The Viability Assessment (including the Assessment of Threshold Land Value)

Having considered what the funding is needed for, the next area of practice is how to assess how much money may be available, and again this is an area of guidance that has changed significantly over the period. The initial proposals for the PGS didn’t really need to look at the effect of the tax or levy on the viability and by extension the deliverability of development. Although it is acknowledged that the PGS proposals did state that care must be taken not to set the tax too high so as stop development coming forward.

“The property industry, including both commercial developers and house builders, has been working over the last ten weeks to prepare a response to the invitation contained in the Housing Green Paper to consider a number of alternative approaches to a Planning-gain Supplement (PGS).

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Our alternative is a tariff based system with the tariff set at the local level according to planned infrastructure needs and levied on all but the most minor development. Payment would be made directly by the developer to the local authority and there would be provision for essential site mitigation needs to be met under a simplified Section 106 arrangement. We set out, in the attached paper, more details on how we believe this system would work.

We have also sought the views of local authorities, both individually and through their representative bodies, and have been re-assured to find that all those we have contacted also favour a tariff-based approach in preference to PGS.

The property industry has accepted the Government’s wish to have a more comprehensive approach to contributing to infrastructure than is provided for by the variably applied Section 106 process. Moreover, there is a growing body of real evidence that tariffs can be implemented effectively by local authorities in a way that does not discourage development.” (Home Builders Federation et al., 2007)

The change to CIL required a major change in approach with the levy linked to a local authority area and determined within that local context, with even the option for a local authority not to introduce CIL.

The switch from PGS to CIL was at least partially instigated by consultation with the development industry who had strongly opposed the PGS. But who also considered the CIL a better approach in principle at least, although again concern about the method of assessment was an important detail to be resolved satisfactorily.

“There has to date been a consensus among stakeholders in favour of CIL.

The Confederation of British Industry identified the benefit of “greater certainty for businesses” offered by the CIL,15 while in its briefing to MPs in advance of the Commons Report stage of the Bill, the British Property Federation (BPF) highlighted “the property industry’s continued support for the Community Infrastructure Levy (CIL).” The BPF went on to say that “significant progress has been made with the practical detail. CIL remains the most sensible approach towards obtaining a contribution from developers to support the

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infrastructure requirements which are a consequence of new development.”

(DCLG, 2008b p23)

The value capture concept and idea is always inextricably involved with the issues about how the tax or levy is calculated, and the important challenges around that issue and as flagged up by the Barker report. The initial proposals were to assess land value increases due to the grant of planning consent, based on land registry data, this is very different from the assessment of land values from a residual valuation approach, advocated by CIL as considered later. In fact the challenge of finding a satisfactory method of calculation for PGS may in itself have been a factor in its abandonment as well as the opposition and criticisms.

“The Planning-gain Supplement (PGS) remains the Government’s preferred option for securing more of the benefits conferred by the planning system to support housing growth. However, before legislating, the Government wants to be sure this is the best option.” (CLG, 2007a p44)

In paragraph 34 on page 55, four alternatives were set out for consideration, and the Government were clearly prepared to changes PGS (CLG, 2007a).

“Hold discussions prior to the Pre-Budget Report with key stakeholders to discuss possible changes to the design of PGS, particularly focusing on the proposed scale back of section 106 and on whether the alternatives they have proposed might be better.” (CLG, 2007a p56)

The CIL as a policy however placed the assessment of viability at the heart of its assessment

“It is for charging authorities to decide how to present appropriate evidence on how they have struck an appropriate balance between the desirability of funding infrastructure from CIL and the potential effects of the imposition of CIL on the economic viability of development across their area.” (DCLG, 2010c p8)

