Developmment finance and funding


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APRO708 Development Finance and Funding 2014
Coursework initial work; Individual
You should identify a real site in the UK (and preferably in London), identified by address, of a minimum land area (not the sum of the floor areas of an existing building on the site) of 1 acre ( 43,560 sq ft) for which, acting as a property development company, you will put forward proposals to acquire and develop. The site will not be one which you (or to your knowledge anyone else in the class) have used in connection with any other module: if it is, then your work will not be accepted.

Your site does not have to be currently on the market for sale and can contain existing buildings which you can assume will be cleared away. If your site is not currently on the market, you should be able to demonstrate the process by which the site would become available. The site should be capable of being developed, if it is not already developed, so should not, for instance, comprise part of a green belt or a garden square. The site should front directly onto a road which is publicly maintained and should not rely upon access over any third party land.

Having identified your proposed site, you should investigate the broad planning position and develop a strategy for developing the site. Your development should contain at least three planning user classes, which are to be submitted, with the site address, to the module leader by email, before 11th February, for approval. No planning use at your site should occupy less than 10% of the net floor area of the whole development. You should draw up a rough plan of the proposed development with an indication of the intended number of floors, showing how it relates to its surroundings.

Note that houses and flats are both considered for the above purpose to be in the same planning user. Social housing is not regarded as a different planning user from open market housing. Your development should not include any elements which you propose will be operated as a going concern by the developer. Nursing home and private hospital uses should be avoided. You need to choose uses for which you will be able to find comparable evidence of rental values for use in your appraisals. Please note that more obscure uses such as doctor’s surgeries, nurseries, sports and fitness clubs and educational establishments may prove very difficult to value, so might be best avoided.

If you would like to confer with the module leader about anything in your proposals, and in particular the planning uses you are proposing to include in your development, you should contact him in room M134.
Coursework 1: Individual
Having identified your proposed development and reported address and outline details to the module leader, you will now produce an outline development appraisal to assess broadly how much you can afford to pay for the site. The concept of development appraisal will by now have been demonstrated in class and you will have an outline computer programme on an Excel spreadsheet on which to base your appraisal. A development cash-flow (required only for Coursework 2) will also have been demonstrated in class. The appraisal must demonstrate that the proposed development is profitable.

You will now need to have an idea, based on the information you have gathered to date, of how much your development will be worth when completed and a proposal for its disposal. Your idea of end value is important as it will be a fundamental part of the development appraisal, but it may change when you further investigate comparables.

Again if you have any issues with the mathematics of the appraisal or operating Excel spreadsheets, contact the module leader. Feel free to discuss the appraisal with the module leader at any time. At this stage the format of the appraisal and your procedure is more important than the precision of the purchase price for the site.

Marks for Coursework 1 will be allocated according to the following breakdown (adding up to 100% of the mark for this part):

Locality (10%): A description the location of the site in the wider context. What are the use classes which are predominant in the locality? What are the heights of buildings generally? When was the area first developed and how much regeneration has occurred since? What are the access and communications? Are there any predominant land owners or occupiers? What is the general feel of the area?

Site description (10%): A description of the site itself. Is the site flat or sloping? Is it a convenient shape which makes development relatively simple? What currently occupies the site – by use and building description? Is the site currently actively occupied or is it vacant? Think about tunnels under the site, flood risk, access into the site, ease of construction. Is it a site which is going to be relatively difficult to build upon? You should note the tenure of the site – is it freehold or leasehold? If the property is to be developed with leasehold ownership, give details of the leasehold terms and state why the freehold is not available. Note that is the freehold interest is not to be purchased, then the development will require consent of the freeholder, who may have ideas/restrictions on what can be built on the site.

You will need to examine the state of the site as far as environmental matters are concerned. You may want to comment on the historic uses of the site, as far as you are able to establish; and initial indication may be found by reference to historic maps. If you feel that an environmental remediation will be required, then you should estimate how long this might take and adjust the development period to allow for this. You would also need to allow for an estimated cost of remediation in your appraisal of the site.

It may be relevant to comment upon the issue of the archaeology of the site. It is a site which may be subject to a local authority requirement for an archaeological dig before development takes place (probably with the developer paying for the dig)? Again if a dig proceeds, then it will take time and could impact the development period. If anything material is found then it may be a requirement to bridge over the archaeological remains in order to leave them undisturbed.

