Property Development Glossary

Welcome to the Property Development glossary…

A

• Agreement in Principle: Prior to finding a property to purchase, a purchaser can ‘pre-qualify’ their borrowing ability prior to a full mortgage application. Vendors will view any purchasers who have an agreement in principle as being in a stronger position to move quickly.

• Acquisition Costs: Incidental costs associated with securing ownership of real property, such as agent commissions, mortgage application fees, professional fees and stamp duty.

B

• Bridging finance: Bridging finance is a short-term financing option for property developers aimed at overcoming a temporary financial need until a more permanent solution is found. It can be an effective way of getting fast access to finance. Though bridging loan rates are often higher than conventional loans, their short-term nature means they can be cleverly used to maximise profit.

• Build to rent: The Build to Rent scheme was launched in 2012 as part of a series of government initiatives to increase the supply of high-quality homes available for market rent in the private sector. The Build to Rent Fund is a fully recoverable commercial investment and is available as a loan to cover up to 50% of eligible development costs. Developers pay the loan back by refinancing the deal or selling on to an institutional investor within one to two years of completing the scheme. The Homes and Communities Agency’s Build-to-Rent Fund Continuous Market Engagement Prospectus January 2015 sets out the eligibility and offers bidding guidance for developers.

C

• Construction Costs: The total cost of building a real estate project.

• Collateral Warranty: A contract under which a professional consultant (such as an architect), a building contractor or a subcontractor warrants to a third party (such as a funder) that it has complied with its professional appointment, building contract or subcontract.

D

• Development appraisal: An assessment of a project’s viability that includes investigation into all project aspects and anticipated outcomes. Appraisal techniques may include Residual Valuation or Discounted Cash Flow analysis. A well-thought-out property development appraisal will help you identify your cash flow needs, a critical success factor for any developer.

• Discounted cash flow method of valuation: A business planning tool which models income and expenditure cash flow. This can be a means of valuation which shows cost and income over the life of a project, discounted at a rate which reflects risk and the cost of capital.

E

Escalation: Changes in the cost or price of specific goods or services in a given economy over a period. (Alternative names: Inflation, Growth Assumptions)

F

• Fast-track planning application: A fast-track application process is offered by some councils and allows a guarantee to process and determine planning applications more quickly in return for a higher application fee.

G

• Gross Development Value: To many property developers, GDV is one of the most important performance metrics that they will monitor throughout the course of a project as it helps to highlight the capital and rental value of their property or development project when all redevelopment works have been completed. Put simply, gross development value is the estimated value that a property or new development would fetch on the open market if it were to be sold in the current economic climate.

H

• HMO: There is a complex legal definition as to what exactly constitutes a House in Multiple Occupation (HMO). However, it can be loosely defined as a building where more than one household lives and shares facilities. A household, in this case, is where members of a family live together, including unmarried couples. If you’re developing an HMO, you’ll have certain responsibilities. Your first port-of-call should be with the local council, which will let you know if you need a licence and also who to contact regarding fire safety regulations.

I

• Improved Land: Any permanent development made to raw land which increases its usability, such as installation of water utilities, sewer, roads and building structures and thereby increases its market value.

J

• JCT Contract: The Joint Contracts Tribunal produces standard forms of contract for construction, guidance notes and other standard documentation for use in the construction industry.

L

• Land Bank: A stock of land held by a developer with the intent to hold it for future development or until such a time as it is profitable to sell on to others.

• Land Holding Costs: Costs related to keeping and maintaining land, such as Council Rates, Land Tax, Bills, Service Charges, etc.

M

• Mezzanine: An intermediate floor in a building which is partly open to the double-height ceilinged floor below.

• Modular housing: Modular housing, another word for pre-made, factory-built homes, is fast gaining the favour of the government as a time and cost-efficient approach to homebuilding and a key part of the solution to the current housing crisis. Small and larger developers across the UK are already demonstrating that pre-made and factory-built are no longer synonymous with ugly identikit homes.

• Market research: A process of gathering, generating and interpreting evidence on supply and demand patterns with the objective of using it to make better development decisions. Your evidence-gathering might broadly cover

1. identification of a specific market and measurement of its size and other characteristics;
2. identification of a need or want and the characteristic of the good or service that will satisfy it; and
3. identification of the preferences, motivations, and buying behaviour of the targeted customer.

P

• Permitted development: An explicit planning permission is not always required; some forms of ‘development’ are allowed under what is called Permitted Development. These rights comprise works and change of use that can be carried out without the requirement of an application for planning permission.

• Planning Performance Agreement: On larger schemes, a Planning Performance Agreement (PPA) serves a similar function to a fast-track planning application, where the applicant may agree on a timeframe and possible resourcing levels with the council for a certain cost.

• Pre-Sale: Signing a contract to commit to purchasing land or property that is yet to be developed. (Alternative names: Exchange, Sell Off-the-plan)

• Pre-Sales Commissions: Proportion of sales commission that is paid at the time of exchange.

R

• Red Book: the name for Royal Institution of Chartered Surveyors (RICS) Valuation Standards – the reference book surveyors use for formal valuations, which sets out mandatory procedures and processes.

• Revolving Credit Facility: A line of credit where the customer pays a commitment fee and is then allowed to use the funds when they are needed. It is usually used for operating purposes and can fluctuate each month depending on the customer’s current cash flow needs.

S

• S Curve: A display of cumulative costs plotted against time. The name derives from the S-like shape of the curve, flatter at the beginning and end and steeper in the middle, which is typical of most projects.

• Sales Rate: The velocity of sales, usually measured by units/lots per month.

• Stamp Duty Land Tax: You must pay Stamp Duty Land Tax (SDLT) if you buy a property or land over a certain price in England, Wales and Northern Ireland. The current SDLT threshold is £125,000 for residential properties and £150,000 for non-residential land and properties. SDLT no longer applies in Scotland. Instead, you pay Land and Buildings Transaction Tax when you buy a property.

Since April 2016, second-home buyers and buy-to-let investors have faced a new higher rate of stamp duty when buying a property. An extra 3% surcharge now sits on top of the rate for the value of the property that they are buying.

You can calculate your SDLT liability using the GOV.UK calculator.

U

• Unimproved Land: Raw land in its natural state void of merged improvements. (Alternative names: Undeveloped Land, Vacant Land)