Commercial Development Appraisal Basics

Before committing to a development or major refurbishment, you run an appraisal to see whether the numbers work. This is the residual method in plain terms.

The residual idea

The residual method works backwards. You start with what the finished scheme will be worth, take off all the costs of delivering it and the profit you need, and what is left is the most you can pay for the site or building. If that residual is below the asking price, the scheme does not work at that price.

The main ingredients

• Gross development value (GDV): the value of the completed scheme, often the net income divided by the target yield.
• Build costs: construction cost, using cost data for the region and type.
• Professional fees: typically a percentage of build cost.
• Finance: the cost of funding the build over the programme.
• Developer's profit: the return required for the risk, often expressed as a percentage of GDV or cost.
• Contingency: a margin for the unexpected.

Residual land value

GDV, less build costs, fees, finance, profit and contingency, gives the residual land or site value. Sensitivity matters: small changes in GDV or build cost move the residual a lot, so test a range.

Use it as a filter

An appraisal is a decision tool, not a promise. For a formal viability assessment, a surveyor uses recognised methodology. Model your own numbers before you commit, and see the renew vs redevelop decision.

What is the residual method?

You start with the finished scheme's value, take off all the costs and the profit you need, and what is left is the most you can pay for the site or building.

What goes into a development appraisal?

Gross development value, build costs, professional fees, finance, developer's profit and a contingency.