Apress Argus Developer in Practice, Real Estate Development Modeling in the Real World (2014).pdf

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For your convenience Apress has placed some of the front
matter material after the index. Please use the Bookmarks
and Contents at a Glance links to access them.
Contents
about the author
ix
acknowledgments xi
preface
xiii
Chapter 1:
Chapter 2:
Chapter 3:
Chapter 4:
Chapter 5:
Chapter 6:
Chapter 7:
Chapter 8:
Chapter 9:
appraisals: an overview
1
an overview of argus Developer
13
argus Developer: advanced Features
35
Commercial Feasibility studies
53
Residential Feasibility studies
133
more Complex projects
163
modeling project Finance
177
Understanding and modeling Risk in Feasibility studies
211
Wrap–up
225
index
237
CHAPTER
1
Appraisals: An
Overview
Development Appraisals and Financial Feasibility
Studies in the Development Process
Before we get into the ins and outs of Argus Developer and how to use it
effectively, let’s take a step back and understand the goals it is meant to help
us achieve.
Why Do Appraisals?
Although this is not meant as a development textbook but one that concen-
trates on modeling using the industry’s main software tool, it is useful to set
the context and establish the roles development appraisal, sometimes known
as financial feasibility studies, have in the development process.
Financial feasibility studies are also known as development appraisals. They
involve the gathering together of all the information on costs and values of a
project. This information is incorporated into a framework and used to deter-
mine the answer to some key questions. Development appraisal is one of the
key aspects of assessing the viability of a development project. It is, however,
used throughout the development process to fulfill a number of key tasks.
2
Chapter 1 | Appraisals: An Overview
■
Note
Development appraisals, also known as financial feasibility studies, are used in part to
determine the value of a piece of property based on what you want to do with it.
Primarily, appraisals are used to determine the bidding price for a piece of
land. This can be difficult because a piece of development land has no intrinsic
or set value; it only has a value derived from the use it can be put to. The value
is determined by the market and restrained by the planning and/or building
restrictions on the site.
Every scheme proposed for a site—residential housing, hotel, retail, and so
on—will generate different values. If a piece of development land has been
fully exposed to the market, then a range of appraisals based on different
schemes will be made on the site by different prospective developers. The
landowner will generally sell to the developer who submits the highest viable
bid. Thus, the financial appraisal is a key component in determining the highest
bid a potential developer can make while still meeting the target return for
the project.
The second major use of appraisal in the development process is to deter-
mine the profit or loss the scheme will make. This is vitally important because
it shows the developer whether the plan is viable or not. Appraisals can also
be used to explore the impact of different variations in the project. These
variations might concern design, the use or use mix that the site can support,
or the different timing of elements in the project. They can also be used to
determine peak profitability—that is, when it might be advantageous to sell.
The financial feasibility study will also be used by commercial lenders to deter-
mine whether they will lend you money to carry out your plans.
Commercial lenders will look at the financial appraisal very carefully before
advancing any funds. In essence they look at two things:
1.
Assumptions.
Lenders check to see whether the
assumptions relating to the development values are
sound. Lenders will carefully examine all of the compo-
nents of the completed project. They will look at the
rental values and the yields that have been projected by
the developer for realism. They will also scrutinize the
selling or leasing program to determine whether goals
can be achieved. Then they will examine the construc-
tion costs and all the other elements of the project. The
appraisal lays these factors completely open to scrutiny.
In short, the developer and lenders will use the develop-
ment appraisal to prove whether the assumptions in the
development project are based on sound projections.

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