Session 1: An Introduction to viability (including definitions and terminology)

Shifting Sands?

What is viability?

An individual development can be said to be viable if, after taking account of all costs, including central and local government policy and regulatory costs and the costs and availability of development finance, the scheme provides a competitive return to the developer to ensure that development takes place and generates a land value sufficient to persuade a land owner to sell the land for the development proposed. If these conditions are not met, a scheme will not be delivered.

Local Housing Delivery Group. Viability Testing in Local Plans – Advice for planning practitioners. (LGA/HBF – Sir John Harman) June 2012

What is viability?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. (Where viability is being used to test and inform planning policy it will be necessary to substitute “a development project” into the wider context)

Financial viability in planning RICS guidance note

1st edition (GN 94/2012) August 2012

When is viability evidence required?Plan-making

– Strategic Housing Land Availability Assessment – Affordable housing viability assessment– Whole local plan testing– Community Infrastructure Levy

Development Management– Site specific viability testing for planning

applications– Masterplan/major application viability testing,

incorporating phasing etc.

Economic viability of a scheme

Source: ‘Financial Viability in Planning’, RICS

Economics of development

Source: RICS Financial Viability in Planning

Economic viability of a local plan

Regulatory Requirements – why is viability important?

• NPPF 173 / 174 - the cumulative impact of the council’s ‘wish list’ (CIL/s106, CfSH etc.)

• NPPF 178 – 181 duty to cooperate, work collaboratively, a continuous process

• CIL Regulation 14 The effect of CIL on viability• SHLAA Are the sites deliverable, 5 year supply• S106 / Individual, site specific In relation to

planning applications, enabling development

Context: Blyth Valley

Lord Justice Keene - Conclusion:• [the inspector] failed to reflect the requirement of

PPS3 as to the need for an informed economic viability study as part of the process leading to a policy requiring a particular percentage of affordable housing…His approach was also vitiated by his perhaps understandable but erroneous application of a presumption of soundness, and his finding that there was no evidence that sites would not come forward if a 30 per cent requirement were imposed is incomprehensible.

Why produce viability evidence?NPPF says:‘Evidence supporting the assessment should be proportionate, using only appropriate available evidence’.

The CIL guidance saysA 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 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 (NPPG ID: 25-019-20140612).

PPG guidance on viability evidence• Evidence should be

proportionate…assessment of samples of sites may be helpful to support evidence and more detailed assessment may be necessary for particular areas or key sites on which the delivery of the plan relies

• It should reflect the range of different development, both residential and commercial, likely to come forward in an area and needed to deliver the vision of the plan.

Context: CIL• NPPF recommends plans are drawn up alongside

CIL charging schedules "where practical" • Avoids repetition and helps prioritise policies • A balance between securing additional investment

for infrastructure and the potential economic effect of imposing CIL upon development across their area

• It is for charging authorities to decide on the appropriate balance and ‘how much’ potential development they are willing to put at risk through the imposition of CIL

• Show how CIL will facilitate development

OLD (March 2010) CIL Guidance

10. The examiner should not use the CIL examination to question a charging authority’s choice in terms of 'the appropriate balance', unless the evidence available to the examination shows that the proposed rate (or rates) will put the overall development of the area at serious risk. The examiner should be ready to modify or reject the draft charging schedule if it puts at serious risk the overall development of the area.

Revised (Dec 2012 & April 2013) CIL Guidance

9. The independent examiner should establish: • the proposed rate or rates are informed by and

consistent with, the evidence on economic viability across the charging authority's area; and

• evidence has been provided that shows the proposed rate (or rates) would not threaten delivery of the relevant Plan as a whole.

10. The examiner should be ready to recommend modification or rejection of the draft charging schedule if it threatens delivery of the relevant Plan as a whole.

PPG CIL Guidance• The levy is expected to have a positive economic effect

on development across a local plan area. When deciding the levy rates, an appropriate balance must be struck between additional investment to support development and the potential effect on the viability of developments.

• This balance is at the centre of the charge-setting process. In meeting the regulatory requirements (see Regulation 14(1)), charging authorities should be able to show and explain how their proposed levy rate (or rates) will contribute towards the implementation of their relevant plan and support development across their area.

(ID: 25-009-20140612)

So what?

Put the overall development of the area at serious risk

would not threaten delivery of the relevant Plan

as a whole

should not be subject to such a scale of

obligations and policy burdens that their ability to be developed viably is threatened

NPPF 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, 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.”

NPPF 174“Local planning authorities…should assess the likely cumulative impacts on development in their area of all existing and proposed local standards, supplementary planning documents and policies that support the development plan, when added to nationally required standards. In order to be appropriate, the cumulative impact of these standards and policies should not put implementation of the plan at serious risk, and should facilitate development throughout the economic cycle. Evidence supporting the assessment should be proportionate, using only appropriate available evidence.”

