Property development, like any industry has its own fair share of jargon: a specialist language among those in the know, which can be confusing if you’re new to it. This glossary will give you a firm grasp of the prominent concepts and technical terms in property development. You’ll get bitesize definitions for the words at the heart of development finance like Gross Development Value, as well as those at the fore of innovative construction trends like modular housing. Of course, an exhaustive list is potentially endless, so this glossary will grow and develop over time. And please do contribute to it: email us with terms you think deserve to be featured.
Welcome to the living Property Development glossary…
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.
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 eligibility and offers bidding guidance for developers.
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 sub-contract.
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.
Development 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. (Alternative name: Project Management Fee)
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.
Englobo Land: An undeveloped lot, group of lots or parcel of land that is zoned to allow for, and capable of significant subdivision into smaller parcels under existing land use provisions.
Escalation: Changes in the cost or price of specific goods or services in a given economy over a period. (Alternative names: Inflation, Growth Assumptions)
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.
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.
Highest and Best Use: Valuation concept meaning the possible use of a property that would produce the highest market value. The use must be legally allowable, physically possible and financially feasible.
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, who 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.
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.
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.
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 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 is 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
- identification of a specific market and measurement of its size and other characteristics;
- identification of a need or want and the characteristic of the good or service that will satisfy it; and
- identification of the preferences, motivations, and buying behaviour of the targeted customer.
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 purchase 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.
Residual Method of Valuation: The residual method of valuation 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 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 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 sale, 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.
From 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 property that they are buying.
You can calculate your SDLT liability using the GOV.UK calculator.
Unimproved Land: Raw land in its natural state void of merged improvements. (Alternative names: Undeveloped Land, Vacant Land)