Guidelines for Producing



Development Valuation TrainingFor Cornwall County Council22 May 2012Charles Solomon Head of Development Viability, DVSCharles.e.solomon@voa..ukTel: 03000 500660/ 07717 301206Paul ScammellDevelopment Viability Specialist, DVSpaul.m.scammell@voa..ukTel: 03000505374/ 07717 450909Programme:Session titleSubjectComments10.00- 10.45 Development land valuationResidential land valuation: General approach.Technical terms Looking at principles of market evidence and residual valuations. (RICS VIP 12)10.45- 11.30 Gross Development Values.Valuation of Market housingValuation of Affordable mercial properties.Market housing values. Effect of CfSH.Affordable housing- tenures, approach to value, DCF. Grant, Valuation issuesInclude investment values11.30- 1145Break11.45-12.45Gross Development CostsBuild costsContingencyProfessional costsCIL/ S106Marketing costsFunding & Finance costsProfit Land value & costsBCIS, CfSH costs, Externals, abnormals12.45- 13.15Lunch13.15- 14.30Development viabilityPrinciplesInformation requiredPlanning appeal decisions.Valuing BenchmarkPlanning uncertainty Assessing resultsRICS “Financial Viability in Planning”Valuation of “hope”14.30- 15.15Viability toolkitsSensitivity testingInclude practical applicationDevelopment programme, out-turn approach15.15-15.30Break15.30- 16.30Exception sitesReview mechanismsQuestionsPart 1: Development land valuationResidential land valuation:The Guide for valuing residential development land is the RICS Valuation Information Paper 12 (VIP12). The guidance from this is summarised below. A valuation of property that is considered to be suitable for development, or redevelopment, may be required for many reasons. These may include advice on loan security, acquisition, sale, valuation of options, capital taxes, planning purposes and appraisals.These notes discuss the approach to the valuation of property where the proposed development is of a cleared, or greenfield site, or the site is to be redeveloped by removing all, or substantially all, of the existing buildings and constructing new buildings. These various scenarios are referred to throughout as ‘development land’.Development schemes can vary from single or multiple residential schemes to industrial estates, a shopping centre or a New Town. Although there may be differences between, say, a valuation prepared for a proposed acquisition or sale and an appraisal by a developer in connection with its own business model it is considered that the principles are the same. These notes deal with the principles underlying the valuation approach.There are two approaches to the valuation of development land:comparison with the sale price of land for comparable development; orassessment of the value of the scheme as completed and deduction of the costs of development (including developer’s profit) to arrive at the underlying land value. This is known as the residual method. In practice it is likely that a valuation would utilise both approaches, and the degree to which either, or both, are relevant depends upon the nature of the development being considered, and the complexity of the issues.Valuation by comparison is essentially objective, in that it is based on an analysis of the price achieved for sites with broadly similar development characteristics. The residual method relies on an approach that is a combination of comparison and cost and it requires the valuer to make a number of assumptions – any of which can affect the outcome in varying degrees.Establishing the factsTo judge the certainty of the outcome of the valuation, and the processes involved, it is essential that the valuer has an awareness of the characteristics of the existing site and an adequate knowledge of each of the development components. The level of detail that is appropriate when assessing development potential varies according to the purpose of the valuation. Judgement is required as to what is appropriate in each case.The level of information available for a residual valuation is determined by the stage at which the valuation is being prepared. For example, a valuation in advance of an acquisition is based on less certain estimates than if the land has been held whilst planning has been progressed, or the valuation is at a date where the redevelopment has commenced. It may therefore be necessary to review the valuation as more detailed information becomes available.Inspection and site specific informationPhysical inspection of the site, and related enquiries, will reveal site specific information. Such information, either positive or negative, could include the following, which are not intended to be exhaustive or to apply to every case:extent of the site – in order to ascertain frontage, width and depth, gross and developable areas;shape of the site and ground contours – ideally in the form of a topographical survey; history of previous, and risk of future, flooding; sizes of any existing buildings. Where buildings are to be retained it is recommended that measurements are taken in accordance with the RICS Code of Measuring Practice, available from . existing building height and that of adjoining properties; efficiency of existing building(s) (if to be retained); any matters that may result in excessive abnormal costs (such as constrained site conditions, and poor or limited access), from development and occupational perspectives. party wall, boundary and rights of light issues; geotechnical conditions; evidence of, or potential for, contamination;availability and capacity of infrastructure (such as roads, public transport, mains drainage, water, gas, electricity and telephony); evidence of other head or occupational interests in the property, whether actual or implied by law; physical evidence of the existence of rights of way, easements, encumbrances, overhead power lines, open water courses, mineral workings, tunnels, filling, tipping, etc.;details of easements, restrictive covenants, rights of way, rights to light, drainage or support, registered charges, etc.; the presence of archaeological features. These may be evident, or there may be a high probability of their presence due to the site location (for instance, close to city centres); evidence of waste management obligations and whether those obligations have been fulfilled; and water or mineral extraction rights that may be available.Existing planning mattersThe following matters may need investigation:The Local Development Framework (LDF) and the Regional Spatial Strategy. Also, where a LDF has not been fully implemented the extant Structure Plans, Local Plans and Supplementary Planning Guidance;the existence of a current planning permission. This may be outline or full and may include conditions or reserved matters;where the permission is time limited it is necessary to establish if it is still valid and, if close to expiry, if a similar permission would be granted again;regulations that specify the extent to which development of the site might be permissible without the need for a planning application or consent; the permitted use of existing buildings (if to be retained), or the possibility of identifying an established use; legally binding agreements that have been, or are to be, documented, in order to secure the grant of planning permission; any special controls that may apply to the site or buildings included (for example, conservation area designation, green belt, tree preservation orders, listed buildings, etc.);requirements to protect or enhance environmentally sensitive features such as SSSIs or water courses, and to comply with the relevant environmental protection legislation; and any requirements for view corridors, sight lines or buffer zones.Assessing the development potentialWhere the current permission(s) is not considered to be the optimum permission for which there is a reasonable prospect, having regard to the applicable planning regime, it may be necessary to form a view as to what permission is likely to be obtained and the associated planning agreements that would be required to obtain that consent. This includes consideration of published planning policies recognising that they heavily influence future additions to the supply of particular types of building. Emerging consultative planning policies may also be relevant, including national or regional guidance that may be taken into account when deciding planning applications and, in the longer term, may influence the supply of competing space or otherwise affect the value of the completed scheme.An accurate assessment of the form and extent of physical development that can be accommodated on the site is essential having regard to the site characteristics, the characteristics of the surrounding area, and the likelihood of obtaining permission. In more complex cases it is recommended that this assessment is undertaken in consultation with appointed project consultants, such as architects, quantity surveyors, and environmental and planning consultants.Matters that may be considered include:the period estimated to complete the new buildings;achieving a high efficiency ratio (net internal area expressed as a percentage of the gross external area), which may be affected by car parking standards, without compromising quality; environmental issues that may have a material bearing on the success of the project (sufficient enquiries need to be made to establish whether the presence of on-site or neighbouring environmental features influence the development process, the density or even the viability of the scheme); the extent to which the planning system is being used to help deliver climate change obligations. (Some planning authorities employ policies stipulating the minimum amount of energy that must either be produced on-site or else obtained from renewable sources. This may be evidenced by the incorporation of conditions incorporating renewable and/or low carbon measures as standard requirements.)Although the valuation is required of the actual site there may be a possibility of increasing the development potential by acquisition of, or merger with, adjacent land. Conversely it may be necessary to acquire adjacent land, or rights over adjacent land, before the proposed development could take place. The valuer needs to liaise closely with both the appropriate planning authorities and the client to ensure that the appraisal reflects fully the various aspects of the proposed development.The development programmeAn outline programme may be provided but its achievability needs to be assessed. It might include the following components:the pre-construction period; site assembly, obtaining vacant possession, negotiations with adjoining owners, extinguishing easements, or removing restrictive covenants, rights of light etc, negotiating the planning process, agreeing architectural and engineering design and/or solutions, soil investigations, the building contract tender period, etc.; and negotiating the form, extent and value of the building contract(s), including demolition and any necessary site preparation (it may be appropriate to seek advice from an environmental, quantity or, building surveyor, mechanical engineer or architect); the principal construction period; site preparation (certain enabling works may be necessary in complex cases these may include an archaeological dig, demolition, de-contamination or the provision of infrastructure prior to the main works commencing); andmain build , which may reflect phasing; and the post-construction period; usually understood to be the period from completion of the construction contract until one of : the full letting , sale or re-finance of the completed development; and any defects liability period.Analysing the marketIn considering the development potential it is necessary to establish the potential demand for the optimum alternative forms of development that may be possible. Clearly it would not be appropriate to consider building a high specification office block in an area where there is no, or limited, demand for such a property. Matters to be considered could include, but not exclusively:an owner occupier’s preferences for particular design features, building layouts and specifications ( that is, the degree of specialisation and its impact on marketability); investors’ requirements; the location; access and the availability of transport routes; car parking facilities; amenities attractive to tenants and/or purchasers; the scale of the development in terms of sale or lettable packages; the form of the development; and market supply, including actual or proposed competing developments.Valuing by the comparison methodValuation by comparison is only reliable if evidence of sales can be found and analysed on a common unit basis, such as site area, developable area or habitable room. Although comparable sales can be analysed in unit terms there are many other factors that determine the price paid and unit comparison may not, in a particular case, be the most significant. Enquiries may also reveal recent marketing, or even transactions, of the site. Even where reliable information is not available the comparison method can provide a useful check of a valuation prepared using the residual method.Typically, comparison may be appropriate where there is an active market and a relatively straightforward low density form of development is proposed (for example, if the land is greenfield within a rural economy where infrastructure costs are consistent and not excessive, or small residential developments, and small industrial estates), and it is likely that the density, form and unit cost of the development will be similar. Less frequently, it may be possible to compare larger sites for housing developments on this basis.In comparing sites the following factors, which are not exclusive, may be relevant:values may differ considerably within a small geographical area; the condition of the site and associated remediation costs are very site specific and could differ significantly between greenfield and brownfield, and between brownfield, sites; site and construction costs, for example, in terms of infrastructure and service requirements differ; the type of the development will vary and may reflect a requirement to provide affordable housing. In the case of residential developments the density achieved can also