What Is a Development Appraisal? Profit on Cost, Profit on GDV and Residual Land Value

RICS defines a development appraisal as a financial appraisal of a development that is "normally used to calculate either the residual site value or the residual development profit". Both forms start from the same place: the value of the completed scheme minus the cost of delivering it.

• Residual development profit. The land price is known (agreed, offered or already paid), so it is treated as a cost. What is left after all costs is the developer's profit.
• Residual land value. A target profit is treated as a cost instead. What is left is the most the scheme can afford to pay for the land.

Which form to run depends on the decision. Before an offer, the land-value form tells you what the site can support. Once the price is fixed, the profit form tells you whether the scheme still earns enough for its risk, and what happens when the design, costs or sales values move.

A useful appraisal keeps every material input visible and separately stated:

• Gross development value (GDV): expected sales receipts or capitalised rents for the completed scheme.
• Land and acquisition costs: the price, plus taxes, legal and agency costs of buying it.
• Build costs: construction, usually a rate per square metre or square foot of gross area, plus demolition, site works and any abnormal costs.
• Professional fees and contingency: usually percentages of build cost.
• Planning obligations: contributions, levies and affordable housing assumptions where they apply.
• Finance: interest on the money borrowed over the programme.
• Selling costs: agency, legal and marketing on disposal.
• Programme: how long the scheme takes, which drives the finance cost.

The appraisal is only as strong as these inputs. A single optimistic figure hidden inside a total is the most common way an appraisal misleads the people relying on it.

Profit is GDV minus total costs, including land. It is then expressed as a percentage in one of two ways:

• Profit on cost = profit ÷ total costs. It shows the return on the money spent.
• Profit on GDV (also called profit on revenue) = profit ÷ GDV. It shows the share of the scheme's value kept as profit.

For a scheme with a GDV of £10,000,000 and total costs of £8,000,000, profit is £2,000,000. That is 25% on cost but 20% on GDV. The two measures describe the same result, so always say which one a target refers to. To convert, profit on cost = profit on GDV ÷ (1 − profit on GDV):

Profit on GDV	Profit on cost
15%	17.6%
17.5%	21.2%
20%	25.0%

In England, the government's planning practice guidance on viability says a return of 15 to 20% of GDV may be considered suitable for plan making, while allowing other figures where the type, scale and risk of development justify them. Individual developers, partners and lenders set their own hurdles.

An appraisal is the developer's own model of a scheme, built on the developer's assumptions for their own decision. A formal valuation of development property is a different exercise: it is carried out by a valuer under professional standards, for a stated purpose and basis of value, and reported accordingly.

The two use similar arithmetic, which is why they are often confused. Treat an internal appraisal as evidence for a decision, not as a valuation for a lender, a purchaser or a court. If a formal valuation is needed, instruct one.

RICS describes two ways of applying the residual method. A basic residual appraisal treats costs and receipts in simple totals, with finance approximated over the programme. It suits early decisions and less complex schemes. A discounted cash flow places each cost and receipt in the month or quarter it happens, which matters for phased delivery, staged sales and funding structures, and it produces an IRR.

Most development teams start with the basic form to test a site and move to a cash flow as the scheme firms up and funding is arranged. A US development pro forma is usually the cash-flow form from the start.

An appraisal that shows one profit figure hides how fragile that figure is. Test what happens when the inputs move:

• sales values fall by 5% or 10%;
• build costs rise by 5% or 10%;
• the land price changes;
• the programme runs three or six months longer.

If a modest change turns an acceptable margin into a loss, the appraisal is telling you where better evidence is needed before committing: cost advice, comparable sales, a firmer programme or a different land position. RICS guidance on viability in planning likewise expects scenario and sensitivity testing rather than a single outcome.

Appraisals drift when they are copied between spreadsheets and the scheme moves on. Tie each appraisal to the exact option it prices (its homes, floorspace and storeys) and to the site evidence behind its assumptions, and record where each figure came from.

Atlasly Developments runs the profit form of a basic residual appraisal. Each appraisal is pinned to one option revision. Every input is tagged as supplied, an estimate or an assumption, and missing inputs stay "not known" rather than being filled in. It shows profit, profit on cost and profit on GDV, a cost breakdown, and sensitivity to sales, build cost, land price and programme. Finance is approximated as the annual rate on land, acquisition costs and half the construction spend over the programme. It does not produce a dated cash flow, IRR or residual land value, and it is not a valuation. For a quick land-side screen, use the free residual land value calculator. Before exchange, work through the site due diligence checklist.