Viability Assessment and Housing Delivery Stuart Andrews, Partner Head of Planning Eversheds LLP September 2013

Viability Assessment and Housing Delivery  The intention of this paper: Part 1.  to focus on the requirements for viability review mechanisms in s106 Agreements.  to review current Government policy.  to look at relevant case law.  to establish some ground rules for viability review. Part 2.  to look at viability inputs by reference to a case study.  to identify some potential ground rules for viability assessment.

The NPPF ‘To ensure viability, the costs of any requirement likely to be applied to development, …should, when taking into account the normal cost of development and mitigation, provide competitive returns to a willing land owner and willing developer to enable the development to be deliverable.’ (paragraph 173).

The NPPF ‘ Where obligations are being sought or revised, local planning authorities should take account of changes in market conditions over time and, wherever appropriate, be sufficiently flexible to prevent planned development being stalled’. (para.205)

RICS: Financial Viability in Planning (August 2012) ‘An objective financial viability test of the ability of a development project to meet its costs including the cost of planning obligations, while ensuring an appropriate Site Value for the landowner and a market risk adjusted return to the developer in delivering that project’.

RICS: Financial Viability in Planning (August 2012) ‘ …re-appraisal mechanisms should only be considered in exceptional cases. These appraisals would usually be undertaken during the reserved matters application stage. Careful consideration would need to be given as to how this is set out in a section 106 agreement, although it will be important to the LPA and applicant to express a range for the assessment, i.e. for the applicant to state the level of obligation above which they would not be expected to exceed and for the LPA to state the level of obligation below which the development will be unacceptable, regardless of the benefits that arise from it.’

Section 106 affordable housing requirements: Review and appeal (April 2013) Unrealistic Section 106 agreements negotiated in differing economic conditions can be an obstacle to house building. Stalled schemes due to economically unviable affordable housing requirements result in no development, no regeneration and no community benefit. Reviewing such agreements will result in more housing and more affordable housing than would otherwise be the case.

Section 106 affordable housing requirements: Review and appeal (April 2013) The Growth and Infrastructure Act inserts a new Section 106BA, BB and BC into the 1990 Town and Country Planning Act. These sections introduce a new application and appeal procedure for the review of planning obligations on planning permissions which relate to the provision of affordable housing.

Section 106 affordable housing requirements: Review and appeal (April 2013) The test for viability is that the evidence indicates that the current cost of building out the entire site (at today’s prices) is at a level that would enable the developer to sell all the market units on the site (in today’s market) at a rate of build out evidenced by the developer, and make a competitive return to a willing developer and a willing landowner.

Section 106 affordable housing requirements: Review and appeal (April 2013) A viable affordable housing provision should be proposed. This should deliver the maximum level of affordable housing consistent with viability and the optimum mix of provision. The proposal may consider whether adjustments should be made to the affordable housing tenure and mix and, where relevant, phasing may also be considered.

Section 106 affordable housing requirements: Review and appeal (April 2013)  A revised appraisal should:  be prepared in the same form to that for the application.  be based on current market conditions.  make the same policy assumptions.  assume that the obligations remain as for the permitted scheme.  identify variables where there is new evidence and that impacts on viability.  be clear where evidence has been revisited for the revised appraisal.

Section 106 affordable housing requirements: Review and appeal (April 2013)  Section 106BC ensures that if an Inspector modifies an affordable housing obligation on appeal, that modification is valid for 3 years. If the development is not completed in that time, the original affordable housing obligation will apply

The approach of the Inspectorate and the SoS  SoS decision relating to development of some 2,300 residential units on land at Long Lane and Shelford Road (Clay Farm), Cambridge: “Turning to the deliverability of the development, the Secretary of State agrees with the Inspector that the current economic conditions may result in the site being left undeveloped for some time and he agrees that this is not a sufficient reason in itself to justify a grant of planning permission for this scheme in the form proposed. Whilst the Secretary of State considers the timing and extent of the recovery in the housing market remains uncertain… He also agrees that there may be scope for exploring options to induce commencement on sites whilst providing mechanisms to achieve an overall total of 40% affordable housing to be spread across the development as a whole.”