Acquisition of the site (10%): A description of your ideas on the methodology of acquiring the site permitting time for you to obtain planning consent. Comment on the risk of acquisition and risk mitigation or passing the risk to another party. Will you buy the site in stages, how and why? Remember that if you intend to borrow money to fund the development, then the site will need to be owned at the time that development finance is actually advanced.

The Proposal and fit with the site (10%): A description of your proposed development and planning uses. You may want to include rough plans and elevations or sections. You certainly may find it useful to relate the development to a plan of the whole site showing access and possibly the position of adjacent buildings. You are not restricted to fitting the whole of your development into one building and you may find it easier and more acceptable to end purchasers if the development is built as more than one building. If you have more than one building, you should state how many buildings you intend to build, what uses they have, how the buildings relate to each other, and the rationale for breaking the development into more than one building. You should give a broad description of adjacent buildings and say how your proposed development fits with these or contrasts with them. You may want to comment on how you arrived at your proposal and why it is appropriate to the site.

Planning (14%): Provide a summary of the planning policies which are relevant to the locality and specifically to your site. Does your proposed development fit in with these policies? Are you likely to be granted consent for your development? What case will you make in your submission to the planners? Do not include a copy of the local authority planning summary/ instructions/ policy document unless there is a specific brief in respect of your site. Note that if there is a specific planning brief in respect of your site, you may choose to challenge that brief so long as you state why.

Risk Analysis (8%): Comment on risk and volatility as it impacts on your development proposal. What risks (not including construction risks unless they are unusually relevant to your site) do you face in carrying out your development, based on the broad information you have at this stage?

Presentation (6%): The style of presentation of your report.

Appraisal (20%): Your initial “open market” development appraisal based upon the information you have to hand at this stage. You may like to base this appraisal on the format provided in the computer workshop. This appraisal is to establish how much you, or anyone else, can afford to pay for your site, so you will need to allow a suitable profit margin on cost.

Approach (8%): Your general approach to the project, including comments on the suitability of the development to the site and your attention to detail shown in the analysis.

Summary (4%): Your summary of this stage of the work.

Coursework 2: Individual
You have now identified a site, drawn up a broad proposal for its development and prepared a development appraisal to show how much you can afford to pay for the site.
You now need to cast you proposals with more certainty, with a report of not more than 5,000 words in which you bring together proposals for the site.

Having undertaken your appraisal with estimated end values for the various parts of the development, you now need to research values in the market and provide proof which supports your figures. Your report will give details of these ‘comparables’ and will analyse them in the context of your development. Once you have the analysis of the comparables you may wish to amend your appraisal. Now you can confidently produce a final bid for your development site. You can now further develop the proposals for sale and this will enable you to propose a timetable for the development from agreement of the site purchase to final sale of the completed building. Your proposals will contain adequate sensitivity analysis. Your final report will demonstrate how the development process will be managed throughout and a portion of the report needs to critically analyse the process.

Your report should include a development cash-flow for your development; this will derive the amount of profit you will achieve for undertaking the development based on the assumption that the price you can afford to pay for your chosen site is that derived in the development appraisal (in Coursework 2). The answer (the profit per development cash-flow) will be close to the result in the appraisal in Coursework 2 but not the same. Your report must also include a ground rent calculation for the site to be used as a base for identifying a basis for partnership opportunities.

Submission date: Thursday 1st May 2014 at 18.00.
This part of the coursework carries 35% of the module marks.

Marks for Coursework 2 will be allocated according to the following breakdown (also adding up to 100% of the total mark for this part):

Risk (8%): Now that you have researched the proposed development further, you should comment again on matters of risk. You will want to extend this based upon the sensitivity analysis you carry out below.

Comparables (14%): Comparables are a crucial part of development appraisal. They should be researched, in as much detail as you can find, and analysed. Make sure that the comparables quoted really are appropriate to your development and in the analysis, show how they relate to your development and how you have used them. It is accepted that sometimes you may be unable to find comparables from properties which are exactly the same as your proposed development and in this case you should demonstrate the skill of being able to not only interpret comparables but also to adjust them to fit with your development. Do not worry at all if your research into comparables proves that the figures used in Coursework 1 were incorrect, but do ensure that you explain why the figures have changed.

Presentation (4%): The style of presentation of this second report.

Appraisal (10%): You should now amend your development appraisal and present it again (also on an open market basis) based upon the comparables and other information you have gained while doing Coursework 2 but do not use the interest figure derived from the development cash-flow as your interest cost in the appraisal. It may be that there is only a small change in the figures but in any event you should explain where the figures have been derived and their fit with the comparables, and why the site value in this second appraisal is different from that derived in the appraisal in Coursework 1. This appraisal will again derive what you can afford to pay for the site.

