- Acquisition Costs
- Costs incurred associated with purchasing a property such as agent fees, valuation fees, legal fees, surveys and stamp duty.
- APR - Annual Percentage Rate
- This is the cost of your debt. As above, a commercial bank may charge around 7% on their lend per year (plus fees, below) whereas a boutique house may charge 12% per annum. On the surface, one is cheaper than the other, but fees can be hidden so always check all costs of the lender as this can push up their actual APR.
- Best and Final
- When a property has more than one interested party, and negotiations are going back and forth with both parties increasing bids, a situation may occur where sealed bids are offered. 'Best and final' is the agents' term for this.
- Bridging Finance
- A short-term debt product for property developers used as a temporary financing solution. It is a useful way of accessing capital quickly in order to cover planning costs or a refinance. Bridging loan interest rates are often higher than conventional loans due to their short-term nature but can be used to maximise profit.
- Build to Rent
- The Build to Rent scheme was launched in 2012 by the government, the term is used to describe private rented residential property, which is designed for rent instead of for sale. As the name suggests, Build to Rent (B2R) involves the building of homes specifically for the rental market. These developments are typically owned by companies (such as property companies or pension or insurance investment companies), let directly or through an agent.
- Construction Costs
- The total cost of building a real estate project.
- Collateral Warranty
- A contract under which a third party 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 sub-contract.
- Development Appraisal
- A numerical assessment of a project's viability that detail on 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 and transaction profitability.
- Development / Project Management Fee
- A fee, usually charged as a percentage of the overall project cost, to cover the costs associated with administering and managing a project.
- DCF - Discounted Cash Flow Valuation
- A valuation technique 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.
- DD - Due Diligence
- When a deal is analysed, it will include a number of assumptions such as the cost of works, the GDV, the developers track record, financial standing etc. A lender and/or equity investor will want assurances from professionals on your projections such as valuers, Quantity Surveyors, Structural Engineers, lawyers etc.
- Movements in the cost or price of specific goods or services in a given economy over a period. (Inflation or Growth Assumptions)
- Fast-track Planning Application
- An accelerated 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.
- Fees (loan in & out fee)
- Fees that are often charged by a debt lender and calculated as a % of the total bank lend ('In') and then a % of either the total lend or the GDV ('Out'). When adding these onto the interest rate of the debt you will understand the 'all in cost' of the capital.
- Freehold / Freeholder
- The owner of the land that the property sits on.
- GDV - Gross Development Value
- This is the figure that you sell (or aim to sell) your entire development for; in other words, what price you agree with the buyer via the estate agent.
- GDC - Gross Development Cost
- This is the total cost of the development, to include all acquisition costs (including fees, SDLT, surveys), all development costs (and VAT), all finance costs and all disposal costs (solicitors, estate agents fees). Omitting costs is what separates you from an amateur developer - this will not be overlooked by any professional, causing your presentation to be flawed through imprudence. Don't be that person, as it will only happen once.
- Highest and Best Use
- A valuation concept meaning a given use of a property that would result in the highest market value. The use must be legally acceptable, physically possible and financially feasible.
- 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. The local council will let you know if you need a licence, and also, who to contact regarding fire safety regulations.
- Improved Land
- Any permanent development made to raw land which increase its usability, such as installation of water utilities, sewer, roads and building structures and thereby increase its market value.
- IRR - Internal Rate of Return
- IRR is the annual rate of growth an investment is expected to generate. Simply put, it is the ROI divided by the total timescale that an investment has been tied up which shows real world profit on an annualized basis. For example a 20% profit over 2 years would equal to a 10% IRR.
- JCT Contract
- The Joint Contracts Tribunal produces a standard form of contract for construction, guidance notes and other standard documentation for use in the construction industry.
- JV - Joint Venture
- This is when two parties jointly are involved in a development, usually through a development manager (known as a promoter) and an equity partner coming together on a deal. As an early developer with limited funds, you should become an expert in promoting JV opportunities.
