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Development Appraisal submission Flashcards

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1
Q

What are site abnormals? and what are the typical ones?

A

These are unusual costs which come up in situation such as, poor load-bearing ground conditions, contamination, risk of flooding and sites laid on slopes or TPOs

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2
Q

How finance is normally calculated based on UK bank base rate?

A

Current base rate + entry fees + exit fees + any additional risk fees ( what the bank want to get in return for lending)

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3
Q

What are different ways of calculating the finance rate?

A

3 main ways:

  • Bank of England Base Rate plus premium
  • By comparable with similar size and risks projects
  • It could be provided in client’s loan terms
  • SONIA plus premium (overnight interest rate that are paid by banks to borrow funds from other banks)
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4
Q

What are the main reasons a developer needs finance for?

A

Site purchase
Construction costs & associated costs
Holding costs to cover void until site disposal

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5
Q

What is an S-curve? please describe it

A
  • It’s a graph showing the patterns of cashflow of a typical development project

Typical scenario of curve:
- The usual curve will normally start at a low level and increase gradually as the project progresses.

  • The curve will reach its peak during the middle of construction, when the majority of costs occur and then tail off towards the end of the development period, to reflect the completion of the project and the realisation of revenue
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6
Q

When could a developer borrow at a lower rate?

A

If the developer is established company and the risk profile of the development is low.

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7
Q

What is the loan to value ratio?

A
  • Ratio expressing value of the loan in proportion to the value of the property
  • Typically LTVs are 60% of value
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8
Q

What is the S-curve used for?

A

The S-curve is useful for assessing cashflow requirements over the development time period and tailor eventual loan to it

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9
Q

What are factors can influence interest rates?

A
  • Risk profile of the development project
  • Risk profile of the developer, whether they are an established company or not
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10
Q

What is affordable housing?

A

It includes social and affordable housing provided to eligible households whose needs are not met by the market and therefore it’s provided at an affordable price.

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11
Q

What are the main type of affordable housing?

A
  • Affordable rent
  • Intermediate housing (shared ownership)
  • Social rent
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12
Q

What ways can GDV of affordable housing be valued?

A
  • By comparable evidence extracted from similar developments in same area
  • By capitalising the net annual rents and summing those up with the capital receipts from initial equity
  • Adopting the subsidy provided by Registered Providers
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13
Q

Do you adopt a different build costs for affordable units? and why?

A

Yes these will generally be lower unless specified.
I would normally expect affordable housing to include lower cost finishes and simplified building designs and specifications.

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14
Q

What is CIL?

A

Community Infrastructure Levy, and It’s a fixed planning payment obligation for new development to help fund new infrastructure in the local area;

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15
Q

When is CIL payable? How is the rate based on (sqf or sqm)? Is it payable on affordable housing?

A

CIL is charged on any net increase of gross internal of development on the site;

The charge is normally provided in sqm

Affordable areas may be exempt from CIL but an applicant needs to query directly the LPA

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16
Q

Are permitted developments conversion liable for CIL?

A

It depends as some of them do (although the floorspace has not increased) so it’s recommended to contact the relevant LPA;

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17
Q

Give me brief summary of your appraisal in Nine Elms?

A
  • S: to verify whether the asking price proposed by the client would be able to attract a sufficient level interest and provide appetite for multiple buyers, in the current market conditions
  • T: Carry out an appraisal based on various assumptions, and fixing the asking price to see what level of profit would the site generate
  • A: Collate key inputs to include in the appraisal; cross checking the Build costs provided by the client with the BS surveying team to ensure this was appropriate
  • R: I determined a Profit on Cost of 10% which I believed would be seen too low for attracting a good level of demand
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18
Q

In nine elms, what were the key inputs of dev appraisal? and how did you determine them?

A
  • 17 resi units of 1,2,3 beds (proposed by client)
  • GDV= £12m [MV ave: £450k- 970k per unit (ave £1,000 psf)]
  • Build costs: £250 psf provided by client and cross checked with BS
  • (Contingency 7.5%)
  • Professional fees (10%)
  • AH contribution: £800k (no AH provide on site)
  • CIL: £700k (£400 psm Wandsworth + £80 psm MCIL 2)
  • Marketing: 1% of GDV
  • Agent and legal fees: 1.8%
  • Interest rate: 7% (Profit erosion 2 yrs 10 mths)
  • Constr. Period: 3 + 15 + 6 (24 months)
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19
Q

What was the aim of the Nine Elms appraisal?

A

to verify whether the asking price would generate sufficient demand

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20
Q

What was your conclusion and why in the Nine Elms appraisal?

A

The asking price was too high for attracting demand from developers, as I believed that the expected profit level for that scheme in current market condition should have been of between 18% of Costs

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21
Q

In the Nine Elms appraisal, what was your conclusion and why ?

A

The asking price was too high for attracting demand from developers (Profit generated 10% on Cost), as I believed that the expected profit level for that scheme in current market condition should have been of 15-18% of Costs

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22
Q

What sort of target profit margins would you expect in average risk developments?

A
  • 18-20% of Cost
  • 16-18% of GDV

The target profit will depend on the risk profile of the development, the size and its complexity

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23
Q

What are marketing costs? and how much would you expect to account for those?

Study These Flashcards
A

The costs associated with selling the units such as advertisements, show homes, brochures, EPCs

  • 2.5-3.5%
24
Q

What are the standard inputs in development appraisal?

