Valuations of Development Projects
Jan 10, 2017 18:46:04 GMT
elliotn, markdirac, and 1 more like this
Post by mikes1531 on Jan 10, 2017 18:46:04 GMT
I realise that valuing development projects by looking at the difference between the pre-project value and the GDV and presuming that the property value increases from the former to the latter in a straight-line relationship as the project expenditure is made is the standard method used. It can, however, produce some results that are hard to believe.
There's an obvious flaw in the method where a project goes over budget. The method says the project value is the GDV once the budget is spent, even if the project isn't complete.
A case at hand is the Wirral development (the tranche being funded right now is FS loan 1771328209). I have no reason to believe that there's a problem with this project, but the current state of the project expenditure (60% spent to date) leads to the security value being calculated to be 77.5% of the £800k GDV now, while the photos show a pretty empty building site where the previous house has been demolished and the new house is nowhere to be seen. I accept that some of the completed works may be underground and thus not obvious in the photos. And I accept that some of the expenditure has gone toward frames that have been bought but not yet delivered and installed, so they don't appear in the photos. But I do have difficulty accepting that if the works were to stop tomorrow and FS had to call in the security to repay the loan, someone could be found who would pay anything near the £620k 'value' to take the project off FS's hands. (The total lending, including the tranche currently being funded, is £440k, so net proceeds from the security sale would have to be somewhere around £500k to cover the accrued interest/fees.)
Food for thought, I guess.
There's an obvious flaw in the method where a project goes over budget. The method says the project value is the GDV once the budget is spent, even if the project isn't complete.
A case at hand is the Wirral development (the tranche being funded right now is FS loan 1771328209). I have no reason to believe that there's a problem with this project, but the current state of the project expenditure (60% spent to date) leads to the security value being calculated to be 77.5% of the £800k GDV now, while the photos show a pretty empty building site where the previous house has been demolished and the new house is nowhere to be seen. I accept that some of the completed works may be underground and thus not obvious in the photos. And I accept that some of the expenditure has gone toward frames that have been bought but not yet delivered and installed, so they don't appear in the photos. But I do have difficulty accepting that if the works were to stop tomorrow and FS had to call in the security to repay the loan, someone could be found who would pay anything near the £620k 'value' to take the project off FS's hands. (The total lending, including the tranche currently being funded, is £440k, so net proceeds from the security sale would have to be somewhere around £500k to cover the accrued interest/fees.)
Food for thought, I guess.
