuation, and reporting
## Footnote
Each of these components plays a critical role in the valuation process.
98
What is the importance of site investigations in the valuation process?
Site investigations provide essential information about the property being valued
## Footnote
This may include assessments of location, condition, and potential issues.
99
Fill in the blank: The valuation of development property involves _______.
[a full understanding of the process]
100
True or False: Data collection is not a necessary step in the valuation of development property.
False
## Footnote
Data collection is crucial for accurate valuation.
101
What is the purpose of interpreting the collected data in the valuation process?
To apply the data to the valuation and reporting
## Footnote
Interpretation ensures that the data informs the final valuation effectively.
102
What is included in the reporting stage of the valuation process?
The final summary and presentation of the valuation findings
## Footnote
This stage communicates the results to stakeholders.
103
What must the valuer include in the terms of engagement?
An indication of the large number of matters to be agreed before the report is issued.
## Footnote
This is essential to ensure clarity and mutual understanding before the valuation process begins.
104
How do the terms of engagement vary?
They differ depending on the purpose of the valuation.
## Footnote
It is important that these terms are fully set out and agreed before undertaking the valuation.
105
What must valuers have before accepting instructions for a valuation of development land or property?
Appropriate technical skills, experience, and knowledge of the subject of valuation, the market, and the purpose of the valuation.
## Footnote
This is in accordance with paragraph 1.4 of PS 2.
106
Fill in the blank: Valuers must only accept instructions to carry out a valuation if they have the appropriate _______.
[technical skills]
107
What do IVS 104 and VPS 4 identify regarding valuation?
They identify several bases of value that the valuer must select and follow applicable requirements for each chosen basis.
## Footnote
The bases of value are essential for ensuring accurate and relevant valuations.
108
What is the definition of market value?
Market value is the value of the development property assuming optimum development, considering current and prospective economic and market circumstances and planning conditions.
## Footnote
Market value may include alternative development solutions for the site.
109
When is market value often the appropriate basis of valuation?
Market value is often appropriate when considering optimum development and current market conditions.
## Footnote
The valuer may need assistance from other professionals to determine optimum development.
110
What may dictate different assumptions concerning property development?
The purpose of the valuation may dictate different assumptions, such as actual proposed development projects or alternatives within existing use.
## Footnote
This is particularly relevant for valuations done for lending purposes.
111
What should be identified as special assumptions in a valuation?
Assumptions made when the valuation does not assume the optimum development should be identified as special assumptions.
## Footnote
This distinction is important for clarity in the valuation process.
112
What does VPS 4 state about the prospect of change in market value?
VPS 4 identifies that the market value reflects an expectation of a change in circumstances of the asset in the future.
## Footnote
This includes scenarios where buyers expect additional value to be created in the future.
113
What are examples of factors that may impact market value according to VPS 4?
* The prospect of development without current permission
* The prospect of marriage value from merging with another property or asset
## Footnote
These factors can lead to an increase in market value.
114
What is 'hope value'?
'Hope value' is the potential value that may arise from a change in circumstances.
## Footnote
This term is referenced in the glossary and relates to expectations of future value increases.
115
What needs to be factored into the valuation of development property?
The range of possible scenarios and the difficulties in identifying the impact of any expectation of potential change in circumstances
## Footnote
This can lead to additional uncertainty concerning the valuation.
116
What does additional uncertainty in valuation create?
Particular reporting issues
## Footnote
This uncertainty is addressed in chapter 9 of the professional standard.
117
What should be included in the valuation report?
Valuation assumptions
## Footnote
Assumptions not part of market expectation should be identified as special assumptions.
118
Why should assumptions be clear and consistent in valuation reports?
They can have a significant impact on the valuation outcome
## Footnote
Clarity and consistency help mitigate confusion and enhance the reliability of the valuation.
119
Where can examples of typical assumptions and special assumptions be found?
Appendix C of the professional standard
## Footnote
This appendix provides guidance within the development property valuation process.
120
What is the most appropriate basis of valuation when assumptions relate to a specific entity and/or client?
Investment value basis of valuation
## Footnote
Refer to IVS 104 paragraphs 60.1 and 60.2 and VPS 4 section 6.
121
What is often the appropriate basis of valuation for market value?
Market value subject to assumptions/special assumptions
## Footnote
This reflects the conditions under which the property is assessed.
122
What assumption is made when assessing market value?
Assumption of optimum development
## Footnote
This takes into account current and prospective economic and planning conditions.
123
What are the three main approaches to valuation identified in IVS 105?
The three main approaches are:
* market approach
* income approach
* cost approach
## Footnote
Each approach includes different, detailed methods.
124
What factors influence the approaches and methods used in valuation?
The required basis of value, the purpose of the valuation, and asset-specific facts and circumstances
## Footnote
These factors determine the appropriate valuation strategy.
125
What are the two main ways valuations are undertaken for development property?
The two main ways are:
* market comparison approach
* residual method
## Footnote
Refer to IVS 410 paragraph 40.1 for further details.
126
Fill in the blank: The market comparison approach and the _______ method are used for the valuation of development property.
residual
127
True or False: The income approach is one of the three main approaches to valuation according to IVS 105.
True
128
True or False: The cost approach is not considered a main approach to valuation in IVS 105.
False
129
List the three main approaches to valuation as per IVS 105.
* market approach
* income approach
* cost approach
## Footnote
Each approach serves different valuation needs.
130
What does the choice of valuation methods depend on?
It depends on the required basis of value, the purpose of the valuation, and asset-specific facts and circumstances
131
What is best practice regarding methods of assessing the value of development property?
Avoid reliance on a single approach or method
## Footnote
Best practice recommends using multiple methods for a more accurate assessment
132
Which two methods are commonly used for valuing development property?
Market comparison approach and residual method
## Footnote
Both methods should be cross-checked to ensure accuracy
133
What do the 2019 amendments to IVS 410 recommend regarding valuation methods?
Apply a minimum of two appropriate and recognised methods
## Footnote
This applies to all development valuations, especially for secured lending
134
What should a valuer consider regarding land value and development options?
They are separate; consider other available options concerning the development property
## Footnote
This ensures a comprehensive evaluation of the property's potential
135
What does the term 'weighting' refer to in the context of property valuation?
The process of analysing and reconciling differing indications of values
## Footnote
Weighting does not include the averaging of valuations, which is not acceptable
136
What is the importance of sense-checking the outcome in property valuation?
To ensure accuracy before final reporting of the valuation
## Footnote
This is crucial in the iterative process of valuation
137
True or False: Valuations for development property should only use the market comparison approach.
False
## Footnote
Best practice requires using multiple methods for a reliable valuation
138
Fill in the blank: The weighting attached to different methods depends on the _______.
Quality and quantity of the information underpinning each method
## Footnote
This relates to the valuation process as outlined in IVS Glossary
139
What is the iterative process in the handling and interpretation of data in property valuation?
It involves the application of different methods and data assessment
## Footnote
This is essential for accurate valuation outcomes
140
What is essential for a valuer to judge the certainty of the outcome of the valuation?
Awareness of the characteristics of the existing site and knowledge of development components
## Footnote
This allows the valuer to assess development potential accurately.
141
What factors determine the extent of factual information necessary for a valuation?
The stage of valuation preparation, purpose, characteristics of the property, and assumptions made
## Footnote
These factors influence how detailed the valuation needs to be.
142
What role does local market intelligence play in property valuation?
