UNPACKED - Construction Finance Valuations | CRE Finance
- Tim Allen
- May 30, 2022
- 2 min read
While undertaking a construction project, commercial construction finance lenders always require a valuation report, one that specifically provides a numerical opinion across four key categories.
This style valuation differs from a development site finance report that doesn't focus on project end-value and the nuances of delivery.
The below example outputs are typical of a build-to-sell residential apartment project, where the valuation firm has addressed the below line items.
What is the relevance of each and how do lenders use them?
1. Gross Realisable Value (GRV)
The assessed combined value of the apartments as if they were built and complete
Based on factors including location, size, design & finish specification level
Generally applies an average 'per square metre' rate to each apartment
For example a 100 SQM (internal) apartment might be assessed @ $12,500/M or market value $1,250,000 once finished
Draws on pool of the projects actual off-the-plan sales, comparable sales including other off-the-plan sales and finished existing apartments.
2. Net Realisable Value (NRV)
Combined value exclusive of GST
On occasions the apartment sales may attract a GST discount via Margin Scheme
Generally if the developer purchases land from a vendor not registered for GST the Margin Scheme will apply
To calculate the effective GST rate (GRV less development site purchase price) / (1/11)
The example effective GST rate above is c. 7% as opposed to usual 10%
3. Land Value 'As Is'
Current market value of the land and improvements as is
Can be dependent on current site conditions, quality / state of any existing buildings, potential contaminations and presence or absence of comparable sales.
4. Project Related Site Value (PRSV)
Theoretical project feasibility exercise that back-solves residual land value based on assess GRV & NRV figures.
Takes into account development project costs including contracted construction price, soft costs, managements costs & authority contributions.
Applies an arbitrary project profit & risk margin that ranges 15%- 20% return on cost.
If the figure is greater than 'as is' value this indicates the site has high development appeal and inherent value in the permit.
If less then arguably the site may not offer commensurate return for risk.
The construction valuation is generally a large body of work that assesses other factors including the permit, title encumbrances, market risk factors, market depth and broader macro economic factors at play.
Example commercial valuation firms that appear on major lender panels include, Savills, JLL, CBRE, and CKC.
Contact us to discuss your valuation strategy
Tim Allen - Director
Commercial Real Estate Finance Pty Ltd
0422043443
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