The methodology to assess economic viability has been an area about which the national policy has been rather unspecific, even though initially a standard

methodology was considered

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“John Calcutt’s recent report to the Government on housing delivery recommended that the Government should work with the Homes and Communities Agency, the development industry and local government to develop or adopt a standard methodology to assist local planning authorities in assessing what level of developer contribution is viable for any particular development. Several methodologies or ‘tool kits’ already exist to help inform decision-making on the level of developer contributions where viability is an issue and, as Box 3.3 shows, some local authorities are commissioning

detailed analyses to assist viability judgements at the plan level rather than on individual sites. The Government is considering what further support and guidance could be given to assist charging authorities to make plan-level viability assessments, and chapter 6 considers further the skills issues that this requirement may raise.” (DCLG, 2008b p52)

Whilst this led to the HCA area-wide model in 2011 (HCA, 2011), in fact no

methodology has been advocated, leaving this to the local authority to decide upon, with which to defend its decisions.

“There are a number of valuation models and methodologies available to charging authorities to help them in preparing evidence on the potential effects of the levy on the economic viability of development across their area. There is no requirement to use one of these models, but charging authorities may find it helpful in defending their levy rates to use one of them.” (DCLG, 2013a p8) This position on the economic viability section has remained relatively unchanged throughout the guidance from 2010 to 2014, “the appropriate available evidence” to be included, the economic viability to be included in a separate document, the history of s106 contributions and whether affordable housing targets have been met, are also to be included as evidence. Some additional sections were added in February 2014 reflecting the increase in the prescription of what is required and reduced flexibility for local authorities, there has been an increased emphasis on using evidence to support the viability assessment over time.

“A charging authority must use ‘appropriate available evidence’ (as defined in the Planning Act 2008 section 211(7A)) to inform their draft charging schedule.

The Government recognises that the available data is unlikely to be fully

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comprehensive. Charging authorities need to demonstrate that their proposed levy rate or rates are informed by ‘appropriate available’ evidence and

consistent with that evidence across their area as a whole.” (DCLG, 2014a p 16)

The impact on the viability assessment process has therefore been influenced by other guidance issued over the period, the HCA guidance in 2011, the Harman guidance in June 2012 and the RICS guidance in August 2012. As discussed earlier in chapter 2, this has not always been helpful nor consistent with conflicts between the guidance.

There are two main areas of practice to be influenced by this guidance, the assessment of the TLV (which is the assessment of the land value at which a landowner will sell land for development) and the Economic or Area Wide Viability Assessment (which attempts at a high level to model the residual land values for different uses and locations across a local authority area).

The assessment of the threshold land value is an area of much conflict in the guidance and potential impact on practice. The main areas are about how to

measure the uplift above existing use value to incentivise the landowner to sell land, and secondly how evidence is used in any assessment and finally using the

proportion of the estimated value of the completed development as check.

The calculation of the uplift is a challenging area and the simplest approach is one of the existing use value plus a premium, usually a percentage decided by the valuer.

This is included in the HCA guidance as well as the in the Harman Guidance. It is problematic for several reasons set out by (Wyatt and McAllister, 2013) the lack of any empirical basis to support the incentive premium, it is not linked in any way to the final end use value of the development, it doesn’t necessarily reflect landowners expectations based on their knowledge of other transactions and the use of a static model to incentivise landowners to sell doesn’t take account of changing market conditions over time and in any event the deal in selling land may not be based purely on price but be more complex factors.

The RICS guidance is more related to comparable evidence and adjusting it to take account of planning policy assumptions in making those adjustments. This leads to

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the second area, the use of evidence, all the sources of guidance talk about evidence, even the Government guidance talks about “appropriate available

evidence”, this is one of the problems, the lack of land value evidence. The Harman and HCA guidance also advocate the use of comparable evidence, the differences are in respect of what is relevant evidence, in terms of local markets, but perhaps more crucially in how that comparable evidence is adjusted.