It is a key element in establishing relevant information for the valuation of a development property
## Footnote
Understanding the local market helps in making informed decisions.
143
List some documents that should be considered when establishing the facts for a valuation.
* RICS property measurement
* Environmental risks and global real estate
* International Property Measurement Standards (IPMS)
* International Construction Measurement Standards (ICMS)
## Footnote
These documents provide guidelines and standards for accurate valuation.
144
Why is it important to clearly set out the purpose, basis, assumptions, and facts in valuation litigation?
They are key components of any valuation litigation
## Footnote
Clarity in these areas helps avoid misunderstandings and disputes.
145
Fill in the blank: The level of detail appropriate when assessing development potential may vary according to the _______.
[purpose of the valuation]
146
True or False: The purpose of the valuation does not influence the extent of factual information required.
False
## Footnote
The purpose significantly impacts the information needed for an accurate valuation.
147
What are the different forms of development potential?
Development can take a number of different forms, creating a variety of options concerning what is developed and when.
## Footnote
The value of each development option may vary in relation to different scenarios.
148
What should be specified when assessing development potential?
It is important to specify the assumed development or developments and make the basis of those assumptions clear in the valuation report.
## Footnote
This clarity is crucial for accurate valuation.
149
What factors may influence the permissions likely to be obtained for development?
The associated legal planning agreements required to obtain consent may vary significantly for urban and rural development property.
## Footnote
There could be significant potential to develop alternative uses.
150
What should be considered when assessing the physical development that can be accommodated on a site?
Assessment should consider:
* Characteristics of the site
* Surrounding area
* Supply and demand constraints
* Likelihood of obtaining permission
## Footnote
More complex cases may require consultation with project advisers.
151
What role do emerging consultative planning and development policies play in assessing development potential?
Emerging consultative planning and development policies may be relevant, and policy differences between governmental structures should be recognized.
## Footnote
This includes national, regional, local, federal, and state levels.
152
True or False: The value of development options is constant across different scenarios.
False
## Footnote
The value of each development option may vary in relation to different scenarios.
153
Fill in the blank: An accurate assessment of development potential should consider _______.
[characteristics of the site]
## Footnote
This includes the surrounding area, supply and demand constraints, and likelihood of obtaining permission.
154
What professionals are recommended to consult for complex development assessments?
Consulting with appointed project advisers such as:
* Architects
* Quantity surveyors
* Environmental consultants
* Planning consultants
* Energy consultants
## Footnote
Their expertise can aid in more complex cases.
155
What is the importance of recognizing different governmental structures in development assessments?
Recognizing different governmental structures is important due to the impact of policy differences on development potential.
## Footnote
This includes variations at national, regional, local, federal, and state levels.
156
What matters should be considered in detail regarding land use?
• Permissible land uses within the particular planning regime
• Potential land uses within the particular planning regime
• Density of development
• Topography and site development factors
• Building-related issues
• Development consent issues
• Adjacent land considerations
• Accessibility and developability of the subject property
• Environmental issues
## Footnote
These factors are crucial for assessing development potential and planning requirements.
157
What are the building-related issues to consider in development?
• Estimated time to complete new buildings
• Optimum occupational efficiency ratios
• Car parking standards and/or restrictions
• Regulations concerning energy efficiency
• Use of development control system for climate change obligations
## Footnote
These issues impact the overall feasibility and compliance of the development project.
158
What are development consent issues?
Requirements related to:
* Provision of developer contributions
* Planning obligations attached to permission to develop
## Footnote
These issues can affect the approval process and financial viability of a project.
159
How can adjacent land affect development potential?
• Increasing development potential through acquisition or merger
• Necessity to acquire adjacent land or rights, such as oversailing rights
## Footnote
Adjacent properties can significantly influence the scope and feasibility of a development.
160
What environmental issues should be considered in development?
• On-site or neighbouring environmental features
• Impact on development process, density, and viability
## Footnote
Environmental risks can directly affect the success of a project and need thorough investigation.
161
What is the importance of liaising with stakeholders in the valuation process?
To ensure valuation reflects various aspects of proposed developments and possible future developments
## Footnote
Close collaboration with clients and local planning authorities is essential for accurate valuations.
162
What should be factored into the valuation of a site regarding uncertainties?
Risks attached to the development control process
## Footnote
Adjustments to valuation should explain the assumptions behind them, considering optionality.
163
When using the market approach, what should be considered regarding comparable properties?
How similar factors may have impacted comparable properties
## Footnote
Understanding these risks helps determine if valuation adjustments are necessary.
164
Fill in the blank: The density of development establishes the ______, scale, and massing.
[bulk]
## Footnote
Density is a critical factor in urban planning and development.
165
True or False: Topography and site development factors do not influence the availability of services and infrastructure.
False
## Footnote
These factors are crucial for determining the feasibility of development.
166
What are the four key options in the development process for larger sites?
* develop
* develop in phases
* sell or dispose
* defer or wait
## Footnote
These options are critical for determining the approach to property development and can significantly affect valuation.
167
How can the exercise of development options affect property valuation?
It can significantly affect the valuation of a development property.
## Footnote
The impact of these options should be considered during the valuation process.
168
True or False: Valuers should be unaware of the options available in property development.
False
## Footnote
Valuers should be aware of the options and their impact on value.
169
Fill in the blank: The exercise of development options can be quantified using _______ techniques.
[option pricing]
## Footnote
Option pricing techniques are derived from financial markets.
170
What is the preferred method of estimating market value in valuation?
The market approach based on comparables
## Footnote
It is used as the primary approach in many valuations.
171
What does the RICS document state about direct comparison for development property?
Direct comparison on a price per unit basis is rarely valid
## Footnote
A more detailed analysis is normally needed.
172
What does the professional standard recommend regarding reliance on a single method for development property valuation?
It is not advisable to rely on one method
## Footnote
Valuation should be an iterative process with checks using other methods.
173
Why is an iterative valuation process recommended for development properties?
Due to the individuality of many development properties and difficulties in finding good quality comparables
## Footnote
This process is detailed in chapter 2 of the professional standard.
174
What is required for the valuation of development property by comparison?
A depth of information of similar assets in a similar location
## Footnote
This is outlined in the RICS document.
175
What hierarchy does the RICS document set out for evidence in property valuation?
A hierarchy of different types of evidence with direct transactional data at the top
## Footnote
This includes various types of relevant transactional comparable evidence.
176
What types of evidence are included in the RICS hierarchy for property valuation?
* Recently completed transactions of identical properties with full information
* Recently completed transactions of similar properties with full information
* Recently completed transactions of similar properties with sufficient reliable data
## Footnote
These types of evidence are crucial for accurate valuation.
177
What can provide some of the best evidence for a property valuation?
A recent transaction of the property being valued
## Footnote
This can be particularly useful when full and accurate information is available.
178
What additional evidence can be valuable if a subject property has been marketed?
Information on offers received, even if a binding contract has not been entered into
## Footnote
This assumes that full and accurate information is available.
179
What type of evidence provides guidance rather than a direct indication of value?
Data
## Footnote
This includes information from published sources or commercial databases and other indirect evidence such as indices.
180
What factors determine the importance of information from published sources or commercial databases?
Relevance, authority, and verifiability
## Footnote
These factors help assess the credibility and applicability of the information.
181
What are some examples of data sources that provide broad indications to the valuer?
* Transactional evidence from other property types and geographical locations
* Background data such as interest rates and stock market movements
* Asking prices
## Footnote
The significance of these sources can vary based on market conditions.
