How to calculate the Gross Development Cost (GDC) and How to make an investment decision based on GDC

Assume the Gross Development Value to be £ C.

Hence, A = Gross Development Cost + Developer’s Profit

                           

GDC = Land Cost + Professional Fee + Cost of Construction + Interest on

               Financing

Assume that the Developer proposes to finance the entire development with borrowed funds.

Land cost   -   £   145,000/= (Data)

Let us assume the cost of construction as £ 540.00

Assume the Gross Floor Area of the Complex to be G m²

Hence, the Cost of Construction = £ 540 G

Professional Fee   =   10% of Construction cost (Data)

=    £ 0.1 x 540 G

=    £ 54 G

Interest on short term financing        =       17% per annum (Data)

Projection Duration                          =       18 months (Data)

Hence, interest payable           =       C x 1.5 x 0.17

                                                =       £ 0.255 A

Therefore,  GDC            =       £ 145,000 + £ 540 G + £ 0.255 C + £ 54 G

                                      =       £ 145,000 + £ 594 G + £ 0.255 C

Developer’s Profit                   =       15% of GDV (Data)

                                      =       0.15 C

Therefore,   C                          =       £ (145,000 + 594 G + 0.255 C + 0.15 C)

                                      =       £ (145,000 + 594 G + 0.405 C)

Hence, 0.595 C              =       £ (145,000 + 594 G)                                           

Consider the expected revenue

Gross Floor Area                    =       G m²

Non Lettable Area                             =       20% (Data)

Hence, Lettable Area                         =       0.80 G m²

Estimated Rent                        =       £ 75/- per m² per month

Hence, estimated rent per month      =       £ 0.80 G x 75

                                                =       £ 60 G

ie. Estimated rent per year                =       £ 60 G x 12

                                                          =       £ 720 G

Capitalization of rent                        =       8% (Data)

Assume that this will be set aside when considering the rent receivable and the Developer wishes to recover the cost in one year.

Hence, total receivable                      =       £ 0.92 x 720 G

                                                          =       £ 662.4 G

For the development to be justifiable, let us assume that the Gross Development value should be at least six (15) times the cost of Land.

Accordingly,                            A                 =       £ 15 x 145,000

                                                          =       £ 2,175,000.00

Hence, using the equation 0.595 C             =       £ (145,000 + 594 G)

                                      G                 =       0.595 x 2,175,000 - 145,000

                                                                                      594

                                                      =       2033.4 m²

Hence, the Cost of Construction              =       540 G

                                                ie.      =       £ 540 x 2033.4

                                                          =       £ 1,098,036.00