affect the price; the price may be affected by planning obligations; and in a rapidly changing market, the date of the sale of the comparable is relevant.Generally, high density or complex developments, urban sites and existing buildings with development potential, do not easily lend themselves to valuation by comparison. The differences from site to site (for example in terms of development potential or construction cost) may be sufficient to make the analysis of transactions problematical. The higher the number of variables and adjustments for assumptions the less useful the comparison. Comparison is rarely appropriate where construction has begun.Where the comparative method is used it is assumed that the valuer adopts standard valuation techniques. However, some of the elements of a residual valuation may also be relevant to a valuation on this method.Valuing by the residual methodWhere the nature of the development is such that there are no (or limited) transactions to use for the comparative method, the residual method provides an alternative valuation approach. However, even limited analysis of comparable sales can provide a useful check as to the reasonableness of a residual valuation.The residual method requires the input of a large amount of data, which is rarely absolute or precise, coupled with making a large number of assumptions. Small changes in any of the inputs can cumulatively lead to a large change in the land value. Some of these inputs can be assessed with reasonable objectivity, but others present great difficulty. For example, the profit margin, or return required, varies dependent upon whether the client is a developer, a contractor, an owner occupier, an investor or a lender, as well as with the passage of time and the risks associated with the development. In practice, whilst the comparison method is a clear indication of the value paid for a particular site, it is extremely difficult to accurately analyse and apply the assessed value to another site. There are just too many factors and variables that make this approach too uncertain. This is particularly the case in development viability assessments, and is the reason that the residual method is the usual method for assessing land values in these cases.The residual methodHaving established the development potential a residual valuation can be expressed as a simple equation:(value of completed development) – (development costs + developers profit) = land valueEach element of this equation is discussed in the following paragraphs.Value of completed development- Gross Development Value (GDV) The value to be adopted is the Market Value of the proposed development assessed on the special assumption that the development is complete as at the date of valuation in the market conditions prevailing at that date- current day values. This is widely referred to as the Gross Development Value (GDV).For some developments, particularly residential, the approach may be to adopt the total of the values of the individual properties. In other cases an additional special assumption may be that the completed development is let and income producing rather than available for sale or letting- more typical in commercial property developments.As the GDV does not incorporate an allowance for purchaser’s costs the net proceeds are more often aligned to the Net Development Value, which reflects the transaction costs that would be incurred if the completed development was sold, again, on the date of valuation.The finance costs, notional or actual, are included in the residual value calculation and therefore there is no need to adjust the GDV to reflect these.Market housing:Market housing effectively “cross subsidises” delivery of affordable housing and other planning policy requirements. It may be included for this purpose under NPPF recommendations in developments of rural exception sites.Valuation of market housing usually provides few difficulties. The approach, based on comparable market sales, is well understood. However, this is a particularly important part of the residual assessment approach as it has such a major effect on the residual land value. A 10% variation in sales values will typically generate a 30% difference in land value. Valuation is made more uncertain where there are limited comparable new developments. Second hand housing stock may or may not be suitable- usually not as they do not reflect the same level of fittings, state of repair or design of new housing.Care also needs to be taken in assessing values of housing stock built to Code of Sustainable Homes levels 5 and 6. There are a few examples of housing stock built to these standards, but there is some question as to whether houses built to these standards will have the same value as those built to levels 3 and 4. The answer will lie in the level of specification, and market “acceptability” of the housing.Example of analysis of market sales:Look at Exercise 1 and analyse market sales evidenceAffordable housing: In England, National Planning Policy Framework (NPPF) contains a definition of affordable housing:“Affordable housing: Social rented, affordable rented and intermediate housing,provided to eligible households whose needs are not met by the market. Eligibilityis determined with regard to local incomes and local house prices. Affordablehousing should include provisions to remain at an affordable price for futureeligible households or for the subsidy to be recycled for alternative affordablehousing provision.”Social rented housing is owned by local authorities and private registered providers (as defined in section 80 of the Housing and Regeneration Act 2008), for which guideline target rents are determined through the national rent regime. It may also be owned by other persons and provided under equivalent rental arrangements to the above, as agreed with the local authority or with the Homes and Communities Agency.Affordable rented housing is let by local authorities or private registered providers of social housing to households who are eligible for social rented housing. Affordable Rent is subject to rent controls that require a rent of no more than 80% of the local market rent (including service charges, where applicable).Intermediate housing is homes for sale and rent provided at a cost above social rent, but below market levels subject to the criteria in the Affordable Housing definition above. These can include shared equity (shared ownership and equity loans), other low cost homes for sale and intermediate rent, but not affordable rented housing.Homes that do not meet the above definition of affordable housing, such as “low cost market” housing, may not be considered as affordable housing for planning purposes.Social RentIn England in 2001, a rent influencing regime was implemented as a result of a governmentHousing Green Paper in 2000 that identified marked variations in rental levels being charged by registered providers to tenants who lived in similar sized properties in similar locations. The aim was to link rents to local earnings and property values. The Housing Corporation issued guidance in 2001entitled Rent Influencing Regime: Implementing the rent restructuring framework. The functions of the Housing Corporation were subsequently transferred to the Tenant Services Authority (TSA).The rents that can be charged on social rent units are calculated in accordance with theguidance at levels below market rents. In order to ensure that they are affordable to those in housing need who cannot afford to access market or intermediate tenure housing, the levels vary from one region to another. The rents were indexed based on an assessment of the value of the property in January 1999. The basis of valuation adopted is EUV as set out in the RICS Valuation Standards at UKPS 1.3.In 2002, the government required registered providers to calculate a target rent for eachproperty so that by 2012 the actual net rent of the property would be adjusted to match this target rent (in real terms). The target rent is calculated through a formula that uses relative county earnings, relative property values and number of bedrooms to arrive at the target rent. In order to arrive at the target rent the net rent is tracked against an annual rate of RPI + 0.5% plus or minus ?2 per week. Once the target rent has been reached rents track RPI movement + 0.5% per annum. The TSA issue guidance on rents, rent differentials and service charges changes from time to time and the latest guidance is available on .The target rents are subject to rent caps that are set according to the number of bedrooms. The rent caps are published annually by the TSA. Rent caps are essential in higher value areas in order to keep rents affordable for tenants on lower incomes. Rent caps track RPI movement + 1% per annum.The net passing rent is calculated by deducting the following costs from the gross rent receivable by the registered provider:management costs;repairs & maintenance costs;allowance for voids & bad debts;annual sinking fund (including allowance for major repairs); andunrecoverable service charge.In order to arrive at the GDV the aggregate of the annual net passing rents is capitalised over the period of the cashflow at an appropriate discount rate reflecting:the sustainability of the existing rental income;the likely rate of future rental growth;the condition of the portfolio;the level of outgoing required to maintain the maximum income stream;the likely performance of the portfolio in relation to its profile and location;the real cost of borrowing; andthe long-term rate of gilts.If it is assumed that a Right to Acquire (RTA) will occur and that net receipts will be reinvested by a registered provider, this capital should be built into the cashflow and discounted back at an appropriate rate.Target rents:Extract on Social rent levels and numbers in Cornwall from information in Cambridge Centre for Housing and Planning Research- Target Rents 2009Affordable RentThe Affordable Homes Programme signals a significant change and heralds the introduction of a new more flexible form of social housing, Affordable Rent, which will be the main type of new housing supply.? Affordable Rent will allow a more diverse offer for the range of people accessing social housing.?As it is a new product in affordable housing, and appears to be the Government’s preferred tenure for rented affordable housing, it is appropriate to go in to some detail on what it is and how it is expected to work.The Affordable Homes Programme framework - PDF (473KB) explains?the Affordable Rent model in more detail and the Capital Funding Guide provides guidance for Registered Providers who have received HCA funding for Affordable Rent.Allocations and nominations processes for AR homes are expected to mirror the existing frameworks for social rented housing; and RPs will be under the same statutory and regulatory obligations as they are when allocating properties for social rent. The minimum term of an Affordable Rent tenancy is 2 years, but providers are also able to offer longer fixed term or periodic tenancies.For both new supply and conversions RPs will be required to assess the market rent (using the definition of the International Valuations Standard Committee as adopted by RICS ) that the individual property would achieve and set the initial rent at up to 80% of that level (inclusive of service charges).Exceptionally rents may exceed 80% of market levels in areas where an Affordable Rent would otherwise be lower than the target rent for the property. The target rent therefore constitutes a ‘floor’ for the rent to be charged. However RPs will be required to document such decisions together with supporting evidence for audit purposes.In order to maximise their financial capacity HCA expects RPs to set rents at up to 80% gross market rent. Where in specific circumstances RPs can demonstrate it is appropriate to set rents at less than 80% of gross local market rents whilst still meeting local needs and delivering value for money they will be required to discuss such cases with their Agency lead investor team. Examples where it might be appropriate could include:where a rent at 80% of market rent would exceed the relevant Local Housing Allowance (LHA) cap or place the rent close to the cap, or if the local rented market was considered to be particularly weak or fragile. Homes let on AR terms will not be subject to the rent restructuring policy for social rented housing as set out in the TSA’s Rent Influencing Regime Guidance (RIRG). For further information, please see the TSA tenancy standard. The maximum annual AR increase will be Retail Price Index + 0.5%. RPI will be taken as at September of the previous year. RPs will be required to rebase the rent on each occasion that a new AR tenancy is issued (or renewed) for a particular property; and ensure that the rent remains at no more than 80% of gross market rent (inclusive of service charges) as of the date the property is re-let – even if this means the new rent is lower than the rent previously charged.The type of tenancy which RPs should use when homes are let on Affordable Rent terms is not prescribed. Therefore, RPs will be able to offer AR on flexible tenancies; retaining the option to offer Assured/Secure tenancies if they wish to. AR tenancies must be for a minimum period of no less than two years, but RPs have the flexibility to offer longer tenancies, including Assured/Secure tenancies. It's likely that in future RPs will be required to take into account Local Housing Authorities strategic tenancy policies.Intermediate HousingThere are a number of products that are available, mainly NewBuild HomeBuy, shared equity, discounted market sales, etc. Intermediate rent and Rent to Home Buy also fall within this category. The type most usually encountered in new build assessments is NewBuild HomeBuy (NBHB).It is housing that is priced below market price and that meet local affordability criteria to enable people to access housing, when they do not have the capacity to purchase within the private housing sector.The affordability criteria are set by the local authorities and typically relate to the amount that a person can afford as a percentage of their gross income, to spend on housing costs.Most of these tenures have been available for many years, so a