182
True or False: The weight attached to different sources of information is always the same.
False
## Footnote
The weight can vary significantly depending on individual circumstances.
183
What is necessary for valuation by comparison to be reliable in development property?
Evidence of sales analyzed on a common unit basis
## Footnote
Units of comparison often relate to the relationship between value and size.
184
What types of units can be utilized in the valuation of development property?
* Site value per unit
* Habitable room
* Relationship between site value and the value of the completed development
## Footnote
Various units can be used for comparison in valuation.
185
What risk is associated with analysis in simple unit terms during property valuation?
Overlooking other factors determining value
## Footnote
Many factors can influence value beyond simple metrics.
186
How does planning status impact the valuation of development land?
It can significantly increase reliability of comparables
## Footnote
Land transactions with planning permission or a reasonable prospect of it are often more reliable.
187
What method may provide an essential check when reliable information is not available?
Market approach
## Footnote
It can inform a valuation prepared using the residual method.
188
What modern methods enhance comparative analysis in development property valuation?
Using different units of comparison and knowledge of the transactional market
## Footnote
These methods provide a robust basis for applying the comparative method.
189
When is comparison most appropriate in property valuation?
When there is an active market and/or a straightforward low-density form of development is proposed
## Footnote
This includes greenfield land in rural areas and small residential developments.
190
What types of property developments are less frequently compared using the comparative method?
Larger sites for housing or other developments
## Footnote
Comparison is more common in low-density developments.
191
What factors may require adjustments when comparing sites?
Factors include:
* Values may differ considerably within a small geographical area
* Condition of the site and associated remediation costs
* Site and construction costs
* Type of development and density achieved
* Specific factors relating to the site or purchaser
* Planning status
* Developer contributions
* Date of the comparable transaction
## Footnote
These factors are not exclusive and may vary significantly.
192
How can values differ when comparing sites?
Values may differ considerably within a small geographical area, particularly in established urban areas.
## Footnote
This emphasizes the importance of localized market analysis.
193
What is the significance of site condition in site comparison?
The condition of the site and associated remediation costs are site-specific and could differ significantly between greenfield and brownfield sites.
## Footnote
Greenfield sites are undeveloped lands, while brownfield sites have previously been developed.
194
What factors influence site and construction costs?
Site and construction costs may differ based on:
* Infrastructure requirements
* Service requirements
## Footnote
These factors can significantly impact the overall development cost.
195
How does the type of development affect site comparison?
The type of development may vary between sites, and the density achieved will also affect the price.
## Footnote
Density refers to the number of units or amount of development per area.
196
What specific factors might need consideration during site comparison?
Specific factors include:
* Adjoining ownership
* Synergies with adjoining sites
## Footnote
These factors can influence the overall value and potential of a site.
197
What does planning status refer to in site comparison?
Planning status can range from no designation for alternative use through to detailed consent.
## Footnote
This indicates the level of regulatory approval for development.
198
How can developer contributions vary?
Developer contributions may vary across different jurisdictions and according to the conditions of the permission to develop.
## Footnote
This highlights the importance of understanding local regulations.
199
Why is the date of the comparable transaction important?
The date of the comparable transaction should be taken into account as it affects the relevance and accuracy of comparisons.
## Footnote
Market conditions can change over time, influencing property values.
200
What modern methods enhance comparative analysis in property development?
Modern methods of comparative analysis using different units of comparison, along with knowledge of the transactional market, provide a useful basis for applying the comparative method to development property.
## Footnote
This approach helps in making informed assessments of property values.
201
What is the residual method in property valuation?
The value of a property with development potential is derived from the value after development minus the cost of undertaking that development, including profit for the developer
## Footnote
The formula is: gross development value (GDV) - total development costs (including profit) = residual land value.
202
How can the residual method be used beyond determining land value?
It can determine the surplus available for the developer’s profit if the price of the land is fixed
## Footnote
This is important for valuing development land.
203
What complication arises in the residual valuation method?
Development takes time, while the valuation is at a single time point.
204
What are the two applications of the residual method?
Discounted cash flow and a more basic application of the residual method.
205
What is the focus of this section and Appendix B regarding the residual method?
To set out the underlying principles behind the two applications of the residual method.
206
What should valuers evaluate when using the residual valuation method?
Technical issues and input choices within the two applications.
207
What factors influence the level of detail in the residual valuation method?
* The role of the valuation
* Timing within the development process
* Type of asset
208
When might the basic residual method be used?
For less complex assets or early in the development process to consider optimum development.
209
When is the discounted cash flow method preferred?
For more complex assets with phased construction or disposal where timing needs to be fully accounted for.
210
Fill in the blank: The formula for the residual method is GDV - total development costs = _______.
residual land value
211
True or False: The basic residual approach cannot incorporate phasing of development.
False
## Footnote
Phasing can be developed within a basic residual approach.
212
What is the market comparison approach used for?
It plays an important part in the determination of many inputs into the residual method.
## Footnote
The market comparison approach evaluates property values based on comparable sales in the market.
213
What term does IVS 410 use to represent the estimated contract price of the developed property?
Gross development value (GDV)
## Footnote
GDV assumes that prospective acquisition costs have been accounted for.
214
What does net development value (NDV) represent?
The appropriate basis of value of the completed development net of any sale costs.
## Footnote
NDV provides a clearer picture of the actual value after accounting for expenses.
215
List typical inflows and costs to be considered in residual valuations.
* Value of the completed property
* Net development value (NDV)
* Site clearance, remediation or preparation costs
* Costs of construction, including contingencies
* Professional fees related to construction
* Costs and professional fees relating to planning
* Planning obligations or levies linked to the development
* Finance for the development
* Developer’s profit
* Any other costs or inflows related to the development
* Site costs where land value is not the residual.
## Footnote
Each of these factors plays a crucial role in determining the residual value.
216
True or False: The professional standard prescribes a particular application of the residual method.
False
## Footnote
The choice of application is left to the valuer based on specific circumstances.
217
What are the two different applications of the residual method?
* Discounted cash flow
* Basic application of the residual method.
## Footnote
These applications cater to different complexities in asset valuation.
218
When might a basic residual valuation be used?
For less complex assets or early in the development process.
## Footnote
This allows for consideration of optimum development.
219
When is a discounted cash flow method typically used?
For more complex assets with phased construction or disposal.
## Footnote
This method accounts for the timing of events in the valuation.
220
Fill in the blank: The professional standard suggests that _______ requires careful consideration of how the inputs and outputs are generated.
[development valuation]
## Footnote
Understanding the inflows and outflows is crucial for accurate valuation.
221
What do cash flow models reflect?
Assumptions about the timing of revenue and expenditure over the development period on a period-by-period basis.
222
What does the approach of a discounted cash flow calculate?
The net present value (NPV) of the estimated costs and revenues over the duration of the development project.
223
What does the NPV represent after accounting for all other costs and revenues?
A current estimate of the residual land value.
224
In a standard cash flow model, how is profit represented?
As a return on capital (IRR).
225
What is the condition for NPV to be considered as the residual land value?
The NPV must be positive.
226
What have some applications of the discounted cash flow technique been criticized for?
Departing from the basic NPV model and incorporating inappropriate inputs.
227
What are the main issues surrounding the discounted cash flow technique?
Value and cost changes during the development period, phasing, value/cost projections, treatment of finance, and specification of development profit.