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A
  • GDV
  • Build Costs (contingency 5% but varies)
  • Professional fees (8-12% based on complexity)
  • Planning cost (S106, CIL, S278 for highway)
  • Finance costs (7%)
  • Sales and marketing (2.5-3.5% of GDV + legal fee £750 per unit)
  • Profit
  • Land acquisition costs
  • ## Residual land
25
What is a sensitivity analysis? and what is t used for?
A sensitivity analysis involves testing the financial model of a appraisal under different scenarios, such as changes in key inputs like sales values, yields, build costs, finance rate or phasing of the development. It's used to identify the level of risks and uncertainty associated with the project and allow developers make informed decisions about the level of investment
26
What is a ransom strip? How to value it?
It's a strip of land adjacent to a development land which is owned by someone else and restricts the access to the development land; The way is valued is to assign the ransom strip a % of the development value of uplift (the general rule is to assign a 1/3 of the value uplift)
27
What is a Montecarlo simulation? Why is it used?
It is a type of sensitivity analysis which is based on a statistical model. It estimate the likelihood of achieving certain financial outcomes, based on the low and high markers range that I set out. Is used to evaluate the risks and uncertainties associated with a development.
28
What is Internal Rate of Return? What represents?
It's a financial metric that measures the profitability of the scheme and potential returns. It is the interest rate at which the net present value of all cashflows is equal to zero. That means that the higher the IRR the more profitable a scheme is.
29
What is your reasoned advice with Bromely Road
My advice was that the appraisal, based on the historic land price, had shown a increase of profit due to an increase in sales values and a shorter borrowing period which reduced the total amount of interest and fees paid over the construction period
30
What is profit erosion?
It indicates the time it takes for the proft to erode from the completion of the development, due to empty rates, service charges and interest costs, following the completion of the scheme
31
Why is it important to set the right asking price?
Because: - A property that is priced correctly is more likely to generate interest from multiple buyers; A property that is priced to low will raise questions on the potential purchasers whereas a property prices too high will put purchaser off as is not seen as good investement - it will provide confidence on client that the agent has knowledge and is expert in that area, plus it will help manage expectations - It will avoid delays; a price set too high will take longer to find a buyer
32
Give me your reasoned advice for Purford Green? expand why?
- My advice indicated that the development design proposal prepared by the client had high chances of becoming unviable. The scheme included a number of renewable environmental features such as solar panels and heat source pump which were pushing costs up and consequently producing slim margins.
33
In Purford Green, how did you establish that the there was limited demand in that area for the design proposal?
- I undertook a comparable method to determine the GDV, which indicated that premium sales values achieved in that weren't high enough for justifying the type of design proposed.
34
What was the price per acre that you determined in Purford Green?
£700k per acre
35
In Purford Green, how did you factor in the risk of the narrow access?
I increased the contingency to 9% for reflecting the risk that some heavy duty vehicles may not go through, or the access may need to be modified
36
What alternative solutions would you advise the client for delivering the proposed design?
- Obtain a government/LA incentive to support a more sustainable development - Obtain additional quotation to see if there's a more cost-effective way to implement the propose design
37
What sort of performance measures can you use in a development appraisal?
- Cost per unit - Profit on Cost or GDV - Plot Ratio (FFA/Total Site Area) - Profit Erosion - IRR - Rent Cover (Profit/Rent)
38
What sort of constraints can a development have on the ground whcih would need to be reflected on the appraisal?
- Contamination - Absence or mis-position of Service and utilities - Restrictive covenants - TPO (tree Protectino Order)
39
What is the difference between a development appraisal and a residual valuation?
- Development appraisal: establish the viability/profitability of a proposed development and helps developer choose from different sites - Residual valuation: establish the market value of the land and is based on mainly market inputs
40
What would be included in your estimate for site preparation costs 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
41
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 - recent contract prices / tenders agreed
42
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
43
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)
44
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
45
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
46
What are the void business rates period for office, retail and industrial?
- 3 months for retail and office - 6 months for industrial
47
What is overage (also known as Clawback), and what 2 parties usually share it?
- legal arrangement for the sharing of any extra receipts received over and above the profits originally expected, as dictated by a pre-agreed formula Usually shared between vendor/landowner and developer in a pre-arrangement apportionment
48
What are the limitations of the residual valuation methodology (5)?
- Assumes 100% debt finance - Does not consider timing of cash inflows - Very sensitive to minor adjustments - Dependent on accurate information and inputs
49
What guidance did the RICS release on valuing development property?
RICS Valuation of development property, 2019
50
How should you value land that is in the course of development according to RICS Valuation of development property, 2019 (and/or)?
* Value of the land + costs expended at the valuation date and/or * Completed development value - costs remaining to be expended at the valuation date
51
What method does the RICS Valuation of development property state should be used for complex and/or lengthy development schemes?
Discounted cash flow (DCF) technique. Simple residual method can be used in other cases
52
Why is profit on cost a more reliable method of measuring developers profit than profit on GDV?
GDV is subject to more variation
53
What are the limitations of argus?
argus is difficult to model different types of finance.
54
What is PTAL?
Public Transport Accessibility Level It measures the accessibility to public transport services, buses trains and it's used to assess the density of development schemes.
55
What is the definition of GDV?
The aggregate market value of the proposed development, assessed on the special assumption that the development is complete on the date of valuation in the market conditions prevailing on that date.
56
What is included on a Title Register?
Title Number Property Registry - describes the land Proprietorship Register - identity of owner Charges Register - matters which affect the land
57
What is included on a Title Plan?
Title Number North Point Red Line Boundary Administrative Area Scale
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