brief resume only is provided here. NewBuild HomeBuyThis was formerly known as shared ownership and is an intermediate product where an occupier purchases an initial percentage (usually a minimum of 25%, and up to 50%) of equity in their home and then pays an annual rental charge as a percentage of the retained equity. RPs typically charge this on a sliding rate, but 2.75% is widely adopted. Under Section 106 Agreement, this charge may be specified at a lower rate- which would affect the level of offer the RP could then make.This is also considered in view of affordability against income thresholds.Occupiers have future opportunities to purchase additional tranches. This is known as staircasing from a registered provider. The occupier will also have the opportunity to staircase up to 100%, although in certain circumstances a maximum of 80% ownership is only allowed as part of a Section 106 Agreement. NewBuild HomeBuy has to be affordable for the average person living in the community. Local authorities assess average incomes as part of their housing policy reviews and require that properties sold under this tenure should not be in excess of the total average income of potential purchaser(s). Assessment of affordability has regard to the total costs to a purchaser. The following table is an example of how this is established:This means that there will be a value cap above which NewBuild HomeBuy is unlikely. In central London, as an example, ?300,000 is considered the maximum affordable value.Shared EquityThis is distinct to Shared Ownership where for example 75% (and this is not necessarily the agreed percentage) is held by the occupier and 25% is held by the housebuilder. At some point in time the balance may be acquired by the owner. The interesting part of this is whether the 25% has a value for the full 100% of that portion. Evidence is now emerging that the retained equity is worth 40 to 50% of the 100% retained value.Discounted Market SaleOften this is imposed through a Section 106 Agreement specifying the percentage of market price that can be charged for certain houses. Under NPPF this may now not be be considered to be affordable housingValuing Affordable HousingThere are three main components that make up the gross development value for affordable housing which are:The rent and capital receipts from affordable units.Proceeds that may be reinvested from staircasing receipts, right to acquire or external subsidies.Any internal registered provider subsidy or cross subsidy by including market housing in the scheme.Dealing with each in turn, with regards to rents, the gross rents need to be calculated and from these, costs need to be deducted in order to arrive at the net income. The cost that might be deducted would include management costs, repair and maintenance, allowance for voids and bad debts and an annual sinking fund and finally any unrecoverable service charge.The next step is to capitalise the net income by the appropriate discount rate, which will reflect numerous factors such as future rental growth or condition of the portfolio, cost of borrowing, sustainability of the existing rental income and so on. This is usually assessed by RPs on a DCF basis. The following notes explain how this is done.Discounted Cash Flow explained:Valuation methodology- Income method.The Income Method estimates the present worth of a property assuming projected future net income and re-sale value. The method uses the discounted cash flow (DCF) model to determine the present value of an investment. One underlying assumption of this approach is the principle of opportunity cost of capital, i.e. that money is of more value today than in the future. The principle of anticipation is fundamental to this approach. It states that value can be created today by expected future profits. ProcedureThis method relies on making certain key assumptions on:The prospective income generated by the propertyThe resale valueExample:(For DCF assessment on affordable housing is usually carried over a period of 30 years plus. For this example I will just look at a 10 year period for simplicity.)A two bedroom flat is to be acquired by an RP for Affordable Rent. Market data predicts that the flat will show an average annual increase of 5% in market value for the next 10 years. Affordable rent levels suggest I can expect to receive ?4,000 of rent each year for the next 10 years. In order to calculate the present value, prospective future income has to be discounted to reflect the cost of equity capital. This is part of the discounted cash flow (DCF). The opportunity cost of capital can be interpreted as the income that would otherwise have been generated had the capital been invested in an asset of similar risk instead. Example: Instead of an Affordable Rent flat, the RP could have invested in high-yield bonds that are assessed as being of similar risk. The highyield bonds generate an 8% yield, so I will assume my discount rate (cost of equity capital) to be 8%. The difficult part in calculating the DCF is how to estimate the risk involved. In residential property dealings, these estimates are usually based upon historical data on house price volatility. The next step involves calculating the present value (PV) of the property based on selling it for 50% more in ten years' time. The way to calculate present value (PV) is to divide the future value of a house by the discount rate plus one to the power of the number of years. Example: The three-bedroom flat costs ?120,000. I expect to be able to sell it for ?180,000 in 10 years. Discount rate= 8%. Calculation: Sale PV = ?180,000 / (1 + 0.08)?? = ?83,375 In recognition of the fact that the property will also generate income over the next ten years we need to calculate the present value of this income stream and add it to the value calculated above. Example:Gross Rent: ?4,000 pa.Deduct annual running costs: ?1,600 Net income: ?2,400. Discount rate: 8%. The calculation for the net present value for Year1 income is: Income PV = ?2,400 / (1 + 0.08)?= ?2,222 And so on for the period the property will be held until sold. For a 10 year hold, the calculation is Income PV = (?2,400 / 1.08?) + (?2,400 / 1.08?) + (?2,400 / 1.08?) + ... etc ... + (?2,400 / 1.08??) And results in an income PV = ?16,102Overall assessment is therefore: PV = Sale PV + Income PV PV = ?83,375 + ?16,102 PV = ? 99,477The RP would therefore in this example not be prepared to pay the current price of ?120,000. RPs will assess the value of the properties using long term discounted cashflows 30 years plus, in some cases 45 years historically. Where a S106 agreement requires the affordable properties to be held in perpetuity a 10 year cashflow followed by a reversion to market value would not match the approach taken by RPs. The example set out above is more in line with the approach taken with shared ownership / NewBuild Homebuy where the net income from the asset is projected forward and a staircasing event modelled in the future for a capital receipt. However, forecasting future shared ownership staircasing is difficult and should also be done at a portfolio level so that a variety of scenarios can be tested to assess impact on overall value. Typically RPs have historically assumed that 70% of the SO units will staircase out within 7 years. At the time of the property crash they removed all staircasing from their appraisal but it is now creeping back in. There are no hard and fast rules here but valuers should understand the approach and have the appropriate market knowledge to support their assumptions.It is worth noting that this valuation method generates a result that is highly sensitive to the variable assumptions Income Method AdvantagesIt focuses directly on the value of the property to the individual concerned. Income analyses are very detailed and derive specific conclusions (in contrast to the more general approach practised in the Comparable Sales Method. Income Method DisadvantagesThis method is more complex and less intuitive than the Comparable Sales Method. This is one of the reasons why it is often overlooked. This method ignores the actual market prices for property by neglecting the comparable sales analysis. The ultimate house price recommendation is highly sensitive to the assumptions made.The following is an extract from the GLA Three Dragons Toolkit showing typical deductions and yield to get from gross rent to net for assessing on a DCF basis. This is data from research carried out with London RPs and the figures may vary elsewhereExternal subsidy- Grant funding2011-15 Affordable Homes ProgrammeThere is less grant funding available in the current economic climate than in recent years. The emphasis in providing affordable housing is likely to look to minimise grant funding where possible, and to ensure that the grant provides as many new affordable homes as is possible, in locations where there is maximum demand and need.The Affordable Homes Programme 2011-15 (AHP) aims to increase the supply of new affordable homes in England. During 2011-15, HCA will invest ?4.5bn in affordable housing through the Affordable Homes Programme and existing commitments from the previous National Affordable Housing Programme.?The majority of the homes built will be made available as Affordable Rent with some for affordable home ownership, supported housing and in some circumstances, social rent. For further information on how the programme works read the Framework document - PDF (473 KB).QualificationOrganisations delivering programmes through the Affordable Homes Programme 2011-15 must be qualified as HCA Investment Partners. Availability of grant fundingGiven constrained public finances, it is important to make the best use of the range of sources of funding for new supply. The HCA wishes to see providers consider and maximise value for money by bearing down on the costs of new supply. Providers will be required to submit a procurement statement as part of their offers. Given the uncertainty of the availability and level of grant funding, agreement should be reached in assessing the land value as to what assumptions should be made for grant funding. These assumptions should be made clear in the valuation report.Use of public land Providers carrying out developments on land owned by the public sector should aim to minimise other forms of subsidy such as HCA funding. Where a public body is unwilling or unable to transfer the land for free or for a nominal capital receipt, then it should be willing to share in the risks of development, with the deferred value to be realised over the lifetime of a project. Section 106 schemes HCA expectation is that s106 schemes can be delivered at nil grant input for both affordable home ownership and for Affordable Rent. For the latter, the assumption is that the price paid will be no more than the capitalised value of the net rental stream of the homes. Providers who are efficient in their operating costs are likely to have a competitive advantage in making offers. For affordable home ownership, HCA will expect the price paid to include reasonable assumptions about the likely value of homes and the initial average share to be offered. The price paid should also be based on reasonable assumptions about the rent to be charged on the unsold equity in the home. As with Affordable Rent, providers who are efficient in their operating costs are likely to have a competitive edge in making offers. Grant bids will move away from scheme by scheme assessment. Scheme specific scrutiny should be expected where: Any grant is sought;the use of RCGF or DPF; application of a provider’s own resources; funding from conversion is proposed, on s106 sites. Open book provision of data about the economics of the scheme will be required from both the developer and the long term owner of the affordable housing (if they are different). HCA may test the economics of individual schemes through their development appraisal tool, particularly where HCA funding is sought on s106 sites. If HCA funding is requested on s106 sites they would expect, as part of the appraisal, to see evidence that this will result in provision of additional affordable housing which would not otherwise be delivered including by reference to the local planning authority’s viability assessment. Design and Quality Standards Offers must meet the HCA’s Design and Quality standards (April 2007) and accommodate any changes in Building Regulations. Some local authorities may require additional local standards and providers will need to liaise with local authorities in whose areas they will be developing new homes. Providers whose offers include proposals in London should also see chapter seven of this Framework. 