228
What does the discounted cash flow application require?
Explicit period-by-period assumptions concerning the breakdown of costs and values during the development period.
229
What time frames can be used in the discounted cash flow application?
Monthly or quarterly.
230
What assumption must be made in the discounted cash flow application?
The target rate of return.
231
What does the discounted cash flow application allow to be incorporated?
Market dynamics through time, such as changes in costs and values.
232
If value and cost projections are adopted, what must be done?
They should be explicitly stated, along with an explanation of the assumptions underpinning those projections.
233
What should be explicitly stated regarding required rate of return?
Other assumptions, including required rate of return, should also be explicitly stated.
## Footnote
This ensures clarity in financial projections and analyses.
234
What is the basic application of a discounted cash flow?
To calculate the NPV of the estimated costs and revenues over the duration of the development project.
## Footnote
NPV stands for Net Present Value.
235
What is the residual land value derived from?
The value of the completed development (net) minus the development costs, including developer's profit.
## Footnote
This is a key concept in property valuation.
236
What should be done when using value/cost projections?
This should be explicitly stated together with an explanation of the assumptions underpinning those projections.
## Footnote
Transparency in projections helps in understanding the valuation process.
237
What are nominal cash flows required to use?
Nominal rates of return.
## Footnote
Nominal cash flows do not account for inflation adjustments.
238
What should be adjusted when current values and costs are used?
The rates of return should be adjusted accordingly as cash flows are being expressed in real terms.
## Footnote
Real terms consider inflation, providing a more accurate reflection of value.
239
What is an acceptable approach in discounting cash flows?
Differential rates to discount different elements of the cash flow according to their risk profile.
## Footnote
This approach accommodates varying levels of risk in cash flow components.
240
What are the major issues with the basic residual method?
The simplicity of the application and the accuracy of the inputs and outputs.
## Footnote
These concerns highlight the need for careful consideration of assumptions.
241
What does the basic residual method represent?
A simplified representation of the expected revenue and expenditure from a development.
## Footnote
This simplification can lead to oversights in complex scenarios.
242
True or False: Changes in value and cost through the development period are easily incorporated in a basic residual valuation.
False.
## Footnote
Incorporating these changes can be challenging.
243
What is illustrated in Figure 3 of the document?
The basic residual valuation model.
## Footnote
Visual aids like figures can enhance understanding of complex concepts.
244
What are the two approaches to valuing development property?
Market approach and residual method
## Footnote
Each approach has unique characteristics that can affect valuation.
245
What is a key risk in the market approach to valuation?
Individuality of each site affecting comparisons
## Footnote
This individuality impacts the quality and quantity of comparisons and the difficulty in adjusting evidence.
246
What leads to valuation variation in the residual method?
Residual amount is a function of multiple inputs subject to variation
## Footnote
Small changes in inputs can cause high variations in residual output.
247
What does the professional standard recommend regarding valuation approaches?
Do not rely on a single approach or method
## Footnote
Emphasizes the need for a comprehensive analysis.
248
What contributes to possible valuation variation in the development process?
Various options to develop within different timescales and inherent scenarios
## Footnote
Additional analysis is suggested to contextualize valuation outcomes.
249
What is the simplest form of risk analysis mentioned?
Sensitivity analysis
## Footnote
It evaluates how changes to individual inputs affect the valuation.
250
What should sensitivity analysis inform in the valuation process?
It may lead to a different market value than the residual output
## Footnote
Comparables should also be considered.
251
What is scenario modelling used for in risk analysis?
To evaluate how different combinations of inputs affect valuation
## Footnote
This includes optimistic and pessimistic economic views.
252
How does combining risk analysis techniques with discounted cash flow benefit valuation?
It allows easier testing of impact from different timings of events
## Footnote
This is more efficient than using a basic residual framework.
253
What is necessary when testing multiple development scenarios?
Scenario modelling combined with sensitivity analysis
## Footnote
This approach is particularly appropriate for thorough evaluation.
254
What can be assigned to various scenarios in advanced risk analysis?
Probabilities
## Footnote
This allows for simulation models to combine these probabilities over multiple runs.
255
What should the rational basis for choice of variations in risk analysis be?
Clearly set out when reporting valuations
## Footnote
It should include assumptions about distribution and correlations between inputs.
256
What should the valuer note regarding emerging technologies?
Emerging technologies in the area of risk analysis
## Footnote
Keeping abreast of new technologies is essential for accurate valuation.
257
Fill in the blank: Risk analysis should be used to evaluate how changes to individual inputs, such as ________ or sales values, might affect the valuation of development property.
construction cost
258
What is the relationship between valuation uncertainty and the level of risk in individual development projects?
Valuation uncertainty is often, but not always, closely related to the level of risk; normally, both are higher for development projects than for other property types.
259
Under what circumstances can valuation uncertainty be low despite high risk in development projects?
Valuation uncertainty can be very low when there are a number of good, directly comparable transactions available as comparables.
260
What is the purpose of risk analysis in property valuation?
Risk analysis enables evaluation of inputs that most impact outcomes and provides a measure of volatility between different investments and developments.
261
What should valuers explicitly state regarding risk and return?
Valuers should explicitly state the level of risk and return used and the assumptions relied on to identify them, as this is a key input to the residual method.
262
What additional reflection is required for valuation outputs in development property?
Valuation outputs require non-quantitative reflection on potential large valuation variation from small changes in important inputs.
263
What should valuers consider regarding options in development property valuations?
Valuers should recognize that development property includes options that may not always be captured in valuation methods but impact value.
264
What is a recommended practice for valuers when assessing residual valuation outcomes?
Valuers should compare residual valuation outcomes with market transactions and explore alternative scenarios and potential outcomes.
265
True or False: The level of risk and return assumptions are not important in the residual approach.
False
266
Fill in the blank: Development property valuation may experience large variations due to small changes in _______.
[important inputs]
267
What does the professional standard concerning the valuation of land and property focus on?
The process underpinning the valuation of development land using both the market comparison approach and the residual method.
268
What two applications can the residual method be used for?
* Basic residual
* Discounted cash flow
269
In a basic residual, what happens if the land price or value is known?
The land price becomes a cost to the development.
270
When does the land sale typically occur in a basic residual?
At the beginning of the development.
271
In a basic residual, when are all other costs and values assumed to occur?
At the end of the development period.
272
How are costs assumed to accrue in a basic residual?
At the borrowing rate.
273
What must be done to estimate the profit at the end of the development?
The land value must be taken to the end of the development period by adding interest.
274
What is deducted from the NDV to leave the residual profit in a basic residual?
The costs including land.
275
In a discounted cash flow, how are all inflows and outflows treated?
They are discounted back to the start of the cash flow.
276
What does the internal rate of return (IRR) represent in the context of a discounted cash flow?
An estimate of the developer’s return.
277
How is profit determined as a single lump sum at the end of development?
By inserting the land value at the beginning of the cash flow and compounding interest.
278
What is assumed about borrowing when calculating expected profit at the end of development?
Assuming 100 percent borrowing.
279
What can be developed within the cash flow format regarding borrowing?
Applications that take account of the level of borrowing and different costs of borrowing on different forms of debt.
280
What is crucial to recognize when developing models for valuation?
The role and purpose of the valuation.
281
What type of inputs are required for market valuations?
Market-based inputs and assumptions as to highest and best use.
282
True or False: Specific funding arrangements and required rates of return by developers are based on market indicators.
False
283
What can the residual method help determine for proposed development projects?
