Anthony Lee Viability and the CIL charging schedule

1.The legislative requirements 2.What evidence is required? 3.Relationship between the evidence and PDCS/DCS 4.Consultation with stakeholders 5.The examination and post-examination follow up 6.Keeping a sense of proportion 7.Questions 2 Introduction

The legislative requirements 1 3

4 Viability considerations firmly embedded in planning National Planning Policy Framework – para 173 “Plans should be deliverable. Therefore, the sites and the scale of development identified in the plan should not be subject to such a scale of obligations and policy burdens that their ability to be developed viably is threatened” “To ensure viability, the costs of any requirements likely to be applied to development, such as requirements for affordable housing…should… provide competitive returns to a willing land owner and willing developer to enable the development to be deliverable.”

5 Viability test for CIL rate setting CIL regulations (2010) as amended Charging authorities ‘must aim to strike what appears to the charging authority to be an appropriate balance between’ ‘ The potential effects (taken as a whole) of the imposition of CIL on the economic viability of development across its area’ Raising funds for infrastructure

What evidence is required 2 6

7 What evidence is required? Appropriate available evidence Proportionate Not every single site needs to be tested Key sites/types of sites Types of development that actually get built Emphasis on key sites that are critical to the Plan Capable of being put into the public domain

8 What evidence is required? What is required? Same approach as for individual schemes – just more appraisals! Residential: A range of typologies that represent entire anticipated housing supply Taking account of other policy requirements (standards; affordable hsg etc) Strategic sites (on-site S106; infrastructure burden; cashflow profile) Commercial Main types of development expected to come forward (retail, offices etc) Testing developments to justify nil rates? Other uses D1/D2 – predominantly reliant on public subsidy etc Sui generis – too many to test – plan not reliant on one particular SG use

9 What evidence is required? RESIDUAL LAND VALUE

10 What evidence is required?

11 What evidence is required?

12 What evidence is required? Strategic sites – why separate testing? Critical to delivering the Plan Important to test impact of CIL On-site infrastructure/utilities - £250-£750k per ha Subject to receiving information from Developer Might be delivering on-site Section 106 (eg schools) Timescale for delivery/capital tie-up/cashflow Critical issue is nevertheless the impact of CIL

13 What evidence is required?

The relationship between the evidence base and the PDCS / DCS 3 14

15 Evidence and the PDCS ‘Room for pragmatism’ Number of zones The viability buffer Nil rates Is [use] criticial to the delivery of the Plan? Focus on where development will actually happen BUT CIL is not a tool to incentivise/disincentivise

16 Evidence and the PDCS – how to determine boundaries Difficult in urban areas – markets not black and white Postcodes – often of relevance to market boundaries ‘Natural’ barriers – railways, major roads Settlements (if not contiguous built up area) Combined approach of Individual site testing Land Registry/other source data by sub-postcodes Unlikely to be a perfect match

17 CIL and other policy objectives Urban areas are complex – range of viability outcomes Affordable housing policies – ‘maximum reasonable’ CIL and AH effectively competing for scheme value No different under Section 106 Each £ taken for S106 = £ less for AH BUT cost of delivering AH is far greater than CIL PD to AH – typically £4,000 psm, CIL = £200 psm

18 CIL and Affordable Housing 18 Impact of increase in CIL from £250 to £350 psm

19 Broad test of reasonableness 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%

Consultation with stakeholders – what to expect 4 20

21 Consultation with stakeholders ‘…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…’

22 Consultation with stakeholders Should be an evidence gathering exercise Developers better placed than anyone to provide evidence Sales values on new build schemes Build costs Fees, finance etc Consultation not working in the manner envisaged One way flow of information (CA to stakeholders) Reps typically unevidenced assertions Developers hide behind ‘confidentiality’ of data Consultants act as a barrier between CA and developers Ultimately just a messy exercise in negotiation

23 Consultation with stakeholders Each £ in CIL is £ less for land Developers fearful of impact on land supply In practice, uplift in land still significant Concern regarding impact on AH and political pressure