Development Cash-flow (30%): A month by month cash-flow (on an open market basis) showing the various payments to be made in connection with carrying out the development together with an interest calculation also on a monthly basis. Your cash-flow will include ( as a negative ) the sale of the development either as a whole or in parts, as is appropriate; if it is the intention to retain the property or any part thereof, then the value thereof should be included as a notional sale on an appropriate date. The cash flow will include the site purchase as a cost as derived in the second appraisal. The figure derived in the cash-flow is the development profit. You should now compare the development profit derived in the cash-flow with that calculated in the second development appraisal – the figures should be different. The format of cash-flow will also be given in the Computer-lab session.

Be careful not to confuse the Development Cash-flow with Investment DCF Cash-flows which are conceptually different. If you follow instructions found in a text book for Investment DCF Cash-flows, you will not obtain an answer which is meaningful for the context of the Development Cash-flow.

Ensure that in the Development Cash-flow you calculate the interest figure each month. Do not take the interest figure used in the appraisal and divide it by the number of months in the cash-flow and use the resulting figure as the monthly interest cost; the figure used in the appraisal is intended to be a rough figure and that derived in the cash-flow is much more accurate.

Ground Rent Calculation (10%): You should undertake a calculation to establish what ground rent would be appropriate for your site in the case that the freehold is retained by the vendor, who will grant a lease of the site to you. You should amend the ground rent such that it does not adversely impact on the value of the leasehold interest, so possibly giving a lump sum which will need to be paid to the vendor upon the granting of the leasehold interest in addition to the annual ground rent.

Be careful to differentiate between residential ground rents and commercial ground rents, which are fundamentally different. The ground rent to be calculated will, in effect, only apply to the commercial portions of your development and so will be a “commercial ground rent”.

Sensitivity analysis (10%): No residual appraisal should be undertaken without sensitising the figures to see the result. You should take relevant inputs into the appraisal and change them suitably; you can then show and analyse the answers.

For the purposes of this section there are two sets of calculations to consider. The first is the exploration of the impact of changes to variables which occur once the site has been purchased, so putting a fixed site purchase cost into the appraisal, changing a variable and seeing what the impact is on the profitability of the development. Once you have done this you can further examine, and comment upon, the risk of undertaking your development. You may want to “test the appraisal to destruction” so showing figures whereby the development is no longer profitable.

For this section only, you may wish to include in the appraisal the interest figure derived in a development cash-flow which is constructed using the same inputs as your sensitised appraisal.

The second calculations relate to the justification of paying a slightly higher price for the site than the initial appraisal showed.

The open market appraisals you have produced above will have shown how much you or anyone else can afford to pay for the site. However in order to clinch the deal you will need to pay a slightly higher price for the site, so now you can comment on how you could change the figures to justify paying the higher price.

Forward Funding (6%): Examine the possibilities for institutional funding of the commercial portions of your development and comment on the associated issues.

Approach (2%): Again based on your general approach to the job in hand.

Summary (6%): Your summary of the whole exercise of appraisal of your site.
Coursework 3: Re the New York trip; submission date and method: TBA with A Youens.
This carries 30% of the module marks

Note: The final submission dates are crucial deadlines – work will not be accepted after this date without a discounting of the mark awarded, so ensure you deliver early.

In respect of Courseworks 1 and 2:

Hand-in: All work should be handed in hard copy to the ABE registry. If you want, you may additionally send to the module leader, by email, a copy of the appraisal and cash-flow. Courseworks 1 and 2 have been exempted from electronic submission.

You will find it best to split up your work to include a section on each of the relevant suggested subjects shown above with mark break-downs attached. Do ensure that your submission addresses each of the subjects raised, or marks will be lost.

The various mathematical exercises which Courseworks 1 and 2 require will all be addressed in the computer lab sessions in the module teaching. Please make every effort to attend these. At the end of each of these sessions you will be able to retain the software programs we produce and use them in your coursework calculations.

Note, again, the restrictions:

1 The site will not be one which you (or to your knowledge anyone else in the class) have used in connection with any other module.
2 Your development will contain at least 3 planning uses, with the additional restrictions shown above. You must be capable of finding comparables for the chosen uses.
3 No planning use will occupy less than 10% of the total net floor area of your development.
4 No part of the development will be retained by the developer for operating as a going concern.
5 Not green belt or garden squares.
6 Direct frontage onto publicly maintained road.
7 Development of the site must be profitable.



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