2008-11 NAHPThis programme has now pretty well run its course, and there will be limited need in the future to assess land value subject to grant funding on this basis. Funding was primarily made available for social rented and LCHO tenures. Bids for funding were supported by an Economic Assessment Toolkit, replaced in April 2011 by a Development Appraisal Toolkit.Internal subsidy and market housing cross subsidyInternal subsidy:RPs are in a competitive market amongst themselves to acquire new affordable housing. Having gone through the valuation exercise and assessed what the units may be worth under a DCF approach, considered if additional (external) funds may be available, there is a further assessment- What are these units worth to the overall business plan?This is a very difficult area to quantify and currently very uncertain due to the HCAs Framework agreement. The level of cross subsidy will be dependent on a wide range of items hinged on whether an association has a contract with HCA under the new Framework. It is too early to tell where this will end up but it is likely that in order to be competitive in acquiring sites, RP will need to increase the level of internal subsidy if possible.Internal subsidy is often revenue based with schemes running at a loss in the early years but likely to be more capital subsidy focused going forward as funds are used from profits made elsewhere in the RPs business. RPs will need to become more commercial and move towards private sales and market rents going forward.There is evidence that RPs will bid higher than a standard EUV-SH calculation (by as much as 40%) where they can demonstrate efficencies in management costs better than other RP who may not have such a local presence.Market housing cross subsidy:Increasingly RPs are seeking to build schemes that include both affordable and market housing. This has the advantages of:Providing a key planning aim of mixed sustainable communitiesThe capital receipts from the sale of market housing cross subsidises the delivery of affordable housing. Surpluses generated from the sale of market housing cross may subsidise delivery of affordable housing with or without other sources of additional subsidy (ie internal subsidy or external grant funding). In assessing land value, an understanding of what the development scheme is likely to comprise is essential, and this should be specified in the valuation report.Alternative approach to assessing affordable housing values- Comparable evidenceIt is essential to carry out a careful comparison check when doing a DCF based valuation of affordable housing values. There is usually good market evidence available to experienced affordable housing valuers on what RPs will pay for all usual tenure types. RPs are not just taking account of the return on capital. They are looking at their overall business performance, meeting their policy objectives, and seek to meet tenant demand. As such, they will in many cases exceed the value that a DCF approach may show as the EUV-SH. Additional finance may be available through internal subsidy.Exercise 2 looks at a valuation of social housing to illustrate how internal subsidy can be applied by RPs, and the relevance of comparable market mercial propertiesValuation of commercial properties depends on the type of property. Office, industrial and retail developments are often valued on an investment value, where the assessment of rent and investment yield are the main factors. In valuing on this basis, the valuer will also need to consider if a rent free period (Often agreed on new lettings to allow the tenant to fit out the property and as an inducement.) is likely, and include an allowance for purchaser’s costs. These types of commercial use are generally not financially viable in the present market, except for prime retail developments, and developments with an owner occupier purchaser, who may be prepared to pay a premium price for the right property. Medical centres are also usually viable if developed under the Doctors Rent & Rates mercial properties which have a specific business focus (ie Leisure) will usually be valued on a turnover basis, and valuation of these uses is usually done by specialist valuers.Below Is a simple example of the valuation approach for mixed commercial development of offices, industrial and retail.Development costsObtaining planning permissions and associated mattersWhere there is no existing planning permission for the project it is necessary to allow for the costs of obtaining that permission. Where the development may be contentious allowances may be made for the potential additional costs, including delays caused by appeals and/or inquiries, (these include fees and additional holding costs and may extend to creating models, lobbying, etc.). This heading would not normally include any deferment of the scheme as a whole due to the contentious nature of the development as such matters wouldproperly be reflected in the final assessment of the land value.The impact of legally binding agreements linked with the grant of planning permission has to be considered. With the introduction of Community Infrastructure Levy (CIL) the obligations usually are deliverable on-site. The requirements might be for a cash payment, the provision of community facilities and affordable housing. Also the timing of the payments, or the fulfilling of the obligations, may be relevant in these cases.There are various matters relating to statutory and regulatory obligations that may have to be considered. Such matters, which could incur significant costs, could include:listed building consents and associated negotiations with English Heritage;the accommodation of archaeological surveys or digs;environmental protection during demolition and construction;obtaining necessary approvals under Building Regulations; and inspections of residential development related to new-build insurance schemes.Acquisition costsThese include agents’ fees, legal costs and stamp duty land tax that would be incurred on the acquisition of the land prior to the commencement of the development. Typically, assuming a site purchase of over ?1m, this cost would be taken as 5.76% of the land value.Site-related costsIt is necessary to consider the costs to be incurred before the main construction activity can proceed. These include:the cost of meeting any environmental issues. (Whilst this can relate to any remedial works it can also reflect important conservation or flood protection requirements. Such costs have to be provided by an appropriate expert); there may be an obligation to remove contamination, and the consequential waste management obligations, and special environmental provisions to abate noise or control emissions; there may be ground improvement works needed before the main construction period begins to make the site safe for development (liaison with a civil and/or structural engineer may be necessary); any archaeological investigation costs may be borne before the main contract is let (the time to undertake such work and its cost needs to be understood); diversion of essential services and highway works and other off-site infrastructure costs; creating the site establishment and the erection of hoardings; the costs of conforming to appropriate health and safety regulations during the course of the development; and there may also be issues surrounding sustainability that may have a direct bearing on the site (in England this can include the provision of Sustainable Urban Drainage Schemes (SUDS) and site specific transport plans).If appropriate, it may be necessary to estimate the costs incurred in securing vacant possession, acquiring necessary interests in the subject site or adjacent property, extinguishing easements or removing restrictive covenants, rights of light compensation, party wall agreements, etc. Realistic allowances have to be made, reflecting that the other parties expect to share in the development value generated.The letting out of advertising space on hoardings or the securing of short-term tenancies (for example, surface car parking) can help to offset finance costs before and during the development phase.Phasing of the developmentLarger schemes are likely to be phased over time. Phasing of the infrastructure provision or distinct elements of a complex development site may be as a result of planning requirements. For example, that the car parking provision and highways improvements are complete prior to occupancy, or to maximise cost savings in labour or materials. These are reflected in the developers’ cash flows when formulating their bids and are likewise be reflected in any valuation of such property. In such cases it would be appropriate to reflect the deferment of some of costs, listed in the following paragraphs, to a date when it might be reasonable to expect them to be incurred. Similarly, not all receipts occur simultaneously.In many cases where individual buildings or units may be sold, particularly where the development includes residential properties, the sales may be achieved over a period that may start before the development is completed and be phased over a long period of time. In these circumstances the income is to be recognised in the cash-flow at the appropriate time and the incidence of the relevant costs needs to reflect the actual timing of such payments. In particular this should reflect the sales “profile”- often including forward sales and an initial high volume of sales followed by a longer but smaller volume of sales seen monthly.Building costsA reasonably accurate estimation of the building costs, at the valuation date- Current day costs, of the development is a major component in a residual valuation. In other than the most straightforward schemes it is recommended that the costs be estimated with the assistance of an appropriately qualified expert. Detailed costings are conventionally based on the Gross Internal Area (GIA) and are usually recorded on this basis in reference books. The residual method is very sensitive to variations in the estimated costs and the accuracy with which costs can be assessed may vary greatly according to the specific site characteristics or the requirement, or plan, to retain specific structures, any unusual building specifications and the extent to which a new building has to reflect relevant sustainability policies. In assessing build costs key issues to consider are:Is the specification proposed commensurate with the likely sales values? This is sometimes an imposed requirement- for example in Conservation Areas design considerations may dictate particular external appearance standards. Is the design the most cost effective way of delivering the development? This is particularly pertinent in meeting Code for Sustainable Homes (CfSH) requirements.The use of reference books, and websites, including the BCIS website, are considered to be only guides and undue reliance on them can compromise the accuracy of the valuation. However, for early stage valuation assessment these data sources are helpful. An example of a BCIS extract is shown below. This is an average cost data base for Cornwall as at Q2 2012 for the building only, and does not include external build costs, infrastructure costs or any abnormal costs. This data series is based on cost tenders that generally precede CfSH standards. This will change as more current cost data is included. However, at the moment, additional costs need to be allowed for in using this data for any CfSH requirements. DCLG have produced a helpful guide- Cost of building to the Code for Sustainable Homes Updated cost review- August 2011. An extract of this with helpful indicative additional costs is shown below.ContingencyIn all cases the inclusion of a contingency allowance to cater for the unexpected is essential. The quantum which is usually reflected as a percentage of the building contract sum is dependent upon the nature of the development, the procurement method and the perceived accuracy of the information obtained.Typical ranges for contingency are between 0-5% on new build, with Greenfield sites being at the lower end. For refurbishment schemes, depending on the nature of the scheme, contingency levels are likely to be higher- typically at between 5-10% of build costs.In allowing for contingency costs it is important o check that this has not been double counted- ie within the QS assessed build cost estimate and as a “stand alone” add-on.Fees and expensesThe incidence of fees and expenses can vary significantly according to the size and complexity of the development. The following items may need consideration:professional consultants to design, cost and project manage the development – The development team normally includes: an environmental and/or planning consultant, an architect, a quantity surveyor and a civil and/or structural engineer. Additional specialist services may be supplied as appropriate by mechanical and electrical engineers, landscape architects, traffic engineers, acoustic consultants, project managers and other disciplines, depending on the nature of the development. These fees are typically between 6-12% of build costs but can be higher;fees may be incurred in negotiating or conforming to statutory (for example Building Regulations) or planning agreements;the costs of conforming to the relevant health and safety regulations during the course of the development;legal advice and representation at any stage of the project;lettings and sales expenses – where the development is not pre-sold, or fully pre-let, as a single unit this item includes incentives, promotion costs and agents commissions. The costs of creating a show unit in a residential development may also be appropriate. For market housing sales and marketing costs are typically between 3-6% of the sales value;rent free periods, whether as an incentive or recognising the tenants fitting out period. These may be reflected by either:continuing interest charges on the land and development costs until rent commencement. This approach is usually favoured by the financing arrangers; or taking account of the costs in the valuation of the completed development. This approach is usually favoured by investors because there is an assumption that market conditions will not change;costs related to the raising of development finance (these can include the lender’s monitoring surveyor’s fees and legal fees); andin some cases the prospective tenant/purchaser may incur fees on monitoring the development (these may have to be reflected as an expense where they would normally be incurred by the developer).CIL and S106 costsNearly all residential developments will be subject to planning policy obligations. These may be under emerging Community Infrastructure Levy (CIL) or S106 Town & Country Planning Act 1990 arrangements.CIL: CIL is charged on the net increase in the gross internal area of development on the site. Affordable housing is exempt. The levy on the qualifying net increase varies for each local authority, often with separate rates applied for different use classes. S106: NPPF explains what the tests are for planning authorities to seek s106 obligations. A planning obligation must be:necessary to make the development acceptable in planning terms;directly related to the development; andfairly and reasonably related in scale and kind to the development.The use of planning obligations must be governed by the fundamental principle that planning permission may not be bought or sold. It is therefore not legitimate for unacceptable development to be permitted because of benefits or inducements offered by a developer which are not necessary to make the development acceptable in planning terms.Similarly, planning obligations should never be used purely as a means of securing forthe local community a share in the profits of development, i.e. as a means of securing a "betterment levy".Interest or financing costsInterest is incurred on