This article is the second in a series set out to highlight the differences between DA UK's proprietary Development Appraisal software, and a Microsoft Excel appraisal document.

Over the past couple of weeks I’ve spoken to a new user a number of times in relation to the Homes England Development Appraisal Tool [DAT file]. They had used the DAT file for the past 5 years. It’s free, available from the government website, but comes with some limitations.

Firstly it’s a macro enabled Excel file. Sounds great, until you download it to your computer and get presented with numerous warning messages about opening and enabling macros on a file you’ve downloaded from the internet! So Excel security features aren’t a massive fan.

With it being an excel template, you’re constrained to the formula already entered within the spreadsheet. This limits your appraisal to 15 years in duration. I know that’s probably ample for 99% of the developments it will be used for, but the formula entry already being done has other impacts. All values are cashflow ‘linear’. There’s no option to have an s-curve distribution for construction costs, or steadily descending values for professional fees. There are also limits on the amount of items you can have in anyone ‘phase’.

These were all items that I considered when designing my software. I wanted the user to be able to control everything. You can set timescales and project durations far into the future. There are 5 linear distribution options, 6 s-curve distributions and 4 options that allow you to combine a lump sum with a linear or s-curve distributions. These apply to both revenues and costs too. The aim was always to be able to provide enough detail and control that you could demonstrate to a stakeholder that you’d thought of exactly how this project was going to proceed. Your cashflow would show the effort you’ve gone to in order to get accurate results.

The DAT file only allows a single rate for it’s finance debt interest. Again, when wanting to show understanding and applying real world expectations, it’s likely that the project will be funded through a mixture of equity, investor equity, senior finance and mezzanine / bridging loans - all of which can be modelled within DA UK’s software. I understand that it’s not straight forward in Excel to calculate the net amount of a loan when you’re funding the final 65% of a project as would be the case within senior debt. It requires trial and error. Add this to residual land value calculations and sensitivity analysis and you’re really looking at getting external consultants and Excel super users to set this up for you. For items like this, a proprietary piece of software really comes into it’s own.

Any logic you want to add to an excel file needs to be within the spreadsheet cells or the visual basic files. The average Excel user will never open the visual basic editor so they’re limited to the cell formulae. Having to add in so much logic into each cashflow cell can prove difficult and means that certain edge cases are overlooked.

For example, if a scheme isn’t viable at a certain level of profit and the land value, which should be a cost, shows as a revenue - this has knock on effects. The DAT file treats this ‘positive’ land value as income and offsets the amount against the initial costs when calculating finance. This gives an incorrect figure and false sense of the actual finance costs for the scheme.

This is another example of where specialist software out performs Excel spreadsheets. All logic is houses centrally, not just in a 1 line function of a spreadsheet cell. Edge cases can be reviewed and handled much more easily. In out software, a positive land value is automatically excluded from the finance calculations. Any item linked to it [stamp duty, legal fees] will automatically be zero’d as a positive value for land would equate to a positive, revenue like figure for star duty too, further distorting the appraisal.

Actually, lets not even think about cutting and pasting a value into the wrong place…