The profitability of proposed development projects.
284
What approach is unlikely to be the most appropriate for valuing assets where work on development has commenced but is not completed?
Market comparison approach
## Footnote
Partially complete developments may have various reasons for coming to market, and market evidence should be used carefully.
285
What are the two basic approaches to valuing land in the course of development?
* The value of the land plus the costs expended (improvements) at the valuation date
* The completed development value minus the costs remaining to be expended at the valuation date
## Footnote
Both approaches can be used as a check against each other.
286
What should the valuer consider when employing the residual method as the primary method in valuation?
The assumption of optimum development
## Footnote
If the actual development is not the optimum, costs for removing existing works should be allowed.
287
When is it appropriate to assess the costs of completing the development?
At the valuation date
## Footnote
IVS 410 states that relying solely on projected costs and income from project plans is not appropriate for partly completed development properties.
288
What should the valuation reflect regarding the risks remaining at the valuation date?
The risks may differ from the commencement of the project
## Footnote
A reassessment of the rate of return is required, influenced by the project's current stage.
289
True or False: A project nearing completion is typically viewed as more risky than one at an early stage.
False
## Footnote
Projects nearing completion are generally considered less risky.
290
Fill in the blank: The valuation approach is the responsibility of the _______.
valuer
## Footnote
The approach should be clearly stated in the valuation report.
291
What must be agreed with the client in advance when stating the valuation approach?
A number of assumptions and special assumptions
## Footnote
This is essential for clarity in the valuation report.
292
What additional factor may be added to a risk discount in project valuation?
Complexity of the project, stage of construction, and state of the market
## Footnote
These factors influence the overall risk assessment in project valuations.
293
What is a 'low point' projected valuation?
A valuation that can be lower than the acquisition plus cumulative sums expended
## Footnote
This valuation reflects the project's status at a specific stage of construction.
294
What assumptions may a valuer need to make regarding the construction contract?
The construction contract and subcontracts are active and work on-site has not stopped
## Footnote
This assumption is critical for accurate valuation.
295
What rights must a lender have in relation to construction agreements?
Full step-in rights in all construction agreements, including planning agreements
## Footnote
This ensures the lender can intervene if necessary.
296
What must be settled in full prior to the valuation date?
Any claims in terms of extra work, suppliers’ materials, increased costs, or delays
## Footnote
Settling these claims is essential for an accurate valuation.
297
What must be assumed about collateral warranties and contracts in valuation?
All collateral warranties and contracts are issued and transferable
## Footnote
This assumption helps in evaluating the legal standing of the project.
298
What are the two basic approaches to valuing land in development?
1. Value of the land plus costs expended at the valuation date
2. Completed development value minus costs remaining to be expended
## Footnote
Using both approaches can provide a cross-check for accuracy.
299
True or False: Both approaches to land valuation can be used together as a check.
True
## Footnote
Employing both methods can help validate the valuation process.
300
What must be clearly stated in a valuation report?
The basis of valuation
## Footnote
If a basis other than market value is adopted, it must be fully explained.
301
What assumptions must be stated in a valuation report?
All assumptions/special assumptions made
## Footnote
Comments on the effect of those assumptions should be included if they are material.
302
Why is it important to comment on the valuation approach?
It is particularly important in these valuations
## Footnote
This requirement is specified in VPS 3, paragraph 2.2 (l).
303
What may the value of development property include?
An element reflecting the difference between the value of the land with specific planning consent and enhanced consent
## Footnote
This value is subjective and based on the valuer's experience and market knowledge.
304
How should valuers report the element of reported value for loan security purposes?
It should be identified as a separate figure
## Footnote
This can be reported as a market value subject to an assumption under VPS 3, paragraph 2.2 (i).
305
What should be reported if the valuation of development property results in a negative value?
The negative value must be reported
## Footnote
An explanation for the negative value should accompany the report, as per VPS 3, paragraph 2.2 (m).
306
Why are risk analysis techniques necessary in property valuations?
To identify the variation in valuations and the source of that variation
## Footnote
This is particularly relevant for development properties due to value volatility.
307
How should a valuation be reported when risk analysis has been applied?
As a single figure, with potential for significant variation reported appropriately
## Footnote
If valuation uncertainty is material, further commentary must be added to avoid creating a false impression.
308
What does VPGA 10 recommend regarding material valuation uncertainty reporting?
It should normally be reported qualitatively and a stated range of values is not good practice.
## Footnote
VPGA 10 emphasizes qualitative reporting to avoid misinterpretation of value ranges.
309
Is it acceptable to report a range of values for development property valuations?
Yes, if the purpose of the valuation does not require a single figure valuation, it can be agreed upon with the client.
## Footnote
This flexibility allows for a more comprehensive understanding of valuation impacts.
310
What should reports include regarding risk analysis?
An explanation of the reasons for the adopted range and a statement that the range does not encompass all possible inputs.
## Footnote
This is crucial for clients to understand the variability in valuation outcomes.
311
Why should valuers be careful in reporting valuation variation quantitatively?
It may be used in litigation cases as proof of the permissible margin of error in some jurisdictions.
## Footnote
Careful quantitative reporting helps protect the valuer in legal contexts.
312
According to VPS 3, paragraph 2.2, does valuation variation in development property constitute material valuation uncertainty?
No, it does not constitute material valuation uncertainty.
## Footnote
This distinction is important for compliance with valuation standards.
313
What may valuers find helpful in drafting their reports?
Paragraphs 3.2 and 3.3 of VPGA 10.
## Footnote
These sections provide guidance on addressing valuation uncertainties.
314
How should valuers report tolerance around the valuation?
They may refer to the process by which the valuation was produced and highlight issues contributing to uncertainty.
## Footnote
This contextualizes the valuation and aids client understanding.
315
When valuers account for financial arrangements, what should be reported?
The valuation before finance and any valuation net of finance separately.
## Footnote
This clarity helps clients understand the impact of financing on value.
316
What must valuers decide when assessing value under a particular financing regime?
Whether it is the market value, market value under special assumptions, or the investment value.
## Footnote
Accurate classification is essential for transparency in reporting.
317
How should most valuations be reported?
As a single figure.
## Footnote
This standardization simplifies communication of valuation results.
318
What should be reported alongside the single figure valuation when risk analysis is applied?
The potential for significant variation should be reported appropriately.
## Footnote
This helps clients understand risks associated with the valuation.
319
What should valuers be aware of regarding potential development sites?
Sites may contain many hazards
## Footnote
For a comprehensive guide to safe working practice, see the current edition of Surveying safely: health and safety principles for property professionals.
320
What type of information can physical inspection of a site reveal?
Site-specific information, which could include:
* Presence of archaeological features
* Evidence of waste management obligations
* Water or mineral extraction rights
* Geotechnical conditions
* Limitations or encumbrances on the interest
* Rights of access to public highways
* Availability and requirements for necessary services
* Need for off-site infrastructure improvements
321
How does the planning regime impact the value of development land?
It regulates overall development
## Footnote
The planning regime includes generic principles and issues to address when undertaking a development valuation.
322
What should be assessed regarding development plans when valuing land?
Existence of any particular development plan or zoning elements for different uses
323
What type of permissions should be considered during a development valuation?
Current permissions to undertake development, which may be in outline or in full
324
What should be verified if a development permission is time-limited?
Whether it is still valid and if a similar permission would be granted again if close to expiry
325
What regulations might affect development without needing a planning application?
