Viability

What’s new? Preparing evidence Viability and ‘delivery of the plan’ Area based rates Viability and the new SG

Charging authorities ‘must aim to strike what appears to the charging authority to be an appropriate balance between’ - Raising funds for infrastructure and - ‘The potential effects (taken as a whole) of the imposition of CIL on the economic viability of development across its area’ The key test – regulation 14

“…It is for charging authorities to decide…’how much’ development to put at risk…” “…As set out in the NPPF in England, the ability to develop viably the sites and the scale of development identified in the Local Plan should not be threatened…” Emphasis on delivering the Plan

“…a CA may want to sample directly a few sites across its area to supplement existing data…” “a CA should sample directly an appropriate range of types of sites across its area…subject to receiving support from local developers … in particular on strategic sites” Preparing evidence

Example: Preparing evidence Site typeNumber of units:% of housing in Plan Strategic brownfield5009% Large greenfield150032% Medium greenfield35028% Small greenfield1512% Below AH threshold510% Specialist housing609%

“…where a CA is proposing to set differential rates, they will want to undertake more fine grain sampling (of a higher percentage of total sites…to identify…the boundaries of particular zones…” Does this miss the point? Preparing evidence – area based rates

How to establish boundaries (particularly in urban areas)? - Postcodes – of relevance to housing markets -‘Natural’ barriers – railways, major roads - settlements (if area is not contiguous built up area) - combined approach of (a) Site testing (b) Land Registry sales value data by sub-postcode – in Preparing evidence – area based rates

Differential rates for supermarkets and other retail - Borough of Poole and Sainsburys - Size doesn’t matter - Key driver is yield differential - ‘Big four’ – yield sub 5% - Corner Store operator – 7.5% sq ft store, rent of £25 psf with 5% yield = cap val £250k sq ft store, rent of £25 psf with 7.5% yield = cap val £167k - A ‘Sainsburys Local’ is just as viable as a superstore - Its all about the yield, but clearly can’t have a ‘Sainsburys’ CIL – in Rates based on different uses

Wycombe appear to have cracked it: “Convenience based supermarkets and superstores 1 and retail warehousing 2 (net retail selling space of over 280 sq metres) 1 Superstores/supermarkets are shopping destinations in their own right where weekly food shopping needs are met and which can also include non- food floorspace as part of the overall mix of the unit. 2 Retail warehouses are large stores specialising in the sale of household goods (such as carpets, furniture and electrical goods), DIY items and other ranges of goods, catering for mainly car-borne customers.” – in Rates based on different uses

- As ‘background evidence’ provide information on amounts raised through Section 106 -Extent to which affordable housing targets have been met Issues -Test of ‘reasonableness’ against Section 106 -Implication that you can’t have CIL if not meeting AH targets -Implication that CIL shouldn’t be higher than Section 106(?) -Not all authorities have maxed out on Section 106 -But… isn’t CIL about what schemes can viably afford? Additional requirements – S106 receipts

Example: Other measures of impact on development Site typeCIL as % of scheme value CIL as % of development cost Strategic brownfield3.7%4.2% Large greenfield3.5%4.0% Medium greenfield3.4%3.8% Small greenfield3.4%3.8% Below AH threshold2.7%3.2% Specialist housing3.4%3.8%

What’s different about them and why separate testing “CAs could treat a major strategic site as a separate geographical zone where it is supported by robust evidence on economic viability” - On site infrastructure/utilities etc - £750,000 per ha - On site community infrastructure (schools etc) - Significant upfront costs; long build out periods - BUT do not assume they cannot afford CIL as well…some can - Is Section 106 sometimes preferable on large schemes? Strategic Sites

‘…early engagement with local developers and others in the property industry is clearly good practice and should help the CS consultation and examination process run more smoothly…’ ‘…the extent to which charging authorities can do this will depend on the level of engagement from local developers…’ Is this about getting the right answer, or is this a negotiation? Meaningful consultation with stakeholders

Most developers will be hoping to minimise CIL! - Those who bought land pre-CIL but do not have consent - Those who have taken out options to purchase - Developers looking for land to purchase - Savills’ remit through NHBF ‘consortium’ – not about getting to the right answer: “Savills, on behalf of the Consortium, also wishes to meet with the Borough Council and BNP Paribas to discuss how the viability appraisal may be improved, and notably how the proposed CIL rate can be reduced.” Meaningful consultation with stakeholders