land and development costs. It is either paid when due or deferred (rolled up) throughout the projected programme during the pre-contract, contract, and post-contract stages. An allowance is to be made to reflect the opportunity cost of the monies, even if the developer is funding the project internally, on the assumption that the completed fully let and income producing development is to be sold, or long-term finance obtained on itstransfer to the developer’s investment portfolio. This allowance is also included where the development is to be owner occupied.It is usual 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. In the case of residential developments the sales of individual units may occur at various stages during the development and appropriate assumptions have to be made regarding cash flow, both inward and outward. The rate of interest adopted reflects the levels adopted in the market for the type of scheme involved.The approximate timings for the pre-construction, principal construction and post construction periods have to be determined. The valuer is recommended to liaise with the client, such professionals as might be appointed, or colleagues with relevant experience, to assess an appropriate, realistic time frame for each of the phases.Conventionally the chosen interest rate is usually compounded, either quarterly or annually in line with the current market practice.In applying interest two approaches are commonly used:Straight line: This assumes that the preliminary costs are incurred at the valuation date and the principal development costs are incurred in equal tranches and at regular and equal intervals throughout the development. The post development costs are assumed to be incurred at the start of that period.S-curve: The weighting of the build costs be may be incurred early in a scheme, (for instance in industrial development), or at a later stage, (for instance hotels and high value residential development). The purpose of an s-curve is to reflect more accurately the incidence of the costs in a particular scheme. This approach is sophisticated and specialised, and, if used without the necessary expertise, is as likely to produce less accurate values as it is to produce accurate assessments.Holding costsThe attendant costs (excluding interest) in holding the completed building up to the assumed date of the final letting or sale, including such items as insurance, security, cleaning and fuel. A proportion of the service charge on partially let properties may have to be included together with any potential liability for empty rates.Tax relief and grantsIn some areas and on some properties special allowances, or grants, may be available to the developer. These may relate to the cost of remediation of contaminated land (NB Finance Act 2001, s70- just extended), promotion of job creation, or assistance to ensure that a scheme proceeds. The availability of such funds needs to be established with the relevant government office and the possibility of their availability being changed, or withdrawn at short notice, is to be recognised.Capital allowances might be available on the cost of plant and equipment and certain buildings. They are available as an expense of the business being carried on by the property owner, whether that is as an owner occupier or an investor. They are not available to developers, unless the property is to be retained as an investment.The worth of capital allowances is not assessable by way of a formula as they are dependent on the particular circumstances of the property owner. They are not usually explicitly included in development appraisals, but their potential availability may be reflected in the price offered by certain clients.Developer’s profitThe nature of the development, and the prevailing practice in the market for the sector, helps to determine the selection of the profit margin, or rate of return, and the percentage to be adopted varies for each case.It is usual to assume that the developer seeks either a capital profit expressed as a percentage of the total development cost (including interest) or of GDV. The former approach is more common for commercial developments, but profit on GDV is usual on residential led developments. There are, however, other criteria that are sometimes adopted. These include: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. This criterion may be significant in establishing whether the developer could service a long-term mortgage loan, or for evaluating the effect of the development scheme on the profit and loss account of the company. It is typically used for commercial property and affordable housing developments;Discounted Cash Flow (DCF) methods – The income stream is projected with explicit assumptions about rental growth and discounted back to a net present value (NPV) using an appropriate discount rate; the scheme is deemed viable if NPV exceeds the total development costs. The discount rate includes an allowance (profit margin) for the management requirements and risk of investing in a development project rather than an existing fully let property.;Equated yield (or Internal Rate of Return (IRR)) – A variant of DCF in which the yield is defined as the discount rate which equates NPV with total development cost. This approach is particularly appropriate for large, phased schemes, particularly for an “enabling” developer who provides the infrastructure to allow development plots to be developed. For further information on the DCF method see the RICS Information Paper Commercial property valuation methods available from ;The appropriate level of profit to be assumed in the appraisal is dependant on market requirements, which vary from project to project and from time to time. Evidence may be deduced (with difficulty) by analysing transactions, but it is better obtained from the valuer’s knowledge of the market or of developers’ requirements.Typical profit levels in the current market are 15-20% of GDV on market housing developments, 6% of build costs on affordable housing (ie in effect, a contractor’s return) and 20% of GDC on commercial developments. These profit levels are sometimes considered “globally”, and a blended average of 12-17% of GDV might be typical on this basis.In any event, the appropriate profit to be expected from a particular development may be influenced by a number of factors which might lead to the departure from the market ‘norm’. High amongst these is the certainty of the information available to the valuer, and the general risk profile (for example, whether the interest rate is fixed, whether the scheme is pre-let orpre-sold) but the scale of development, the amount of financial exposure and the timescale are also relevant.Part 2: Financial viability in planning.Introduction: Financial viability has become an increasingly important material consideration in the planning system. While the fundamental purpose of good planning extends well beyond financial viability, the capacity to deliver essential development and associated infrastructure is inextricably linked to the delivery of land and viable development.The Government’s recent National Planning Policy Framework (NPPF) emphasises deliverability and the provision of competitive returns to willing land owners and developers to enable sustainable development to come forward. RICS are in the process of releasing a Guidance Note: “Financial Viability in Planning (Due for release in June 2012). This guidance note seeks to elaborate on how this can be achieved. It recognises that development for which there is no plausible business case, on viability grounds or for other reasons, will not take place. The purpose of the guidance note is to enable all participants in the planning process to have a more objective and transparent basis for understanding and evaluating financial viability in a planning context. Arriving at an outcome which is satisfactory for all should be much easier where there is an agreed framework and basis for evaluation. It is acknowledged that the market is constantly moving, however the principles set out in the guidance should be applicable in all states of the economy and property sector.The guidance note:defines financial viability for planning purposes; separates the key functions of development, being land delivery and viable development (in accordance with the NPPF). It highlights the residual appraisal methodology; defines Site Value for both scheme-specific and area-wide testing in a market rather than hypothetical context; indicates what to include in viability assessments; defines terminology and suggested protocols; and explains the uses of financial viability assessments in planning. Principles: The guidance note provides all those involved in financial viability in planning and related matters with a definitive and objective methodology framework and set of principles that can be applied mainly to development management. The principles are however applicable to the plan making and CIL (area-wide) viability testing.The most common uses for financial viability assessments are for development management (including affordable housing, enabling development, land use, Section 106 Agreement planning obligations) and plan making (policy and CIL viability testing). The guidance note has a particular focus on development management (scheme specific assessments), although the principles set out are equally applicable to plan making and CIL (area-wide) viability testing. Financial viability for planning purposes is defined by this guidance as follows:An objective financial viability test of the ability of a development project to meet its costs including the cost of planning obligations, while ensuring an appropriate Site Value for the landowner and a market risk adjusted return to the developer in delivering that project.(Where viability is being used to test and inform planning policy it will be necessary to substitute “a development project” into the wider context)In the context of achieving sustainable development the Draft National Planning Policy Framework refers to ensuring viability and deliverability at sections 173-177.…. To ensure viability, the costs of any requirement likely to be applied to development, such as requirements for affordable housing, standards, infrastructure contributions or other requirements should, when taking into account of the normal cost of development and mitigation, provide competitive returns to a willing land owner and willing developer to enable the development to be deliverableThe guidance note separates the two key components of development: land delivery and viable development. This is in accordance with the NPPF. Fundability is also an intrinsic element of both. The residual appraisal methodology for financial viability testing is highlighted where either the level of return or residual Site Value can be an input and the consequential output (either a residual Site Value or return respectively) can be compared to a benchmark to assess the impact of planning obligations or policy implications on viability.The guidance note does not recommend any particular financial model (bespoke or otherwise) or provide indications as to inputs or outputs commonly used. It is up to the practitioner in each case to adopt and justify as appropriate. Site Value, either as an input into a scheme-specific appraisal or as a benchmark, is defined in the guidance note as follows:Site Value should equate to the market value (1) subject to the following assumption: that the value has regard to development plan policies and all other material planning considerations and disregards that which is contrary to the development plan.(1): 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 properly marketing and where the parties had each acted knowledgeably, prudently and without compulsion.When undertaking Local Plan or CIL (area-wide) viability testing, a second assumption needs to be applied to the Site Value definition:The Site Value (as defined above) may need to be further adjusted to reflect the emerging policy/CIL charging level. The level of the adjustment assumes that site delivery would not be prejudiced. Where an adjustment is made, the practitioner should set out their professional opinion underlying the assumptions adopted. These include, as a minimum, comments on the state of the market and delivery targets as at the date of assessment.In undertaking scheme-specific viability assessments, the nature of the applicant should normally be disregarded, as should benefits or disbenefits that are unique to the applicant. The aim should be to reflect industry benchmarks in both development management and plan making viability testing.Viability assessments will usually be dated when an application is submitted, or when a CIL charging schedule or local plan is published in draft; exceptions to this may be pre-application submissions and appeals. Viability assessments may occasionally need to be updated due to market movements during the planning process.The guidance note highlights where re-appraisals, i.e. viability reviews prior to scheme or phase implementation interpretation, or projection (growth) models may be appropriate as an alternative to current day methodologies. It is assumed that for CIL charging schedules and local plan testing this will be undertaken on a current day basis, subject to suitable margins/buffers.It is strongly recommended that financial appraisals are sensitivity tested as a minimum, and with more complex schemes further scenario/simulation analysis should also be undertaken. This is to ensure that a sound judgment can be formulated on viability.The guidance note sets out what should usually be included in viability assessments, common terminology and definitions, together with additional technical guidance for practitioners. Confidentiality protocols and suggested non-binding mediation/arbitration mechanisms for resolving disputes are set out in the guidance note.The fundamental issue in considering viability assessments in a town planning context is whether an otherwise viable development is made unviable by the extent of planning obligations or other requirements. This is illustrated below in terms of comparative development rmation required in support of a viability appraisal:Summarised at Appendix 1 is a list of information