The Examination and post-Examination follow up 5 24

25 Viability at examination Examiners often based topics on respondents’ issues Likely issues: Land value assumptions Market value vs current use value approach (more later) Benchmarks reflective of sites that are likely to come forward Extent of buffer and its adequacy Assumptions re on-going S106 after CIL adoption Realism of sales values and build costs Phasing of CIL Effect of CIL on strategic sites/opportunity areas Zones – are boundaries in the right place Adequacy of evidence – sufficient number of appraisals

26 Post examination Examination not closed until Examiners report issued Opportunity post-hearing for additional evidence CAs cannot pre-empt discussions at hearing Islington: new issues raised on hotel appraisals requiring re-model Lambeth: new evidence on yields became available Tandridge: critique of small sites – developers invited to evidence Examiner can hold further hearings if necessary

27 Issues at Examination – affordable housing Affordable housing – ‘compliance’ with policy Conflicting approaches adopted by examiners ‘Mid-Devon’ approach vs London approach Newham Examination: Examiner accepted LBN not achieving 35% Acceptable to base viability on a lower proportion of AH Waltham Forest Examination: 20% not viable at current time – cost of 20% to 50% - £7m Cost of proposed CIL - £0.5m Setting a nil CIL would not enable schemes to deliver 50%

28 Issues at Examination How much weight to place on non-viable appraisals What is a strategic site for CIL purposes Lambeth – no site providing more than c.5% of supply is strategic Representors – any site of scale is ‘strategic’ ‘Market sense testing’ of benchmarks Student housing – ‘nomination’ vs ‘private schemes’ Examiners uncritically accepting developers’ word

Mayoral CIL adopted in April 2012 LAs required to have regard to Mayor’s CIL when setting rates Mayor adopted before all authorities except Redbridge (Jan 12) What happens when Mayor wants to review his CIL? Extent to which Crossrail S106 to be taken into account is unclear Crossrail S106 is an indicative charge, subject to viability LBTH has challenged Crossrail S106 taking priority over own CIL LBTH proposed ‘sharing’ of available pot with TfL TfL has challenged entire charging schedule to avoid precedent 29 Relationship between boroughs and Mayor of London

“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.” [emphasis added] * First assumption is that scheme complies with existing planning policy 30 Why is ‘market value’ inappropriate for CIL rate setting?

31 Why is ‘market value’ inappropriate for CIL rate setting? 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!

32 Why is ‘market value’ inappropriate for CIL rate setting? 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 & 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

33 Why is ‘market value’ inappropriate for CIL rate setting?

34 Why is ‘market value’ inappropriate for CIL rate setting? MV

Keep it in proportion 6 35

CIL does not account for significant % of total costs Typically less than 3% of total costs Lower % when existing floorspace deducted Largely replaces existing S106 ‘ask’ S106 limited by Regulation 122 to: Necessary to make development acceptable in planning terms Directly related to the development Fairly and reasonably related in scale and kind to the development 36 Keep it in proportion

Can schemes be so ‘on a knife-edge’ for CIL to tip the balance? In vast majority of cases, no CIL can be absorbed through modest reduction in land value Alternatively CIL can be offset by small reduction in Aff Hsg Other policy requirements can vary Instalments policies can help mitigate the impact Ultimately, exceptional relief can be made available Despite the fuss, other appraisal factors far more important 37 Keep it in proportion

38 CIL in the wider context of development economics 38 Risk Margin Grant funding Affordable Rent Mayoral CIL £35 Borough CIL £150

Tariff approach - NEVOA Tariff of £40,000 per unit Timetabled increase in 2016 Money ring-fenced for NLE All units pay tariff Ability to negotiate but rarely applied 39 Presentation Footer Text CIL Tariff converted to CIL £265 per sqm Degree of uncertainty Existing floorspace Exceptional relief Discretionary relief Receipts could be lower No ring-fencing No ability to increase in NEV Whole CS review required But – there are practical issues to overcome

Key messages 7 40

Focus on what matters to the delivery of the Plan Remember there is room for pragmatism Inability to flex in response to market cycles is an issue Process of establishing and adopting rates can be a minefield The test under the regulations in now more onerous BUT CIL accounts for only a small proportion of costs Relatively insignificant in major projects Other policy objectives have more influence (and can flex) 41 Key messages

Questions? 8 42

Anthony Lee Viability and the CIL charging schedule