Reference no: EM132221948

Development Finance and Funding

Coursework initial work; Individual

You should identify a real site in England and Wales (Scotland has a different legal system which makes the development process more complicated) (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 square feet) 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. It is preferable if no-one else in the class is also using your site but if the same site is found to be used by two or more students, so long as they present different development proposals the work will 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. 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 must front directly onto a road which is publicly maintained and so should not rely upon access rights over any third party land.

For the purposes of Coursework One you should assume that the freehold of your site is available to be purchased.

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 13th February 2019, for approval. No proposed planning use at your site should occupy less than 12% 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. Student housing is a different use. 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, public houses, sports and fitness clubs and educational establishments may prove very difficult to value, so might be best avoided. Ground rents and parking spaces will not be permitted as main user classes. Hotels should ideally be valued without recourse to the profits method. A3 use should be regarded as part of high street retail.

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 site and reported the address and outline details to the module leader, you will now produce an outline development appraisal to assess broadly how much the market considers it 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 ( for Coursework two).

You will need to assemble a timetable for events at the site from initial purchase to final exit. This will be demonstrated in class.

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.

Locality: 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? What type or style of buildings are near the site and what are their rough ages? When was the area first developed and how much regeneration has occurred since? Has regeneration been of single buildings or more extensive? What are the access and communications? Are there any predominant land owners or occupiers? Is there local public open space? What is the general feel of the area? Is the location improving or in need of general upgrading? How accessible is the location, i.e. road, public transport?

Site description: A description of the site itself. Is the site flat or sloping? Is it a convenient shape which makes development relatively simple? (rectangular sites are much easier to deal with). 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? For the purposes of the two courseworks (apart from the Ground Rent calculation), you should assume that the freehold interest in the site will be owned by the developer during the development period. [ If the property is in reality not available to be purchased freehold, give details of the likely/probable leasehold terms and state the name of the freeholder and why the freehold is not available. Note that if the freehold interest could not be purchased, then the development will require consent of the freeholder, who may have ideas/restrictions on what can be built on the site and may require some form of ground rent/equity participation (and see later in these instructions the need to provide a commercial ground rent calculation whether or not your site is actually available on a freehold or leasehold basis)].

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 an 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. However it is readily accepted that costing of environmental remediation is extremely difficult to cost, so if you need to insert a cost figure for this, do it on a "best guess" basis just to have a figure in the appraisal.

It may be relevant to comment upon the issue of the archaeology of the site. Is it 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: 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. A lecture covers the relevant issues here in detail.

The Proposal and fit with the site: 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 rough sketch 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. You should discuss any proposed phasing of the development as this will have a large impact on the risk involved and the aggregate cost commitment at any point in time. You should comment on any proposed overlap between phases.

Planning: 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. Remember that the provision of planning consent and in particular the related Judicial Review Period may impact upon your proposals regarding acquisition of the site. You should note any conditions which might be attached to the planning consent insofar as they have a financial implication; examples include a social housing requirement, a need to pay for access works whether to be undertaken by the developer of the local highways authority and any likely payments to the local authority such as Community Infrastructure Levy.

Risk Analysis: Comment on risks and volatility as they impact 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? This section may require you to consider what you have written to date in the specific context of risk.

Appraisal: 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 (and see the comment below in this regard).

The commercial elements of the development will carry rental voids as a cost on the appraisal. These cover both the letting period and any rent free period granted to the incoming tenant. Note that the periods allowed are those which represent a fair expectation of the rent free period which will be expected at the time of the granting of the lease and a fair estimate of the time it will take to obtain a letting. There is no fixed period for either of these and they will depend entirely upon the state of the market at the time; you will need to project this by educated estimation. This is important as the rental voids can add up to a considerable amount of cost.

Summary: Your summary, round-up and conclusions of this stage of the Coursework, raising any issues which are pertinent to your development and not covered elsewhere.

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 the market can afford to pay for the site.

You now need to cast your proposals with more certainty, with a report in which you bring together proposals for the site.