Existence of regulations that specify permissible development extents
326
What should be considered regarding existing buildings during development valuation?
Permitted use of existing buildings or possibility of identifying an established use
327
What type of agreements may be relevant for securing planning permission?
Legally binding agreements that have been or are to be documented
328
What special controls might apply to a site or buildings?
Controls related to heritage and conservation
329
What environmental requirements may need to be considered during development?
Requirements to protect or enhance environmentally sensitive features and comply with legislation
330
What spatial requirements may be relevant in development planning?
Requirements for view corridors, sight lines, or buffer zones
331
What does the form of inputs into a residual valuation depend on?
The type and application of the method
## Footnote
This indicates that different valuation methods may require different input formats.
332
What valuation technique allows for a detailed set of assumptions to be applied to inputs?
Discounted cash flow technique
## Footnote
This technique is commonly used in financial analysis to assess the value of an investment based on its expected future cash flows.
333
What does 'R' represent in the discounted cash flow model?
Estimated periodic net revenue received, or net expenditure incurred at the end of each period
## Footnote
R is a crucial component as it reflects the financial performance over time.
334
What does 'LV0' signify in the discounted cash flow model?
Land value at time, t = 0
## Footnote
LV0 indicates the initial value of the land before any development occurs.
335
What is represented by 'DV' in the discounted cash flow model?
Estimate of development value
## Footnote
DV is essential for determining the potential financial outcome of a development project.
336
What does 'n' denote in the context of the discounted cash flow model?
Number of periods over which the development takes place
## Footnote
n is important for assessing the timeline of the investment.
337
What does 'd' represent in the discounted cash flow model?
Target rate of return
## Footnote
d is used to discount future cash flows back to their present value.
338
What does Appendix B1 address?
Various inputs into a residual by reference to the more detailed cash flow approach
## Footnote
This section provides a thorough examination of the inputs necessary for a residual valuation.
339
What is the focus of Appendix B2?
Different approach to some of the inputs within a basic residual method
## Footnote
It explores alternative methods for handling inputs in simpler residual valuations.
340
True or False: The inputs into a residual valuation are typically uniform across all methods.
False
## Footnote
Inputs can vary significantly depending on the valuation method used.
341
What is the value to be adopted for completed property development?
The market value, subject to any special assumptions concerning the basis of valuation and the purpose
## Footnote
Market value reflects an optimum proposed development and is assessed based on defined plans and specifications.
342
What does the term GDV stand for?
Gross Development Value
## Footnote
GDV is also referred to as the completed property value.
343
What influences the GDV?
Assumptions concerning whether the completed property is to be sold or let
## Footnote
This includes whether the property is sold at the end of the development period, sold in phases, or held as an investment.
344
What is the role of RICS documents in property valuation?
They provide guidance on the valuation of specific property types
## Footnote
RICS documents should be referred to when assessing the market value of properties with particular valuation difficulties.
345
What must a valuer ensure when assessing the value of completed property?
They must have appropriate expertise or take additional advice
## Footnote
This is in accordance with PS 2 paragraph 2.1.
346
In what scenarios might the total of the values of individual properties be adopted?
In residential, mixed-use, or multi-asset developments
## Footnote
This approach may be particularly relevant for developments with several discrete assets.
347
What should be included in the cash flow concerning rental income and sales?
Phasing of rental income and sales should be explicitly included
## Footnote
Additional assumptions can be made regarding the timing of these inflows.
348
When is the inflow recognized in cash flow for developments with individual buildings or units?
At the appropriate time during the development period
## Footnote
The incidence of relevant costs must reflect the actual timing of payments.
349
What does the income capitalisation approach require concerning purchaser’s costs?
Normal assumptions within the particular market sector
## Footnote
The GDV should represent the expected contract price, while NDV accounts for seller’s costs.
350
True or False: The completed property value is assessed without considering market conditions.
False
## Footnote
The assessment is based on market conditions prevailing at the date of valuation.
351
What is the expected contract price in relation to GDV?
The net proceeds of disposal minus seller’s costs
## Footnote
This is referred to as NDV.
352
Fill in the blank: The value of completed property is referred to as _______.
completed property value
## Footnote
This term is synonymous with GDV.
353
What can phasing include during the development period?
Properties that can be let while other properties are completed
## Footnote
This can help incorporate additional income into the cash flow.
354
What should be considered when incorporating income-producing assets into the cash flow?
Timing of lettings, rent-free periods, capital contributions
## Footnote
These factors can affect the overall financial analysis of the development project.
355
How can changes in values be incorporated into cash flow?
By identifying expected changes in values
## Footnote
Consistent treatment of inputs like costs and interest rates is crucial.
356
What are the two types of interest rates that can be used in valuation?
Real rates and nominal rates
## Footnote
Target rates of return and the use of finance rates depend on this choice.
357
What should be considered regarding development costs?
The context of optimum versus actual development
## Footnote
Reduced costs for the actual project may not apply to the optimum development.
358
What costs should be accounted for if there is no existing planning permission?
Costs of obtaining planning permission
## Footnote
This includes potential additional costs for contentious developments.
359
What additional costs may arise in contentious developments?
Delays caused by appeals, inquiries, fees, holding costs
## Footnote
These may also include costs for creating models and lobbying.
360
What impact do legally binding agreements have on development consent?
They may involve liabilities offset against the asset's value
## Footnote
Developer contributions can be on-site or off-site and affect financial appraisal.
361
What types of developer contributions might be required?
Cash payments, community facilities, affordable housing, enhanced public transport
## Footnote
The timing of these payments can be relevant.
362
What statutory and regulatory obligations might incur significant costs?
Heritage building consents, archaeological surveys, environmental protection, building approvals
## Footnote
These obligations depend on individual jurisdictional regulations.
363
What are the main components of site acquisition costs?
Agents’ fees, legal costs, taxes payable on the acquisition of land
## Footnote
These costs are incurred prior to the commencement of development.
364
What costs are included in site-related costs before main construction?
Environmental issues, contamination removal, ground improvement works, archaeological investigation costs, diversion of essential services, site establishment costs, health and safety regulations compliance, securing vacant possession
## Footnote
These costs must be considered before the main construction activity can proceed.
365
What environmental issues must be addressed before construction?
Remedial works, conservation requirements, flood protection requirements, noise abatement, emission control
## Footnote
These issues can significantly impact site-related costs.
366
What is the purpose of ground improvement works?
To make the site safe for development
## Footnote
Liaison with civil and/or structural engineers may be necessary.
367
What types of costs may arise from archaeological investigations?
Costs related to the time and work needed for investigations before the main contract is let
## Footnote
Understanding these costs is crucial for project planning.
368
What are some off-site infrastructure costs that may be incurred?
Diversion of essential services, highway works
## Footnote
These costs are necessary to prepare the site for development.
369
What is involved in site establishment costs?
Erection of hoardings, creating the site establishment
## Footnote
These costs help prepare the site for the development phase.
370
What regulations must be complied with during the development phase?
Health and safety regulations, sustainability issues
## Footnote
Compliance is critical for legal and operational reasons.
371
What may be required to secure vacant possession of a site?
Acquiring necessary interests, extinguishing easements, removing restrictive covenants, rights of light compensation, party wall agreements
## Footnote
These actions often require realistic allowances for costs.
372
What strategies can help offset costs during the development phase?
Letting out advertising space on hoardings, securing short-term tenancies
## Footnote
Examples include surface car parking.