Do CAs achieve anything meaningful from consultation? - Lots of moaning and criticism (particularly from advisors) - Very little (if any) hard evidence is submitted - Views expressed must be taken with pinch (bucket?) of salt - Consulting early does not stop developers objecting - Moral high ground at examination? Meaningful consultation with stakeholders

“…The examiner should check that…the proposed rates are informed by and consistent with the evidence on… viability…” “…The examiner should establish that…” “…Examiner should be ready to…modify or reject the draft CS if it puts at serious risk the overall development of the area…” “…Examiner should be ready to…reject the draft CS if it threatens the delivery of the relevant plan as a whole…” Examination of viability evidence

‘…use of an exceptions policy enables the CA to avoid rendering sites unviable should exceptional circumstances arise…’ 3 tests: - Cost relating to the Section 106 are greater than the CIL - A test of viability has been submitted and agreed - Granting relief would not constitute state aid - Key unanswered question – do ‘costs’ include the aff hsg? - If so, all sites providing aff hsg could be eligible - How might this be resolved? Exceptional relief

Land value assumption is a critical issue to viability testing! Choice of benchmark can result in significant differences - Brief account of basic principles - What the guidance says Other guidance – RICS and LHDG (Harman)

Basic viability principles Private Affordable RESIDUAL LAND VALUE

Basic viability principles Value ‘created’ by grant of planning

RICS Guidance: Advocates ‘Market Value’ as benchmark land value “When undertaking…CIL (area-wide) viability testing, a second assumption* needs to be applied to the Site Value definition: The Site Value…may need to be further adjusted to reflect the emerging policy/CIL charging level. The level of the adjustment assumes that site delivery would not be prejudiced. Where an adjustment is made, the practitioner should set out their professional opinion underlying the assumptions adopted. These include, as a minimum, comments on the state of the market and delivery targets as at the date of assessment.” * First assumption is that scheme complies with existing planning policy Other guidance – RICS and LHDG

Does the RICS guidance work in practice? - It implies that you know what the CIL already is/should be (MV needs to be adjusted to reflect ‘emerging’ CIL) - You need to know how much you can adjust MV downwards before delivery is prejudiced. How do you know? What are the processes or principles for establishing this? GN is silent. - ‘Adjustment’ relies on arbitrary judgements by a valuer - How can the Examiner check whether (s)he is right? - There is no objective test! Other guidance – RICS and LHDG

Issues with market value in practice - MV is primarily based on what people pay for land Why is this problematic? - Developers build in growth when bidding for land - They ‘take a view’ on squeezing planning obligations and AH - Differing densities mean land values vary - Developer may not have made a profit - Historic – based on current planning policy - Tells us nothing about what policies could be viable in future Other guidance – RICS and LHDG

Issues with market value in practice - MV is primarily based on what people pay for land Why is this problematic? - Developers build in growth when bidding for land - They ‘take a view’ on squeezing planning obligations and AH - Differing densities mean land values vary - Developer may not have made a profit - Historic – based on current planning policy - Tells us nothing about what policies could be viable in future Other guidance – RICS and LHDG

What does this mean for levels of CIL and other requirements Other guidance – RICS and LHDG

What does this mean for levels of CIL and other requirements Other guidance – RICS and LHDG MV Unviable

LHDG guidance: “using a market value approach as the starting point carries the risk of building-in assumptions of current policy costs rather than helping to inform the potential for future policy” “We recommend that the Threshold Land Value is based on a premium over current use values [which] should be determined locally” Other guidance – RICS and LHDG

LHDG approach will identify the parameters for CIL - The ‘maximum’ potential CIL rate - SG cautions against setting rates at the ‘margins of viability’ - Need to consider an appropriate discount below maximum - exceptional costs - risk of falling sales values - EUVs will inevitably vary between sites - 25% - 50% is the typical range Other guidance – RICS and LHDG

- More emphasis on how CIL affects the Plan as a whole - Testing of strategic sites - Comparisons to Section 106 – but consider other measures - Consultation – a necessary evil – needs to be evidence based - Examiner’s task is to establish not check - Benchmark land values are crucial – follow the right guidance Key points

Questions