Having undertaken your appraisal with estimated rental and capital 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' (see later) and will analyse them in the context of your development. Once you have the analysis of the comparables you may need to amend your appraisal. Now you can confidently produce a market value and final bid for your development site. You can now further develop the proposals for the disposal of the parts of the development and you will refer back to, and perhaps give more detail to, the timetable produced in the first Coursework for the development from agreement of the site purchase to final sale of the completed building. Your proposals will contain adequate sensitivity analysis (see below). 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 (see below) 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 (see below for details).

Risk: 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: Comparables and their analysis are a crucial part of development appraisal. They should be researched in as much detail as you can find, and analysed/adjusted to be appropriate to your development. Comparables should be found and analysed for each planning use and any ancillary uses in your development. 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 adjusted and 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 "low quality " 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.

You should work on the basis that it is much better to have a relatively small number of relevant comparables which have been well analysed than to have long lists of possible comparables which have not been analysed. The analysis of the comparables should be explained in as much detail as possible. Marks will primarily be given for the analysis and relevance of comparables. It is crucial that comparables are as up-to-date as possible, so do quote dates of transactions quoted as comparables; this is very helpful in understanding the current state of the market and trends.

Appraisal: 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 ensure that you 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: 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 a calculation of notional interest on cost, also on a monthly basis. Your cash-flow will include (as a negative or the cash-flow will not work) 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 still be included as a notional sale on an appropriate date. The cash flow will include the site purchase (including costs of 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 difference will equal the difference between the interest figure in the second appraisal and that in the cashflow. If the differences are not equal, then there is an error in the mathematics of the cash-flow. The format of cash-flow will also be given in the Computer-lab sessions.

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.

The cash-flow will end in the month of the last sale of a part of the development. Under no circumstances should the cash-flow extend into a period of investment rather than development. [ see the lectures for an understanding of this].

Commercial Ground Rent Calculation: You should undertake a calculation to establish what ground rent would be appropriate for your site on the assumption that the freehold is retained by the vendor, who will grant a [normally 125 year] lease of the site to you. This only relates to the commercial portion of your development. 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. [ the ground rents will not impact your appraisals or cashflow.

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".

The calculations for this will be shown in class.

Sensitivity analysis: 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. This section therefore carries 20% of the total marks for the second coursework and should not be ignored.

There are two sections of sensitivity analysis which need to be undertaken, the first relating to the period before the site purchase price has finally been contracted and the second to the period after the site purchase has been contracted. Until exchange of contracts for the site purchase the price may be renegotiated; once exchange has taken place then the price is fixed. The principle of Caveat Emptor applies, so there will be no ability for a legal challenge to the price after exchange of contracts.

So for the purposes of the first sensitivity analysis you will take the appraisal produced in Coursework Two and you will vary the relevant input assumptions to explore the impact upon site value. It may be that you want to change more than one input into the appraisal at the same time to see what the impact is [ generally if the market moves then more than one input may be changed]. This will enable you to see the impact of market changes before you have contracted to buy the site, when you are able to renegotiate the price or see how much profit you are potentially able to make on the site if the purchase price does not change. The cashflow is not used for this sensitivity analysis as you are only looking to change the site value - your assumption of required percentage profit margin will not change. However you may also want to see the impact on site value of changes to your required profit margin.

In reporting the answers to your sensitivity analysis, do not show copies of each appraisal undertaken but just show the results in tabulated form.

For the second sensitivity analysis you will explore the impact of changes to inputs which occur once the site has been contracted for purchase. Here you will need to use the development cashflow but inserting the site value in the base appraisal (now contracted so legally fixed) as a fixed figure (typed in and so not impacted by changes in any other figure) seeing what the impact is on the profitability of the development (the final output of the development cashflow). 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. Again only show the results in tabulated form.

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, referring back to the sensitivity analysis above, you can comment on how you could change the figures to justify paying the higher price.

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

A lecture will be given on forward funding.

Summary: Your summary of the whole exercise of appraisal of your site. It should include, inter alia, confirmation of, and comment upon, your final site valuation. You might also want to add further discussion on the impact of the sensitivity analysis.

Coursework 3: Re the New York trip; Andrew Youens leads this field trip and will set the related coursework. This carries 30% of the module marks.
If you go to Hong Kong there will be a related coursework set by Gheorghe Multescu and marked by him.
If you do not go on either field trip then you will be set a coursework relating to London. Andrew will set this and mark it.

Attachment:- coursework instructions.rar