373
What is a major component in a residual valuation?
Estimation of the construction costs
## Footnote
This estimation is crucial for determining the value of a property at the valuation date.
374
Who should assist in estimating construction costs for complex projects?
An appropriately qualified expert
## Footnote
This is recommended for projects that are not straightforward.
375
Which measuring codes may be applicable to property types and jurisdictions?
* RICS Code of measuring practice (6th edition)
* RICS property measurement (2nd edition)
* IPMS
* ICMS
## Footnote
These codes help ensure consistency in measuring buildings.
376
What should be checked regarding calculations provided by other professionals?
That they are on the same measurement basis
## Footnote
This ensures consistency and accuracy in the valuation process.
377
What does the choice of procurement route affect?
Responsibilities of the parties and construction costs
## Footnote
Different procurement routes impose varying obligations and implications for cost estimation.
378
What is a common reference made in construction contracts?
Fixed-price contract
## Footnote
This type of contract allows for inflation but is limited to the works specified in the contract.
379
Under what conditions can a contractor amend pricing in a fixed-price contract?
If variations to the specification are made or unforeseen events occur
## Footnote
This allows flexibility for contractors in project execution.
380
What must a valuer understand regarding the procurement route?
Which route has been or is likely to be chosen
## Footnote
Understanding this is crucial for accurately assessing the implications for the residual calculation.
381
What needs to be incorporated if cash flow projections include changes in costs?
Those projections need to be similarly incorporated into the model
## Footnote
This ensures that the cash flow model reflects realistic expectations.
382
What are the two common shapes for the distribution of costs within cash flow models?
* Straight line
* S-curve
## Footnote
These shapes help model the timing and distribution of costs throughout the development period.
383
What does the straight-line shape in cost distribution assume?
Preliminary costs are incurred at the beginning and principal costs at regular intervals
## Footnote
This model reflects a uniform distribution of costs across the development period.
384
What does the S-curve shape in cost distribution reflect?
Costs are small at the beginning, accelerate in the middle, and reduce towards the end
## Footnote
This model represents a more realistic incidence of costs in construction projects.
385
What may be required to accurately reflect the incidence of costs in a project using the S-curve?
Expert advice from other construction professionals
## Footnote
This collaboration ensures that the model accurately captures the specific delivery patterns for construction costs.
386
What is the impact of developing procurement contracts on construction costs?
The timing and shape of construction costs will develop and change
## Footnote
Reinforces the need for additional professional advice as procurement methods mature.
387
How do changes in procurement practices affect project costs?
The shape and weighting of costs through a typical development project will also develop and change
## Footnote
Cash flow allows these changes to be incorporated period-by-period.
388
What is a contingency allowance?
A contingency allowance is included for unexpected increases in costs due to unforeseen circumstances
## Footnote
Usually reflected as a percentage of the building contract sum.
389
What factors determine the quantum of a contingency allowance?
The quantum is dependent on:
* Nature of the development
* Procurement method
* Perceived accuracy of the information obtained
390
What is the relationship between contingency allowance and risk analysis?
Whether a contingency allowance is appropriate is linked to the analysis of risk within development projects
## Footnote
A contingency allowance can count the input uncertainty risk twice.
391
Why are higher development target returns required?
Higher development target returns are required to compensate for risks such as unforeseen increases in costs.
392
What is the relationship between contingency allowance and target rate of return?
A higher contingency allowance should be compensated by a relatively lower target rate of return.
393
What factors can influence the incidence of fees and expenses in a development?
The incidence can vary according to:
* Size of the development
* Complexity of the development
394
Which professional consultants may be involved in a development?
Professional consultants may include:
* Environmental/planning consultant
* Architect
* Quantity surveyor
* Civil/structural engineer
* Mechanical/electrical engineer
* Landscape architect
* Traffic engineer
* Acoustic consultant
* Project manager
395
What types of fees might be incurred in a development project?
Fees may include:
* Negotiating or conforming to statutory requirements
* Planning agreements
* Conforming to health and safety regulations
* Raising development finance costs
396
What additional fees might a prospective tenant or purchaser incur?
They may incur fees on monitoring the development, which may need to be reflected as an expense.
397
What are lettings and sales expenses in the context of completed development?
Includes incentives, promotion costs, agents’ commissions, and costs of creating a show unit
## Footnote
Relevant when the development is not pre-sold or fully pre-let as a single unit.
398
What types of incentives on letting may be considered?
Rent-free periods and capital payments to prospective tenants
## Footnote
These may recognize fitting out liabilities and time periods.
399
What should be considered regarding financing the development?
Fees for arrangement of development funding and legal advice
## Footnote
Legal representation may be needed at any stage of the project.
400
What are special tax allowances that may be available to developers?
Relate to remediation of contaminated land, job creation, or project assistance
## Footnote
Availability should be confirmed with the relevant government office.
401
Should interest and finance on borrowings appear in a formal discounted cash flow appraisal?
No, appraisal theory states they should not appear
## Footnote
Discounted cash flows should incorporate a risk premium based on project risk.
402
What is the implication of the lender sharing in the risk of the project?
Their target rate of return should be equal to the development as a whole
## Footnote
This contrasts with scenarios where the lender does not share risk.
403
How does finance typically appear in discounted cash flows in practice?
Often appears as a major input into the valuation
## Footnote
Valuers should be aware of the issues this practice introduces.
404
What assumption is commonly made regarding financing in discounted cash flow applications?
Assumes 100 percent financing of both costs and land value
## Footnote
Finance is often rolled up through the development and deducted from proceeds.
405
How is profit typically identified at the end of the development?
As a single lump sum tied to GDV or overall costs as a percentage
## Footnote
This approach is part of the cash flow methodology.
406
What approach should be used to identify the actual cash flow from development?
The discounted cash flow approach
## Footnote
This approach discounts cash flows at a project risk adjusted target rate of return to represent profit as a periodic return.
407
What can be amended in a discounted cash flow model?
Finance arrangements and loan-to-cost ratios
## Footnote
The model may use market-based inputs and appraise net of finance cash flows.
408
What is a net of finance cash flow constructed on?
The equity provided by the developer
## Footnote
The rate of return is based on the risk of that equity.
409
How does the risk of equity typically compare to overall project risk?
Higher than the overall project risk
## Footnote
This assumes lower risk exposure by the lender.
410
What is the relationship between nominal cash flows and interest rates?
Nominal rates of return apply to nominal cash flows
## Footnote
Real rates of return apply to cash flows that have not been projected forwards.
411
What factors affect the variation of interest rates in a project?
Level of debt and financing combinations
## Footnote
Different types of debt include senior and mezzanine debt.
412
What should be assessed separately when calculating net income?
Costs of different types of debt
## Footnote
These costs should be deducted from the net income each period.
413
What two approaches are recommended for assessing the market value of a site?
Market comparison approach and residual valuation
## Footnote
This assumes no debt and a project target rate of return.
414
What is crucial for identifying the appropriate return to the developer?
Understanding the nature of risk of the development
## Footnote
Risks relate to profit volatility relative to input uncertainty.
415
How are nominal cash flows treated in a discounted cash flow?
Discounted at the project target rate of return
## Footnote
This rate is based on a risk-free investment plus a premium for risk undertaken.
416
What does development profit represent?
A rate of return
## Footnote
It is not a single lump sum at some point in the development.
417
What can significantly vary between projects and is hard to determine?