The approach of the Inspectorate and the SoS  Note, however, the PINS decision in the Forest Of Dean District Council case relating to Land at the Lydney Bypass, Lydney.  The Inspector concluded that the site ceases to: “The evidence is that the appeal site can be developed only by forfeiting a significant proportion of the affordable housing which has been justified in effect at all levels of policy and via a recent SHMA, leaving the overall need defined to a large extent unsatisfied, and with no opportunity to recoup affordable housing from another allocated site. I consider that if developed according to the current proposal the site would not contribute adequately to the creation of sustainable, inclusive mixed communities in the terms of PPS3; would not be suitable in those terms; and in those circumstances would not comply with the development plan, or with PPS3.”

The approach of the Court  Robert Hitchins Ltd − v − Secretary Of State For Communities And Local Government (ex p. Forest Of Dean District Council) CO/13646/2009 “…in my judgment the Inspector was saying that the current economic conditions carried little weight in view of the lengthy timescale over which the …project was planned and the reasonable expectation was that current economic conditions were likely to be temporary. She acknowledged that the figures prepared by the Claimant had been based on current known costs and market conditions prevailing at the present time and that the Council's efforts to use forward projections was wrong in principle. … she distinguished the facts of that case because the scale of the Godalming project was much smaller and it was not realistic then to wait for a change in market conditions. The Inspector did not, on a fair reading of her report as a whole, fall into the error which the Claimant attributes to her.”

Viability Assessment and Housing Delivery  The basic ground rules for viability review:  it is about assessing the economics of future development.  it is(n’t) about assessing past performance.  it should follow the same format as the application.  it is based on current market conditions.  the best evidence will be from the scheme itself.  try to apply the same policy assumptions and obligations as the permitted scheme.

Viability Assessment and Housing Delivery  The basic ground rules for viability review:  identify variables that will impacts on viability.  be clear what will be revisited.  set a realistic time horizon for the review.  look to a mechanism to recoup provision.  apply within a range.  utilised at RM stage.  but don’t ‘stifle’ future development.

Viability Inputs: Case Study  Appeal relating to Land at the Manor, Shinfield, Reading (8 January 2013).  s106 costs – 10% margin of difference. Insp. - App. higher cost.  Prof. fees – LPA 8%/App. 10%. Insp. - 10% due to complexity.  Profit – agreed 25% of costs/20% GDV - but on affordable LPA 6% /App %. Insp. - 20%  Sales Value – App. – 6 comparables (£271psf)/LPA – 3 comparables (£295psf). Insp. - £271 based on character

Viability Inputs: Case Study  Appeal relating to Land at the Manor, Shinfield, Reading (8 January 2013).  Finance – agreed 7%  Benchmark land value – LPA £1.98M / App. £2.32M. Insp. £2.3M - no evidence for LPA and recent sales values for App.  Competitive return – LPA £1.86M / App. £4.75M. Insp. £4.75M – incentive and ‘the willing landowner’.  Affordable Calc. – RICS says s106 ‘out of uplift in land value’ but ‘not all of it’ to incentivise. LPA argue owner entitled to / App. Comp. less 50% to s106. Insp. – 50% of £4.75M – s106 costs plus 2% affordable.

Viability Inputs: Case Study  Appeal relating to Land at the Manor, Shinfield, Reading (8 January 2013).  Test the s106 costs against Reg.122  Prof. fees, profit, finance etc - informed by scheme complexity.  Sales Value – inform by viable comparables.  Benchmark land value – reliable evidence base (often actual sales value is better than any valuation).  Competitive return – based on incentive and ‘the willing landowner’.  Affordable Calc. – follow RICS guidance that s106 comes ‘out of uplift in land value’ but ‘not all of it’ to incentivise.

Viability Assessment and Housing Delivery Stuart Andrews, Partner Head of Planning Eversheds LLP September 2013