The third issue is included in the Harman guidance and is a useful double check or sense check on the other calculations. The Harman guidance suggests that the time horizons of landowners should be considered, plus the structure of landownership in an area, the nature of the location as rural or urban, the differing levels of “hope value” in an area over existing use value and the Development or Local Plan allocations. The RICS guidance suggest a wider view of market value rather than just local market evidence and that market evidence based on Development Plan policies that have now changed should be disregarded or adjusted. The site value should reflect emerging policy proposals that may affect market values, including the CIL policy itself. This last point is the main area of significant difference between Harman and the RICS guidance.

What is clear is that this impacts on practice and in turn on the CIL viability

assessments, it also implicitly requires local authorities to have an understanding of the structure of landownership in their area as well as some understanding of

landowners decision-making as well as sources of evidence. The practice of trying to assess the uplift in land value resulting from the grant of planning consent advocated in the original Barker proposals is still in some ways present, but it has been changed round to say what uplift does the landowners need to sell rather than, the landowner will gain an uplift in value some of that should be shared by the public sector and community who have generated value.

The other element of the assessment is the area wide appraisal to determine a range of residual land values across the local authority area to show differing viability in different locations and for differing uses, this is vital to support differential CIL rates, to comply with EU State Aid regulations.

“However, charging authorities should be mindful that it is likely to be harder to ensure that more complex patterns of differential rates are State aid compliant,

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so for example, charging authorities need to be consistent in the way that appropriate available evidence on economic viability informs the treatment of a category of development in different zones.” (DCLG, 2012a)

The CIL guidance (DCLG, 2014a) has become more prescriptive over time about the selection of hypothetical sites and the process required prior to CIL examination.

The residual valuation process again is a standard valuation approach of subtracting development costs from development values to produce a residual site value. The assumptions made about the development costs have been influenced by the Examiners Reports as they are released, they are also influenced by what are seen as industry standards such as developers profit should be 20% of Gross

development value, which has been established as a standard. This reflects the change in guidance to include a “competitive returns to a wiling landowner and willing developer to enable the development to be deliverable” as stated in paragraph 173 in the NPPG in March 2014.

“Pursuing sustainable development requires careful attention to viability and costs in plan-making and decision-taking. 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, standards, infrastructure contributions or other

requirements should, when taking account of 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.” (Para 173 DCLG, 2014b)

The building cost assumptions are also based on certain standards and the BCIS are a major source of evidence, but then so is the development industry in a local area and hence the importance of consultation and engagement as discussed later. The market value assessment is based on market values in a local area and these may or may not be easy to obtain, they often require adjustment, and again they may be supplied by developers in a local area.

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The changes in the guidance as relating to practice in this area have been more about the detail of specific assumptions rather than the general approach, as the residual method of valuation is long established. The biggest impact on practice is whether the residual method of valuation which traditionally has been applied to a specific site to ascertain its value, usually for a specific client for their specific proposals, can be satisfactorily adapted to work effectively over an area wide basis across a local authority area.

The use of hypothetical sites with hypothetical assumptions is the approach proposed (DCLG, 2014a) and sometimes this is supplemented by the evidence of residual valuations of specific sites in the Local Plan or SHLAA to assess their viability for development, but again these are at least partially based on hypothetical assumptions. Even the use of actual site based viability appraisals from actual s106 negotiations whilst useful, as these have been undertaken prior to development starting on site, still don’t always reflect the real development position.

The challenge of trying to map across a local authority area the zones of different value for different property sectors is challenging as to how boundaries are drawn and values derived from available evidence, clearly an area of conflict between actors. Added to this is the assessment of cost variations across individual sites for different forms of development proposals, these are in reality very site specific, but for the area-wide viability assessment need to be averaged out based on generalised assumptions as to costs, this is clearly also an area for conflict between actors in the process.

The Comparison between the TLV and the residual valuations in each zone across the area wide appraisal determines the available headroom for charging CIL in that area and will inform the setting the rate practice which is now considered.

5.6.3 The Setting of the Rate (Striking the Balance and Cumulative Policy