that should be included with a viability appraisal.Planning appeal decisions:Planning appeals decisions have, prior to the release of the RICS GN been the main “authority” for how viability should be assessed. They are still important in showing how inspectors, Secretary of State and the Courts have considered the issues, but it needs to be recognised that these decisions were made in the absence of an authoritative guidance. NPPF and the RICS GN are now likely to be considered the best guide. However, attached at Appendix 2 is a schedule of important planning appeal decisions which can support these guides. The lead decisions are considered to be:Flambard Way: Methodology & Expert WitnessFlemingate, Beverley: Phased dev assessed as they come forwardLydney B: Long term developments- Reasonable market conditionsJericho Canalside: Special circumstancesChurch/ Glebe Farm, Cambs: Current land value not historic purchase price.Benchmark:For a development to be financially viable, any uplift from current use value to residual land value that arises when planning permission is granted should be able to meet the cost of planning obligations while ensuring an appropriate Site Value for the landowner and a market risk adjusted return to the developer in delivering that project (the NPPF refers to this as ‘competitive returns’ respectively). The return to the landowner will be in the form of a land value in excess of current use value but it would be inappropriate to assume an uplift based on set percentages as detailed above and in Appendix E, given the heterogeneity of individual development sites. The land value will be based on market value, which will be risk-adjusted, so it will normally be less than current market prices for development land for which planning permission has been secured and planning obligation requirements are known. The assessment of market value in these circumstances is not straightforward, but it will be, by definition, at a level at which a landowner would be willing to sell which is recognised by the NPPF.Sale prices of comparable development sites may provide an indication of the land value that a landowner might expect, but it is important to note that, depending on the planning status of the land, the market price will include risk-adjusted expectations of the nature of the permission and associated planning obligations. If these market prices are used in the negotiation of planning obligations then account should be taken of any expectation of planning obligations that is embedded in the market price, or valuation in the absence of a price. In many cases, relevant and up-to-date comparable evidence may not be available, or the heterogeneity of development sites requires an approach not based on direct comparison. The importance, however, of comparable evidence cannot be over-emphasised, even if the supporting evidence is very limited, as evidenced in court and land tribunal decisions.This guidance has sought to reflect more appropriately the workings of the market. With a definition of viability established it has been considered appropriate to look at terms the industry is familiar with, rather than invent new ones. Accordingly, the guidance adopts the well understood definition of market value as the appropriate basis to assess Site Value, subject to a number of assumption(s) as set out above.It has become very common for practitioners to look at alternative use value (AUV) as a land value benchmark. This will come with its own set of planning obligations and requirements. Reviewing alternative uses is very much part of the process of assessing the market value of land and it is not unusual to considera range of scenarios for certain properties. Where an alternative use can be readily identified as generating a higher value, the value for this alternative use would be the market value. Again, comparable evidence mayprovide information to assist in arriving at an AUV. The points raised in 3.15 would again apply. Accordingly, in assessing the market value of the land there may well be a range of possible market values for different uses, which could be applicable to the land and buildings, from current use through to a number of alternative use options, each having its own planning obligation requirements. These will be used to derive the ‘market value with assumption’ (the option with highest value being the Site Value) for input into a viability assessment.Actual purchase priceSite purchase price may or may not be material in arriving at a Site Value for the assessment of financial viability. In some circumstances the use of actual purchase price should be treated as a special case. The following points should be considered.A viability appraisal is taken at a point in time, taking account of costs and values at that date. A site may be purchased some time before a viability assessment takes place and circumstances might change. This is part of the developer’s risk. Site Values can go up or down between the date of purchase and a viability assessment taking place; in a rising market developers benefit, in a falling market they may lose out.A developer may make unreasonable/over-optimistic assumptions regarding the type and density of development or the extent of planning obligations, which means that it has overpaid for the site. Where plots have been acquired to form the site of the proposed development, without the benefit of a compulsory purchase order, this should be reflected either in the level of Site Value incorporated in the appraisal or in the development return. In some instances, site assembly may result in synergistic value arising.The market value of the site should always be reviewed at the date of assessment and compared with the purchase price and associated holding costs and the specific circumstances in each case.It is for the practitioner to consider the relevance or otherwise of the actual purchase price, and whether any weight should be attached to it, having regard to the date of assessment and the Site Value definition set out in this guidance.Holding costsThe site will be valued at the date of assessment. Holding costs attributable to the purchase of the site should, therefore, not normally be allowed, as the Site Value will be updated. In phased schemes where land is valued at the beginning of the development and land is drawn down for each phase, it may be appropriate to apply holding costs. Also, where plots of land have been assembled and subject to assessment it may also be appropriate to include related holding costs. Where holding costs are applicable they should be offset by any income received from the property.Other relevant costs subsequent to purchase, including professional fees and other costs incurred in bringing the application forward, and holding the site including remediation measures, should be reflected in the development appraisal as appropriate and reasonable.Third party interests, vacant possession and relocation costsOften, in the case of development and site assembly, various interests need to be acquired or negotiated in order to be able to implement a project. These may include: buying in leases of existing occupiers or paying compensation; negotiating rights of light claims and payments; party wall agreements, oversailing rights, ransom strips/rights, agreeing arrangements with utility companies; temporary/facilitating works, etc. These are all relevant development costs that should be taken into account in viability assessments. For example it is appropriate to include rights of light payments as it is a real cost to the developer in terms of compensation for loss of rights of light to neighbouring properties. This is often not reflected in Site Value given the different views on how a site can be developed.Re-appraisals (viability reviews)The re-appraisal approach, which may be more applicable to certain schemes, allows for planning applications to be determined but leaving, for example, the level of affordable housing to be fixed prior to implementation of the scheme. Such re-appraisals are generally suited to phased schemes over the longer term rather than a single phase scheme to be implemented immediately, which requires certainty. Where long life planning permissions are granted (5 years plus) reappraisals may also be appropriate. As such reappraisal mechanisms should only be considered in exceptional cases. These appraisals would usually be undertaken during the reserved matters application stage. Careful consideration would need to be given as to how this is set out in a section 106 agreement, although it will be important to the LPA and applicant to express a range for the assessment, i.e. for the applicant to state the level of obligation above which they would not be expected to exceed and for the LPA to state the level of obligation below which the development will be unacceptable, regardless of the benefits that arise from it. The methodology may include, for example, specifying: the process involved, the basis of model, inputs, basis of return, and Site Value. It is stressed that the re-appraisal should always be undertaken prior to the implementation of a scheme or phase in order to fully account at the time for the risk the developer is undertaking, and, therefore, the appropriate return. So-called ‘overage’ arrangements (post-development appraisals) are not considered appropriate, as development risk at the time of implementation cannot be accounted in respect of the inevitable uncertainty of undertaking a development or individual phase.It is important to ensure that the drafting of re-appraisal provisions do not result in the earlier phases becoming uncertain as to the quantum of development to be provided on site. This would have the unfortunate effect of stifling development. Each phase requires sufficient certainty to be able to provide the required returns and secure development funding.Validity of projection models for capturing future market growthAn alternative approach to the re-appraisal approach (and current day appraisals) is the use of projection models. In more volatile market conditions, many planning applications may not be viable for the schemes proposed using present-day values and costs. This reflects a variety of factors that would include the relationship of likely end values to the costs of building the scheme. Inevitably, when such schemes go forward for discussion with the LPA, applicants may look at growth models (see Appendix B) and the likelihood of the proposed development becoming viable over the short to medium term, with the acceptance that it may not be currently viable. This is normally more relevant to large schemes to be built over the medium to longer term than for short term projects.Current day methodologies, for large schemes of a medium to longer term build out duration at times, may give the LPA cause for concern as the case is made that the site is not currently viable. As a result they may not achieve the desired outturn in terms of planning obligations, etc. The principle and application of projection models is for sites that are non-viable today but where the likelihood is that development would occur at some future date in the life of a planning permission, or where the development is likely to be over a sufficiently long period of time during which the market conditions may vary.It is important to distinguish in cases where projection modelling is used between market value growth and site regenerative growth when preparing appraisals. Larger schemes may be subject to intrinsic/internal value growth as a result of development, achieving a critical mass that may or may not be reflected in the broader market.Projection models are valid in terms of assessing the viability of the site. Advisers for both applicant and local authority should put themselves in the position of looking at the potential of the site in the future and assess the likely obligations and commitments that a particular site can make based on those forecasts, rather than on current-day assessments. Such an approach might enable the LPA to achieve a number of its objectives by adopting the ‘looking forward’ approach, and for both the LPA and applicant to achieve certainty over the level of planning obligations attached to the planning permission. Definitions:Attached at Appendix 3 is a glossary of terms prepared by RICS and widely used by valuers in assessing development viability appraisals.Appendix 1Indicative outline of what to include in a viability assessmentProposed scheme detailsFloor areas:commercial: gross internal area (GIA) and net internal area (NIA)residential: GIA and NSAResidential unit numbers and habitable rooms including the split between private and affordable tenuresGross development value (GDV)Any existing income that will continue to be received over the development period Anticipated residential sales values and ground rents (and supporting evidence including deductions for incentives) Anticipated rental values and supporting evidence Yields for the commercial elements of the scheme and supporting evidence Details of likely incentives, rent-free periods, voidsAnticipated sales rates (per month)Anticipated grant funding for affordable housingAnticipated value of affordable units (with supporting evidence/explanation of how these have been valued and assumptions)Deductions from commercial GDV to reach NDC (Stamp Duty Land Tax (SDLT), agents, legal + VAT).CostsExpected build cost (a full QS cost report also showing how costs have been estimated)Demolition costsHistoric costs (as reasonable and appropriate)Site preparation costsVacant possession costsPlanning costsConstruction timescales, programme and phasingAny anticipated abnormal costsRights of light payments / party walls / oversailing rightsDetails of expected finance ratesProfessional fees, including:ArchitectPlanning consultantquantity surveyorstructural engineermechanical/electrical engineerproject managerletting agent feeletting legal feeSite Value Other costsAdditional details for future phasesExpected sales growthExpected rental growthExpected cost inflationCredit rateDevelopment programmePre-buildConstruction periodMarketing periodViability cashflowIncome / value / capital receiptCostsPhasing (where appropriate)Benchmark viability proxiesProfit on costProfit on