The target rate of return
## Footnote
The target rate of return can fluctuate due to various factors including contractual arrangements and planning uncertainties.
418
What type of activity is development considered to be?
A high-risk activity attracting a high-risk premium
## Footnote
The risks associated with development can differ between value components and cost components.
419
What can cause major shifts in the level of profit in development projects?
Small changes in the value or costs
## Footnote
Development profits are susceptible to volatility, particularly after land purchase.
420
How should the rate of return be identified where practical?
From an analysis of individual land transactions
## Footnote
This analysis is based on assumptions of GDV and construction costs.
421
What complications can arise from incorporating profit as a single lump sum in cash flow?
Issues regarding what rate to discount the remaining cash flows
## Footnote
This approach can complicate the assessment of profitability.
422
What is a common approach to profit accumulation in development?
Accumulate the cash flow with interest based on 100 percent borrowings
## Footnote
This method effectively represents a net terminal value over a borrowing rate.
423
What can the accumulated cash flow be discounted back at to identify NPV?
The borrowing rate
## Footnote
This can help identify a land valuation residual if no land value element is included.
424
What is the closest application to a basic residual valuation mentioned in the text?
The approach of accumulating cash flow with interest
## Footnote
This method aims to align more closely with basic residual valuation principles.
425
What do the alternatives to standard appraisal modeling in other asset classes often include?
Finance when they should not
## Footnote
These alternatives can lead to unrealistic financing provisions and confusing returns.
426
What is the limitation of techniques based on target rate of return?
Fewer limitations compared to alternative applications
## Footnote
An approach based on target rate of return on direct costs and values is generally more reliable.
427
True or False: All techniques in development appraisal have no limitations.
False
## Footnote
All techniques have their limitations, but some approaches are less restrictive than others.
428
What is the basic residual valuation method?
A simplified representation of expected revenue and expenditure from a development
429
What does the residual land value represent?
The value of the completed development (net) minus the development costs, including developer’s profit
430
What is the formula for residual land value (LV0)?
LV0 = DV0 - (DC0 + I + p * DV0)
431
In the residual valuation formula, what does 'i' represent?
Cost of finance (annual interest rate)
432
What does 't' stand for in the residual valuation context?
Development period
433
What is GDV in the context of basic residual valuation?
Gross Development Value, an estimate of the value of the completed development at current prices
434
Is it normal to adjust the GDV for changes in value during the development period?
No, it is not normal to adjust the GDV for any increase or decrease in values
435
Can the GDV be phased through the development?
Yes, but it is difficult to incorporate into the traditional layout of a residual calculation
436
What is a common method used in more complex cases of valuation?
Cash flows are often applied to the valuation of development properties
437
Are expected construction cost changes incorporated in basic residual valuations?
No, it is not normal to incorporate expected construction cost changes
438
What is typically utilized for development costs in basic residual valuations?
Current values and costs at the date of valuation
439
Can cost changes be incorporated into the pricing process?
Yes, but it is more difficult and less accurate than in the cash flow format
440
In a basic residual valuation, finance is assumed at _______ of both land and building costs.
100 per cent
## Footnote
This assumption applies to the total costs involved in the development.
441
How are development property/land value finance costs included in a residual valuation?
By referencing the residual value being discounted by the borrowing costs over the development period.
## Footnote
This method incorporates the financial implications of borrowing into the valuation process.
442
What is the first method to determine the amount of interest paid on borrowing costs?
Set out the costs as a cash flow and determine the total interest payments.
## Footnote
This approach includes interest as a cost to be deducted from development proceeds.
443
What is the second method for approximating interest on construction-based borrowings?
Assuming that interest accumulates on half the development costs excluding land and profit at the cost of borrowing over the whole construction period.
## Footnote
This method is a more crude approximation of interest payments.
444
What is the third method to approximate interest on building-related costs?
Assuming that the whole of those costs is borrowed over half the construction period.
## Footnote
This method provides another way to estimate interest payments.
445
How does interest play a role in a non-cash flow residual valuation?
It gives the development appraisal a time frame by crudely representing discounting of all values back to the present-day.
## Footnote
This helps to form a current value for the land.
446
When is it normal for interest to be treated as a development cost?
Up to the assumed letting date of the last unit, unless a forward sale agreement dictates otherwise.
## Footnote
This standard treatment applies to most development projects.
447
In residential developments, how can drawdown assumptions be amended?
To compensate for the sales of individual units occurring at various stages during the development.
## Footnote
This requires replacing the basic residual approach with a cash flow format.
448
If a completed development is held beyond the date of completion, what should be added?
Attendant costs of holding that building, such as insurance, security, cleaning, and fuel.
## Footnote
Additional costs may include a proportion of the service charge on partially let properties and potential empty property taxes.
449
In the case of holding costs, how can interest be accumulated?
In two parts; during the construction period and in the post-construction period.
## Footnote
This allows for a comprehensive interest calculation that includes all development costs.
450
What is required for an appraisal considering particular financial arrangements?
It can only be carried out within a cash flow appraisal.
## Footnote
This emphasizes the necessity of using cash flow methods for complex financial scenarios.
451
What determines the selection of the profit margin or rate of return in development?
The nature of the development and the prevailing practice in the market for the sector
## Footnote
The percentage to be adopted varies for each case.
452
What is usually expressed as a capital profit in basic residual valuation?
Profit expressed as a percentage of the total development cost or of GDV
## Footnote
IRR is a truer measure of the required return of a development project.
453
How do development companies judge the success of a project when retaining completed projects?
In terms of the enhancement of the balance sheet (net asset value) rather than the profit and loss account
## Footnote
This indicates a focus on long-term value.
454
What is initial yield on cost?
The net rental return calculated as the initial full annual rental on completion of letting expressed as a percentage of the total development cost
## Footnote
This criterion helps evaluate the ability to service a long-term mortgage loan.
455
Define cash-on-cash (or equity yield).
The capital uplift or net income expressed as a percentage of the long-term equity finance provided by the developer
## Footnote
Usually calculated after interest charges on any long-term mortgage loan.
456
What does interest on capital employed consider?
The rate of return on actual costs expended, calculated net of interest and any relevant taxes
## Footnote
This technique focuses on the actual expenses incurred.
457
What is meant by the amount of cover in development?
The extent to which the rent or sale price can be reduced without suffering an overall loss on the development
## Footnote
Often expressed as a number of months of rolled-up interest or loss of rent.
458
What factors influence the appropriate profit expected from a development?
Factors that increase or decrease the risk and uncertainty within the development
## Footnote
These include certainty of inputs, fixed or variable costs, and finance rates.
459
What is the gross residual in basic residual valuation?
The land value expressed at the end of the development period after deduction of costs including finance and profit.
460
How is the residual value moved from the end to the beginning of the development period?
By using 100 per cent finance and discounting the residual at the finance rate.
461
What effect does discounting the residual at the finance rate have?
It brings both GDV and all costs, including profit, from the end of the period to the beginning.
462
What is the purpose of reducing the land value for purchase costs in basic residual valuation?
To determine the total amount available to fund the site purchase, including contract price, legal and agency costs, and relevant taxes.
463
In a discounted cash flow valuation, what does the land value represent?
The NPV of the project cash flows, requiring no manipulation apart from the deduction of purchaser’s costs.
464
Fill in the blank: The land value is reduced for _______ costs in the basic residual valuation.
purchase
465
True or False: The land value in a discounted cash flow valuation requires significant manipulation to represent current value.
False
