Developers Budget

Developers are always seeking sites for development purposes, will need to consider number
of factors. By considering the factors, they may find the feasibility and the suitability of the
developing a commercial property there. In order to determine whether the scheme is
feasible, it is necessary to prepare a development budget. It will provide the answers for, how
much should be paid for the land, what will be the maximum building cost and what should
be the selling price or rental value of the property. The developers budget comprises of the
items which are given below. (Ashworth, 2002)

Gross development value

Investment yield
Cost of construction
Fees
Developers profit
Finance
Contingencies
Letting and agency fees

Gross development value

To many property developers, GDV is one of the most important performance metrics that
they will monitor as it helps to highlight the capital and rental value of their property or
development project when all redevelopment works have been completed. In other words, it
will show if a profit has been, or will be, made out of the project, and at what level.
GDV= Cost of construction including land cost+ Fees+ Developer`s Profit+ Cost of
finance
Put simply, GDV 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.
Here the GDV stands for : Estimate the total rental value
When preparing GDV;

Allowance must be used for non-useable floor area.

Deduct a reasonable allowance for out goings (Maintenance, repairs, management etc.
This gives the net income.
Capitalized by multiplying with an appropriate Year`s Purse (Yp)

According to the aforementioned formula

Total Expenditure =Cost of construction including land cost+ Fees + Cost of finance
GDV= Income per annum x Year`s Purchase
Profit=GDV-Total Expenditure

Are calculated and the profit is given as a percentage of the GDV.

Investment Yield

The yield on an investment is before the deduction of taxes and expenses. Gross yield is
expressed in percentage terms. It is calculated as the annual return on an investment prior to
taxes and expenses divided by the current price of the investment.

Cost of Construction

The costs related to the constructing the property in the land. It is included excavation up to
conclusion. According to the cost of construction the price may be vary. Higher the cost of
construction sometimes may tend to lesser the developers profit.

Fees

Charges for the professional services provided will need to be added to the cost of
construction. The various professional institutions publish the scales which can be used as a
guide in accessing these costs.

Developers Profit

This is the expected enhancement in value created by a real estate developer. The final
product is worth more than the total cost of materials, labor, and overhead because of the
developers profit. Developer profit generally ranges from 515% of total costs. However,
economic conditions in the market and other factors such as miscalculations in cost
estimating or unexpected forces can significantly affect the developer profit. Actually this is
for the developers risk taking activity.

Finance

Property developments can be funded in a variety of ways. Although not a great deal of
capital is always needed to begin the first project, it is needed to consider the finances
objectively and with a view to the economy perhaps taking a second dip. Loans from banks
or family may get the happily started on the first project with repayments appearing within a
comfortable affordability range however, redundancies are common place as are drops in
income. Those gloomier aspects aside, there is a wealth of sources of finance out there. The
main ones to outline include:

Mortgages
Investment syndicates
Grants Government and Council schemes
Shared ownership
Shared equity
Personal equity
Friends and family

When considering the availability of sources of finance, developments are highly affected.
They have to pay an interest for the finance that borrowed.

Contingencies

A contingency is a provision in a real estate contract that specifies the contract would cease to
exist upon the occurrence of a certain event.

Example: "This contract is contingent upon Buyer successfully obtaining a mortgage loan at
an interest rate of 6% or lower." Should rates rise quickly, and this rate not is available, the
contract would end.

Letting and Agency Fees

A letting agent is a term for a facilitator through which an agreement is made between a
landlord and tenant for the rental of a residential property. The agreement between landlord
and tenant is normally formalized by the signing of a tenancy agreement. A letting agency
will normally charge a commission for their services, usually a percentage of the annual rent.

Fees vary but a good Right move agent could get a higher rent than if it is find a tenant
privately as they have more market expertise and a greater selection of tenants for choose
from which will more than make up for their charges.

Letting and sale fees usually occur towards the end of the development. It is common practice
on larger developments to appoint two or more agents, with a consequent increase in fees.
Letting fees are typically based on 10% of a single years rent where one agent is employed,
and 15% in the case of multiple agents. (Ashworth, 2002)

References

Ashworth, A. (2002). Pre-contract Studies development Economics, Tendering and

Estimating. Oxford, UK: Blackwell Science Ltd.