- Land Bank
- A stockpile of land plots held by a developer with the intent to hold each for future development purposes or until such a time as it is profitable to sell on to others.
- Land Holding Costs
- Costs related to holding and maintaining land, such as Council Rates, Land Tax, Bills, Service Charges and other costs.
- A property where the land it stands on is owned by someone else (such as a flat).
- LTV - Loan to Value
- This is the amount of debt a lender is willing to loan against the total value of either the asset (day 1 LTV) or the development (LTGDV). Typically, larger lender will not go far above 60% LTGDV, smaller specialist asset managers and family office lenders have less constraints.
- Mezzanine Loan
- A loan that is subordinate to another debt obligation secured on the same primary. Mezzanine debt bridges the gap between debt and equity financing and is one of the highest-risk forms of debt—being subordinate to pure debt but senior to pure equity.
- Modular Housing
- Alternatively known as prefabricated or factory-built homes. A fast form of construction which is both 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 is no longer synonymous with lesser design or durability.
- Permitted Development
- An explicit planning permission is not always required; some forms of 'development' are legal under Permitted Development. These rights comprise works and change of use that can be carried out without the requirement of an approved 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.
- Signing a contract to commit to purchase land or property that is yet to be developed (alternatively to Exchange or Sell off plan).
- Pre-Sales Commissions
- The proportion of sales commission that is paid at the time of exchange.
- POC - Profit On Cost
- This is the percentage of profit (GDV less GDC) made, divided by the GDC. For example, if GDV is £1,000,000 and GDC is £800,000, the profit is £200,000. Therefore, POC is £200,000 / £800,00, expressed as a percentage, so 25% (well done).
- Preferred Equity
Preferred equity is a type of capital structure that places a private lender in a priority position for repayment from any cash flow or profit earned from a particular investment over others. Their preferred equity position places them behind the repayment of a senior debt lender such as a first or second mortgage from a traditional bank or lending institution but in front of other participating investors or sponsors (or the developer). Similar to preferred stock, this preferred equity security reduces some risk exposure for the preferred equity investor because it places greater importance on the repayment of their debt above common shareholders or common equity investors. The preferred equity investor earns preference shares, which typically have a higher rate of return than other lenders because they are at a slightly lower lien position than senior debt holders, which carries a higher level of risk.
- Residual Valuation
- The residual valuation method helps property developers to determine a realistic value for their land or property purchase. Identifying a realistic idea of land or property values in this way helps a property developer to determine other expenditure and the maximum that they can afford to spend on say site preparation, land remediation, build-costs, professional fees etc. to achieve a profitable project outcome. The equation for the residual method of valuation in its simplest form is as follows: 'Land/Property = GDV – (Construction + Fees + Profit)' • Land/Property = Purchase price of land/property/site acquisition • GDV = Gross development value • Construction = Building and construction costs • Fees = Fees and transaction costs • Profit = Developers profit required
- 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 allowing them to use the funds when they are needed. It is typically used for operating purposes and can fluctuate each month depending on the customer's current cash flow needs.
- ROI - Return on Investment
- This is the percentage return on the total invested equity amount. This is where the understanding of real profit generation with the use of leverage begins to be understood. For example: If GDC is £1,000,000. • Equity portion was £400,000. • And GDV is £1,200,000. • Project ROI is 20%. • However equity ROI = 50% ((1,200,000 - 1,000,000) / 400,000)
- 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 sold per month.
- SDLT - Stamp Duty Land Tax
- This is the tax imposed by the UK government if you buy a property or land over a certain price in England and Northern Ireland. See https://www.gov.uk/stamp-duty-land-tax for the current thresholds.
- SPV - Special Purpose Vehicle
- This is a company set up purely to own the asset (property). Typically, in the UK this is a Limited company or an LLP with no previous trading history. This is important as any lender will want to know that the structure is 'clean' or has not traded and so could not have any creditors that could have a legal case against it.