Have you ever gazed over a decrepit old
building, or vacant parcel of land, thinking to yourself “This would be the
perfect place for…”
Taking this vision and transforming it into
reality is the premise behind an as-if-complete valuation. This form of valuation
provides a current or prospective (future) value opinion of a development prior
to it being constructed. In addition to undeveloped properties, real estate
owners and developers can also utilise this form of valuation to determine the contributory
value of renovations to an existing property.
Owners and developers typically require this
form of valuation as an input for mortgage financing and proceed in one of two ways: The property can be valued as though it were complete as of the
effective date of the report or alternatively;
it can be valued as at an assumed date of completion. Regardless the path, the
values presented rely heavily
on the standard described in the report,
and the proposed timeframe of the development.
Working together with architects, engineers, lenders,
designers and planners is an integral part of orchestrating the materials
required for this form of valuation. Building plans and renderings paint the
backdrop while finish schedules, cost estimates and operating projections
provide focus to the finer economic details required for these projects.
Financing details are based on the lender’s
relationship with the developer together with their experience completing similar
developments, financial position, cost of the project and overall loan-to-value
ratio. Once the as-if-complete value of the property is determined the bank
will typically schedule formal draws for the various milestones of the development.
For example; the first milestone may cover the cost of excavation and site
work, foundations, framing and roofing. This is where experience, organisation and
timing are key to the financial and fiscal success of the project.
Often developers run into issues during initial
milestones, where projected budgets are exceeded and the initial draw does not
cover the costs allocated to such milestones. This can occur as a result of
unforeseen circumstances, an unexperienced contractor or builder, fluctuating
material costs etc. If the developer
does not have access to an outside source of funds to complete this work and
proceed to the next milestone, lenders will sometimes issue a “swing-line” or short-term,
interest-only line of credit to see them through to the completion of the
milestone at hand. Progressing through the first and second milestones of a
project are often the most difficult as they can be the most capital intensive.
Paying close attention to cash flows and budget are paramount to ensuring the
financing terms are met and the project is completed as scheduled.
While construction pushes forward and
developers achieve various milestones, it is typically the responsibility of
the valuation consultant to confirm the work completed falls in-line with the
details described in the report. Various meetings and site visits are completed
throughout the project, and progress reports filed to the lender as per the
scheduled incremental milestones leading up to, and including, the completion
of the project.
New developments and renovations are
susceptible to a number of different variables that could easily alter a
project cost or timeline. Such variables can heighten the risk of a project;
therefore, including proper contingencies and mapping out the development in
fine detail will aid in minimising risk and provide additional comfort to
lenders considering your project.
The ongoing pandemic has had a tremendous effect
on the world and although primarily negative in nature, many clients have taken
this additional time to dream big and “put the wheels in motion.” Formerly
neglected ideas are re-surfacing and with the help of this form of valuation we
are playing a key role in bringing these ideas to fruition.
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Patrick Mitchell is a consultant in our Valuation Division and has extensive experience in the valuation of projects that are in early stages of development, or have yet to break ground. Patrick’s passion for design and architecture has strengthened his relationships with local architects, builders and developers. For more information about our range of Valuation® services, or more details concerning as-if-complete valuations, feel free to contact Patrick at (902) 429-1811 or pmitchell@turnerdrake.com