valueDevelopment yieldInternal rate of return (IRR)Planning application detailsPlans/sections/elevations (as relevant)Design and access statementSensitivity AnalysisTwo way sensitivity analysisScenario analysisSimulation analysisAccompanying Report (basic outline)Executive summaryContents outlineIntroduction and backgroundDescription of site locationPlanning policy contextDescription of schemeMarket information summaryBuild cost and programmeMethodology and approachOutputs and resultsSensitivity analysisConcluding StatementAppendix 2Planning Appeal & Public Inquiry decisionsAppeal dateAppeal case noAddressApplicationIssueDecisionRemarks07/06/05APP/G2625/A/04/1154768St Anne’s Wharf, NorwichAH viability: Mixed use dev. 437 dwlgsPurchase price reflecting s106 & AH obligationsEUV rejected as being inappropriate in this case. Purchase price should reflect known obligations.Lead case on requirement for land value to reflect known policy obligations.13/12/05APP/E5900/A/04/116875010-20 Dock St, London E1AH viability: Mixed use dev. 95 dwlgs.Suitability of 3 Dragons ToolkitToolkit considered suitable as an appraisal toolkit without cross checking other toolkits.This decision is unlikely now to be upheld in view of the number of criticisms of the toolkit.26/10/06APP/Y3615/A/06/2016787Hayward depot, Dorking Rd, ChilworthAH viability: Appropriate value at purchaseApplicant did viability based on purchase price, including EUV. LA evidence weak- no comps.Accepted developer approach- more substantiated. High EUV affected decision, but no comment on whether sale value disregarded planning requirements. Contrasts St Annes Wharf Norwich decision.12/12/07APP/P0119/A/07/20508675Southmead Rd & Gloucester Rd, FiltonSheltered housing. Commuted sum viability.Methodology for assessing commuted sum.Assessed based on perceived market evidence of land values.LA argument that land value evidence reflected obligation for AH provision and so should be inflated to allow 100% market housing value was rejected.23/04/08APP/U5360/A/07/2059530Lesney factory, Homerton Rd, London E9Mixed dev with 222 dwlgs.Purchase price.Too much paid for land knowing planning obligations.Important decision: Confirms that purchase price can be disregarded if too high a price paid.01/08/08APP/R3650/A/08/2063055Flambard Way, GodalmingMixed commercial and res dev Current viability- future growth considered for viability.Inspector allowed, SoS dismissed. SoS confirmed approach of present market valuesImportant decision: Confirmed current values/ costs as being appropriate. Question mark about whether an out turn approach is suitable.12/08/08APP/G3110/A/08/2070447Jericho Canalside, Oxford54 dwlg res dev with canal facilities.AH viability: Relevance of purchase price in assessment.Price paid 9 months before appeal taken in to account in assessing affordability (Therefore considered sufficiently recent for comparison approach. Earlier appeal (2005) concluded lower AH provision was reasonable- taken in to account.Widely quoted: Sold by tender, and other bidders close to purchase price. Appeal dismissed so no judicial review possible. DVS expert for OCC. Superceded by Clay/ Glebe Farm & Gun Wharf, Bow cases.19/08/08APP/P0119/A/08/206922667-73 Bath Rd, Longwell Green, BristolSheltered housing. Commuted sum viability.Purchase price v current values/ costsExplicitly approves methodology of current sales, costs and land values using appraisal toolkit.Toolkit used was HC/ Grimley model. Purchase price not considered.27/08/08APP/F5540/A/08/20733811 Ivy Lane, HounslowAH viability: Res dev 18 flatsEmerging AH & S106 policy affecting viability. Because of incorrect advice given, impact of this should be taken in to account in assessing viability.Purchaser misled by LA on policy requirement, resulting in over-payment for site. Limited impact because of unusual circumstances.11/02/09APP/C3810/A/08/2086867Fitzalan Rd, & Church St, LittlehamptonSheltered housing. Commuted sum viability.Date of viability review.Taken as June/ Aug 2008- after original planning application and purchase date, but not at date of appeal.Neither party updated appraisal to appeal date, and not commented by inspector. Limited application.26/02/09APP/G1580/A/08/2084559Maunsell House, 154 - 160 Croydon Road, BeckenhamNew residential developmentUplift in site value above MV in existing use.Inspector accepted the principle of uplift in MV over existing (Offices) use to incentivise land owner to bring site forward. Important decision: Inspector considered 20% uplift on a site value of ~?2m was reasonable in this case.02/03/09APP/T5720/A/08/2087666189 Streatham Rd, MitchamMixed deve with 14 dwlgs.Date of assessmentTaken as being current use value, using values at date of appeal.Decision considers need to be pragmatic in current depressed market conditions to get development underway.30/04/09APP/E2001/V/08/1203215Land N of Flemingate, BeverleyMulti phase mixed developmentViability approach on multi-phase schemesAssessment of viability on multi-phases should be made as they come forward for detailed planning, not at the initial overall outline stage. Important decision: SoS review. Multi-phase scheme. Viability on schemes in the future should be addressed at that time when market conditions prevailing may differ to the current market.19/07/09APP/J4423/E/09/2096569Norton Church Hall, SheffieldNew res developmentNew LA SPD to be taken in to account at appeal.Inspector accepted that new SPD adopted after planning application should be taken in to account in appeal consideration.SPD related to AH requirement. 05/08/09APP/K5600/A/09/209745841-43 Beaufort Gardens, London SW1Conversion of hotel to 9 flatsBuild costs- day 1.Build costs specifically identified as being assessed at day 1, not mid point. Insp preferred Savills house sales evidence as based on Estate Agency knowledgeAppeal allowed. Inspector reluctant to agree whose evidence he preferred. 06/10/09APP/P165/A/08/2082407Land at Lydney Bypass, LydneyLarge strategic dev siteWhether an out-turn approach is the correct methodConfirms that in multi-phase strategic sites developable over many years an out-turn approach is reasonableImportant decision: Specifically contrasted approach at Flambards Way, Godalming. Supported by SoS, Ct of Appeal & High Court.11/12/09High Court hearingWakefield DC LDP viability assessmentViability approachBarratts challenged report as being too optimistic based on current viability, showing 30% AH viability over the cycle of LDP period.Case dismissed. The policy adopted did pay due regard to national policy 25/02/10APP/Q0505/A/09/2103599Clay Farm & Glebe Farm, Shelford Rd, CambridgeMulti phase strategic res dev siteViability methodology. Use of price paid for land.Land price paid is irrelevant, as is developer’s accountancy method. Risk reflects market uncertainty and AH should not be the “flex”. Insp took account of economic cycle argument even though this was not raised by either expert.Important decision: dealing with viability approach, use of land price paid etc. SoS decision- differed from PINS re use of Supplementary Planning Obligation to deal with delivery mechanics for AH. Considers delivery a short term problem and can be ignored in this case.26/05/10APP/N1215/A/09/2117195Former Royal Hotel, Newbury, GillinghamViabilityMethodologyLA argued discounts of defaults because of “in house” services available to developer. Arguments rejected by insp, who preferred HCA EAT & BCIS data.LA sought discount of build cost, prof fees, profit & interest cost. Insp preferred industry “standards” in the absence of good alternative evidence. 10/03/10APP/C1950/A/09/2113786Roche buildings, Broadwater Road, Welwyn Garden CityViabilityLand valuation date & escalator mechanismAppellant argued land value as purchase price to ensure delivery, and proposed escalator mechanism for commuted sum in lieu of AH/s106. Insp rejected both- LA should not carry the risk.Insp reiterated the existing land value is correct approach. Developer carries risk not LA.30/06/10APP/G1630/A/09/2097181West of Innsworth Lane & North of A40, Innsworth, GloucesterMulti phase strategic res dev siteViability reviews deferred if AH amount is inadequate.Similar arguments as Lydney. Insp did not appear to understand IRR approach on multi-phase developmentsCase supports the Beverley, lydney and HCA documents requirement to revisit viability in long phased schemes03/11/10APP/E5900/A/10/2127467Gun Wharf, 241 Old Ford Road, LondonViabilityMethodology for site valueAppellant sought to adopt write down from 2007 purchase price. LA argued policy compliant RLV basisInsp confirmed Clay Farm & Welwyn Garden City appeals approach was correct- RLV. Regard only to purchase price in contextual information.03/12/10APP/G2713/A/10/21274851 Leeming Lane, Leeming Bar, NorthallertonViabilityMarket evidence & profit levelsP Lee (DVS) housing sales evidence felt to be more robust than that of Savills. Profit level at 15% based on market evidence accepted. PL used a % of GDV for interest Appeal dismissed. Worth noting the preference of our evidence over Savills- in contrast to appeal inspector at 41-45 Beaufort Gardens12/04/11APP/V5570/E/10/2127802Carlton Cinema, 161 Essex, LondonEnabling development. Approach to assessing viabilityRequirement for the appellant to demonstrate:1. A business case for works.2. That alternative options had been fully considered.3. That the works proposed should not aim to recover original purchase price, but be sufficient to pay for the restoration works.4. Use of the building will ensure future sustainability of the building.5. That the development would be deliverable. Appeal dismissed. Appellant’s expert adopted a future growth approach- No comment made about this. Main concern was that the enabling works would not be done ‘til after the funding development had been completed- Lack of certainty and risk of enabling works being done because of this.28/02/12APP/C2741/A/11/2160459Water way, YorkViabilityBenchmark- adoption of purchase priceInspector preferred the detailed build cost approach of the appellant. Accepted appellant overall profit level of 20% of GDC, which reflected risk. Applicant level of 15% of GDV.Appeal dismissed. Considered property had originally been purchased as an investment. Fall in value reflected in profit level. Benchmark taken as MV- existing use, not historic purchase price.11/05/12APP/V5570/A/11/2162902Bunhill Row, IslingtonViabilityBenchmark- adoption of purchase priceInspector considered purchase price wrong as benchmark- Developer risk.James Brown/ Savills usual argument used by appellant and not considered correctAppendix 3Glossary of termsAffordable housingAll housing provided at below market value or market rental value. May include various forms of tenure, including: social rent, affordable rent, target rent, intermediate housing, shared equity, etc.Acquisition/Disposal CostsCost associated with the acquisition or disposal of property usually including legal, agent and stamp duty land (SDLT) costs.Alternative Use ValueWhere an alternative use can be readily identified as generating a higher value for a site, the value for this alternative use would be the market value with an assumption as defined for Site Value for financial viability assessments for scheme specific planning applications BenchmarkA comparator for either the outputs or inputs into the appraisal, i.e. Site Value or developer’s return, etc.Building Cost Information Services (BCIS)A subscriber service set up in 1962 under the aegis of RICS to facilitate the exchange of detailed building construction costs. The service is available from an independent body to those of any discipline who are willing and able to contribute and receive data on a reciprocal basis.Building costs indicesA series of indices published by the Building Cost Information Service (BCIS) relating to the cost of building work. They are based on cost models of ‘average building’, which measure the changes in costs of labour, materials and plant which collectively cover the basic cost to a contractor.Capital valueThe value of a building or land as distinct from its rental value.Cash flowThe movement of money by way of income, expenditure and capital receipts and payments during the course of the development.CILCommunity Infrastructure LevyClawbackSee overageComparable evidenceA property used in the valuation process as evidence to support the valuation of another property. It may be necessary to analyse and adjust in order to put it in a suitable form to be used as evidence for comparison petitive ReturnsA term used in para 173 of the NPPF and applied to “a willing land owner and willing developer to enable development to be deliverable”. A “Competitive Return” in the context of property transactions is usually acknowledged as the highest overall offer accepted for land or premises, at that time, and should be construed in accordance with the definitions of Site Value in this guidance. A “Competitive Return” in the context of a developer bringing forward development should be in accordance with a “market risk adjusted return”, as defined in this guidance, to the developer in viably delivering a project.Contingent liabilitiesSee Re-appraisalCounterfactual scenarioA scheme that is not that which is being proposed by a developer, but reflects alternative interpretation of planning policy, which can then be financially appraised and compared with the proposed scheme.Current use valueMarket value for the continuing existing use of the site or property assuming all hope value is excluded including value arising from any planning permission or alternative use. This also differs from the Existing Use Value. It is hypothetical in a market context as property generally does not transact on a CUV basis. Current Use Value (plus a premium)Used by some practitioners for establishing Site Value. The basis is as with CUV but then adds a premium (usually 10% to 40%) as an incentive for the landowner to sell. It however does not reflect the market and is both arbitrary and inconsistent in practical application.Deferred paymentsSee overageDepreciationThe rate of decline in rental / capital value of an asset over time relative to the asset valued as new with a contemporary specification. See also obsolescenceDiscounted cash flow (DCF)Discounted cash flow. See internal rate of return or