Development appraisals Flashcards
What is the difference between a development appraisal and a residual valuation?
- Development appraisal: establish the viability/profitability of a proposed development using a client’s inputs
- Residual valuation: establish the market value of a site using market inputs
What is the methodology for calculating residual site value (5 steps)?
Gross development value (GDV) - Total development costs (TDC) = Gross site value - purchasers' costs = Residual site value
What costs would you allow for as part of total development costs (8)?
- Site preparation
- Planning costs
- Building costs
- Professional fees + VAT
- Contingency
- Marketing costs & fees
- Finance costs
- Developers profit
What would be included in your estimate for site preparation costs (7 potentially) and how would you estimate them?
- Demolition, remediation works, landfill tax, site clearance, levelling, fencing and provision of services.
- Obtain a contractor’s estime for these works
What would be included in your estimate for planning costs (5 always, 2 potentially)?
- Section 106 payments under the Town and Country Planning Act 1990
- Community Infrastructure Levy (CIL) charged by most Local Planning Authorities
- Section 278 payments for highway works
- Planning application and building regulation fees
- Costs of planning consultants
- Cost of any specialist reports required by the LPA (e.g. Environmental Assessment)
- Required percentage of affordable housing for a new residential development in the form of social, intermediate and key worker housing
What is the calculation for estimating building costs and what 5 sources of information could you use?
Gross internal floor area multiplied by cost per square metre (to estimate total cost of building works)
- Client information
- Spons Building Costs book
- Quantity Surveyor estimate / bill of quantities / cost estimate
- Building Surveyor estimate
- RICS Building Cost Information Service (BCIS)
What basis are the costs on BCIS usually expressed? Where does RICS obtain the information from?
- Usually based on a GIA basis
* Obtain monthly updates from Quantity Surveyors / Building Surveyors and recent contract prices / tenders agreed
What would be included in your estimate for professional fees (5 potentially, which is largest proportion) and how would you estimate them (typical % range based off figure, why varies)?
- Architects (largest proportion), M&E consultants, project managers, structural engineers, quantity surveyors
- Typically 10-15% (plus VAT) of total construction costs
- Can vary them depending on the complexity of the project e.g. lower architects fees required for an industrial warehouse than a high-rise residential building
What would you typically estimate for contingency costs (typical % range, dependent on what)?
5-10% of total construction costs (depending on the level of risk and likely movements in building costs)
What should you source for your marketing budget, and would be included in your estimate - fixed costs (2, 1 for resi) and fees (2, think agency types, % range based off what figures)?
Marketing budget (use evidence/quotes): • Cost of an EPC • Sales fee: 1-2% of GDV • Letting fee: 10-15% of Market Rent • National House Building Council (NHBC) warranty for residential schemes
In your residual financial calculation, what LTV is assumed, what is the typical development finance rate range, and what are the usual reference rates to calculate the interest rate applied (3 possibilities)?
Loan-to-value assumed: typically 100% on valuation versus actual scheme specifics
Typical development finance rates say 5-7%
Choice of interest rate can include:
• LIBOR (London Inter Bank Offer Rate which is the variable lending rate between banks for a three-month borrowing term) plus the premium to reflect interest rate which is available.
• Bank of England Base rate plus premium
• Rate at which the client can borrow money. (A swap rate agreed with the developer’s bank.)
What are the 3 elements for residual finance i.e. ‘the developer needs to borrow money for the…’ (think 3 phases), and how are they calculated?
+
How is interest calculated/on what basis/over what period for each?
- Finance for borrowing the money to purchase the land (site purchase + purchaser’s costs): calculated on a straight-line basis over the length of the development period. Rolled up method of calculation is used (compound interest).
- The finance required for the construction period = assume total construction costs (including fees) over half of time period using a ‘S’ curve calculation (=50% of actual time)
- Holding costs to cover voids until the disposal of the scheme (empty rates, service charges and interest changes) – compound interest on a straight-line basis
What holding over costs need to be accounted for after the development is completed (3), until the disposal of the scheme?
Empty rates, service charges and interest charges
What financing arrangement does the development appraisal process assume?
100% debt finance
What does the S curve principle assume for total construction costs, and what is it therefore reflecting?
- The usual assumption is to halve the interest that would be borrowed for all of the construction period i.e. assumes that total constructions costs + fees are paid over half the time period
- Reflects when monies tend to be drawn down - lower levels of expenditure at the beginning and end of projects
What is the typical % range for developers profit, on what 2 potential bases, and what % range would this be for consented or non-consented sites?
15-20% of total construction costs or GDV (GDV more frequently used as a base for residential use)
Consented sites will typically have a profit on cost of 15-20%. Non-consented sites will have 20-25%, depending on how it complies to local policies and whether they’d had a positive pre-application
How is the main influence/what does developers profit depend on, when may it be lower, and what is the current trend?
- Depends on the level of risk
- If scheme is low-risk (or pre-let / sold) a lower return may be required
- Current riskier market conditions means the percentage of profit required has risen
How should you verify the output of a development appraisal?
Cross check site value with comparable site sales if possible
When conducting a residual site valuation, what date should the inputs be taken from?
Taken at the date of valuation
What are the two main methods of development finance?
- Debt finance: lending money from a bank or other funding institution
- Equity finance: selling shares in a company, JV partnership, own money used, forward purchase from an investor or occupier
What is a typical loan to value (LTV) ratio, and how is interest typically calculated over the course of a project?
c. 60%
Interest is calculated on a rolled-up basis – i.e. added to the loan as the project proceeds
What are the 3 (potential) capital stacks (debt) used in development financing, and what is the riskiest/least risky/because of what arrangements?
- Senior debt: takes precedence over other sources of funding. If the borrower defaults, the lender can take ownership of the property
- Mezzanine finance: will sit below the senior debt in terms of priority. Typically has a higher rate of return than senior debt but lower than equity
- Equity: riskiest and most profitable portion of the capital stack. Riskiest as the other tranches of capital will be repaid before the equity holders