net present value.Development appraisalA financial appraisal of a development to calculate either:the residual Site Value (deducting all development costs, including an allowance for the developer’s profit/return, from the scheme’s total capital value); or the residual development profit/return (deducting all development costs, including the Site Value/cost, from the scheme’s total capital value).Developer’s profitThe amount by which, on completion or partial completion of a development, the estimated value or the price realised on sale of a developer's interest exceeds (or is less than) the total outlay, including such figure for the land as is considered appropriate in the circumstances (including accrued interest).Developer’s return for risk and profitThis return is commonly expressed as profit on cost; profit on value; development yield; and internal rate of return (see individual definitions). There are other, less used, proxies which may be referred to in certain circumstances. Each is appropriate as a method of interpreting viability. In an appraisal the return incorporates the amount that is allowed to cover both:an estimate of the sum needed to reflect the risk element between the appraisal date and the completion of the development programme; and an amount to meet the developer's requirement for profit on the venture, including an allowance for overheads.Development riskThe risk associated with the implementation and completion of a development including post-construction letting and sales. Development yieldRental income divided by actual cost incurred in realising the development.Discount rateThe rate, or rates, of interest selected when calculating the present value of some future cost or benefit.Estimated rental value (ERV)An estimate of the likely rental income to be generated from the scheme when fully let. Existing use value 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 properly marketing and where the parties had each acted knowledgeably, prudently and without compulsion assuming that the buyer is granted vacant possession of all parts of the property required by the business and disregarding potential alternative uses and any other characteristics of the property that would cause market value to differ from that needed to replace the remaining service potential at least cost. It is an accounting definition of value for business use and as such, hypothetical in a market context as property generally does not transact on an EUV basis.Existing use value (plus a premium)Used by some practitioners for establishing Site Value. The basis is as with EUV but then adds a premium (usually 10% to 40%) as an incentive for the landowner to sell. It however does not reflect the market and is both arbitrary and inconsistent in practical application.Gross development value (GDV)The aggregate market value of the proposed development, assessed on the special assumption that the development is complete as at the date of valuation in the market conditions prevailing at that date.Gross development cost (GDC)The cost of undertaking a development, which normally includes the following:? acquisition costs;? site-specific related costs;? build costs;? fees and expenses;? interest or financing costs;? holding costs during the development period.A full list of typical costs is contained in VIP 12. See also Appendices C and E.Gross external area (GEA)The aggregate superficial area of a building, taking each floor into account. As per the RICS Code of Measuring Practice this includes: external walls and projections, columns, piers, chimney breasts, stairwells and lift wells, tank and plant rooms, fuel stores whether or not above main roof level (except for Scotland, where for rating purposes these are excluded); and open-side covered areas and enclosed car parking areas;but excludes: open balconies; open fire escapes, open covered ways or minor canopies; open vehicle parking areas, terraces, etc.; domestic outside WCs and coalhouses. In calculating GEA, party walls are measured to their centre line, while areas with a headroom of less than 1.5m are excluded and quoted separately.Gross internal area (GIA)Measurement of a building on the same basis as gross external area, but excluding external wall thicknesses.Holding costThe cost involved in owning a site or property, which may include such items as interest on finance used to acquire the asset, maintenance costs, empty rates, etc.Hope valueAny element of open market value of a property in excess of the current use value, reflecting the prospect of some more valuable future use or development. It takes account of the uncertain nature or extent of such prospects, including the time which would elapse before one could expect planning permission to be obtained or any relevant constraints overcome, so as to enable the more valuable use to be implemented.InflationAs measured by the consumer or retail price index or property related index, including BCIS index.Interest rateThe rate of finance applied in a development appraisal. As most appraisals assume 100 per cent financing, it is usual for the interest rate to reflect the total cost of finance and funding of a project, i.e. the combination of both equity and debt in applying a single rate.Internal rate of return (IRR)The rate of interest (expressed as a percentage) at which all future cash flows (positive and negative) must be discounted in order that the net present value of those cash flows, including the initial investment, should be equal to zero. It is found by trial and error by applying present values at different rates of interest in turn to the net cash flow. It is sometimes called the discounted cash flow rate of return. In development financial viability appraisals the IRR is commonly, although not always, calculated on a without-finance basis as a total project IRR.Local planning authority (LPA)The determining authority of a given development project.Market riskThe uncertainty resulting from the movement of the property market, irrespective of the property being developed.Market risk adjusted returnThe discount rate as varied so as to reflect the perceived risk of the development in the market.Market value (MV)The estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.Market value growthThe forecast growth of the capital value of the scheme.NPPFNational Planning Policy Framework produced by the Department of Communities and Local Government on 27 March 2012Net development value (NDV)The GDV less acquisition cash flowsThe free cash flows of the scheme after costs and internal area (NIA)The usable space within a building measured to the internal finish of structural, external or party walls, but excluding toilets, lift and plant rooms, stairs and lift wells, common entrance halls, lobbies and corridors, internal structural walls and columns and car parking present value (NPV)The sum of the discounted values of a prospective cash flow, where each receipt/payment is discounted to its present value at a discount rate equal to a target rate of return or cost of capital. In the case of an investment the formal definition of NPV is net of the initial investment, but the term is more commonly used colloquially to describe the NPV of the future cash flows (net income) and terminal value, which figure is compared with the purchase price in order to reach an invest-or-not decision. In the case of a development the term is more commonly used colloquially to describe the NPV of the future cash flows (costs less income, i.e. net income) and terminal (i.e. sale) value, which figure is compared with the purchase price of the site in order to reach an invest-or-not present value methodA method used in discounted cash flow analysis to find 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 the criterion rate, e.g. the cost of capital.Opportunity costThe return or benefit of the next best choice foregone by pursuing an alternative action.Outturn (growth) modelA development appraisal that has been adapted to forecast various inputs, usually both in respect of values and costs.Overage (clawback)A practice referred to as overage, clawback or deferred payments, and employed as a post development appraisal of the scheme in question.Oversailing licencesWhere a crane, for example, is required to use air space over neighbouring properties. Party wall costsThe practice is not considered appropriate as it cannot take account of risk, uncertainty and funding at the point of implementation. If re-appraisals are to take place, the guidance recommends this is undertaken prior to implementation (see Re-appraisal)Planning obligationProvided for under section 106 of the Town and Country Planning Act 1990, usually in connection with the grant of planning permission for a private development project; a benefit to the community, either generally or in a particular locality, to offset the impact of development, e.g. the provision of open space, a transport improvement or affordable housing. The term is usually applied when a developer agrees to incur some expenditure, surrender some right or grant some concession which could not be embodied in a valid planning condition.Pre-lets and pre-salesWhere a developer of a scheme, usually prior to implementation, has agreed lettings with occupiers or sales of part of the whole of the development. Profit on costThe profit of the scheme expressed as a percentage of cost. This has a direct relationship to profit on value.Profit on valueThe profit of the scheme expressed as a percentage of the scheme’s value. This has a direct relationship to profit on cost.Property specific riskThe uncertainty attached to the intrinsic development of a site or property in addition to the general market risk.Rateable valueThe figure upon which the uniform business rate is charged.Rental valueThe income that can be derived under a lease or tenancy for use of land or a building.Red BookThe RICS Valuation – Professional Standards 2012 (Formerly RICS Valuation Standards).Re-appraisalsAppraisals undertaken prior to implementation of a development in order to assess viability before actual development.Residual appraisalsSee development appraisals.Residual Site Value or residual land valueThe amount remaining once the GDC of a scheme is deducted from its GDV and an appropriate return has been deducted.Residual valuationA valuation/appraisal of land using a development appraisal.Return (on capital)The ratio of annual net income to capital derived from analysis of a transaction and expressed as a percentage.Review mechanismsSee Re-appraisals.Rights to lightAn easement which entitles the owner of the dominant tenement to adequate natural light to a window from the adjoining land. It is appropriate to include as a development cost, compensation for loss of rights of light to neighbouring properties in respect of the particular scheme being appraised.RSL/RPRegistered social landlord/registered provider.Sensitivity analysisA series of calculations resulting from the residual appraisal involving one or more variables, i.e. rent, sales values, build costs, which are varied in turn to show the differing results.Sensitivity simulationA simulation analysis considers the probability of outcomes given certain variances applied to key inputs within the financial appraisal through a stochastic process. It can quantify the robustness of a development in terms of various outputs including risk and return.Site Value (for financial viability assessments for scheme specific planning applications)Market value subject to the following assumption: that the value has regard to development plan policies and all other material planning considerations and disregards that which is contrary to the development plan.Site Value (for area wide financial viability assessments)Site Value (as defined above) may need to be further adjusted to reflect the emerging policy/CIL charging level. The level of the adjustment assumes that site delivery would not be prejudiced. Where an adjustment is made, the practitioner should set out their professional opinion underlying the assumptions adopted. These include, as a minimum, comments on the state of the market and delivery targets as at the date of assessment. (For first assumption of Site Value for financial viability assessments for scheme specific planning applications.)Social and intermediate housingAs defined by government guidance or in statute.Speculative developmentsDevelopments which are commenced prior to any agreed sales or lettings.Standing investmentsProperties which are income producing, usually with a tenant in occupation.Target profitThe level of return considered to be the minimum acceptable.Tender price indicesA series of indices, published by the Building Cost Information Service (BCIS), relating to the level of prices likely to be quoted at a given time by contractors tendering for building work, i.e. it reflects the impact of market conditions on the tenderer's decision whether to bid at a high, low or average level relative to building costs.Threshold land valueA term developed by the Homes and Communities Agency (HCA) being essentially a land value at or above that which it is assumed a landowner would be prepared to sell. It is not a recognised valuation definition or approach.‘Toolkit’ appraisalA generic term often used when undertaking financial viability testing in planning. Sometimes applied to financial models that have been developed to try and standardise the exercise when presenting to local authorities, e.g. the HCA Economic Assessment Toolkit (EAT).Vacant possessionThe 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.Viability assessments/financial viabilityA report including a financial appraisal to establish the profit or loss arising from a proposed development. It will usually provide an analysis of both the figures inputted and output results, together with other matters of relevance. An assessment will normally provide a judgment as to the profitability (or loss) of a development.Weighted average cost of capital (WACC)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.YieldAs applied to different commercial elements of a scheme, i.e. office, retail, etc. Yield is usually calculated as a year’s rental income as a percentage of the value of the property. ................
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