Wish list of discretionary policies

+

+

+

=Cumulative impact of policies

Open space/SUDs

Space/design standards

Afford

able Housing

Energy &

Renewables

Examination – NPPF 182The inspector will examine if plan is in accordance with the Duty to Cooperate, legal requirements, and whether it is “sound”:• Positively prepared – the plan should be prepared

based on a strategy which seeks to meet objectively assessed requirements

• Justified • Effective – the plan should be deliverable over its

period and based on effective joint working on cross-boundary strategic priorities

• Consistent with national policy

Non – Statutory Guidance

• Viability Testing in Local Plans – Advice for planning practitioners (June 2012). LHDG – Sir John Harman

• Financial Viability in Planning (August 2012). RICS• HCA good practice manual ‘Investment and Planning

Obligations: Responding to the Downturn’ (2009)• Research by Chris Hill of Turner Morum on behalf of

CLG entitled ‘Cumulative impacts of regulations on house builders and landowners’ (2011)

• PAS Viability Handbook

Read the Guidance!

S106 guidance (April 2013)• The G&I Act introduced a new application and appeal

procedure for the review of planning obligations on planning permissions which relate to the provision of affordable housing.

• Does not replace existing powers to renegotiate Section 106 agreements on a voluntary basis.

• New procedure will assess the viability of affordable housing requirements only. It will not reopen any other planning policy considerations.

• Sites granted in accordance with a Rural Exceptions Site policy are exempt from this procedure.

S106 guidance (April 2013)• S106BA – application can be made to LPA with viability

evidence. LPA can produce their own viability evidence or provide commentary on applicants evidence.

• S106BC – where there is disagreement or LPA does not determine the application an applicant can appeal to the SoS. LPA can submit own evidence.

• Evidence – must show that affordable housing obligation as currently agreed makes the scheme unviable in current market conditions.

• Form of evidence – prepared in same form using methodology as close as reasonably possible to previous evidence

• Delivery – valid for 3 years to incentivise delivery• Annex A/B – Summary of key variables/Procedural note

Statutory Guidance

PPG: What does the NPPF expect on viability?

Understanding Local Plan viability is critical to the overall assessment of deliverability. Local Plans should present visions for an area in the context of an understanding of local economic conditions and market realities. This should not undermine ambition for high quality design and wider social and environmental benefit but such ambition should be tested against the realistic likelihood of delivery.

PPG: Principles for understanding viability• Evidence based judgement: assessing viability requires a

realistic understanding of the costs and the value of development in the local area and an understanding of the operation of the market (including past performance on build rates and planning obligations).

• Collaboration: a collaborative approach involving the business community, developers and landowners will improve knowledge of what is deliverable…Transparency of evidence is encouraged wherever possible.

• A consistent approach: where possible plan for infrastructure and prepare development policies in parallel.  Authorities should seek to align the preparation of their CIL and Local Plans as far as practical.

PPG: Plan-making and viability

Local Plans and neighbourhood plans should be based on a clear and deliverable vision of the area. Viability assessment should be considered as a tool that can assist with the development of plans and plan policies. It should not compromise the quality of development but should ensure that the Local Plan vision and policies are realistic and provide high level assurance that plan policies are viable.

PPG: land availability assessment

• Assessing the suitability, availability and achievability of sites including whether the site is economically viable will provide the information on which the judgement can be made in the plan-making context as to whether a site can be considered deliverable over the plan period.

• A site is considered achievable for development where there is a reasonable prospect that the particular type of development will be developed on the site at a particular point in time. This is essentially a judgement about the economic viability of a site

PPG: Decision-taking and viability

• This should be informed by the particular circumstances of the site in question. Assessing the viability of a particular site requires more detailed analysis than at plan level.

• A site is viable if the value generated by its development exceeds the costs of developing it and also provides sufficient incentive for the land to come forward and the development to be undertaken.

PPG: changes in values• Viability assessment in decision-taking

should be based on current costs and values. Planning applications should be considered in today’s circumstances.

• Where a scheme requires phased delivery over the longer term, changes in the value of development and changes in costs of delivery may be considered. Forecasts, based on relevant market data, should be agreed between the applicant and local planning authority wherever possible.

PPG: different development types

• Viability of individual development types, commercial and residential, should be considered. Relevant factors will vary from one land use type to another.

• For residential schemes, viability will vary with housing type e.g. large scale private rented sector housing that is built for long-term institutional or RSPs, viability considerations in decision-taking should take account of the economics of such schemes, which will differ from build for sale. This may require a different approach to planning obligations or an adjustment of policy requirements.

PPG: planning obligations• LPAs will need to understand the impact of

planning obligations and should be flexible…Affordable housing contributions are often the largest single item sought on housing developments. These contributions should not be sought without regard to individual scheme viability.

• Assessing viability should lead to an understanding of the scale of planning obligations…where safeguards are necessary to make a particular development acceptable, and these safeguards cannot be secured, planning permission should not be granted.

PPG: total need for affordable housing?The total affordable housing need should then be considered in the context of its likely delivery as a proportion of mixed market and affordable housing developments, given the probable percentage of affordable housing to be delivered by market housing led developments. An increase in the total housing figures included in the local plan should be considered where it could help deliver the required number of affordable homes.

PPG: Land Value 

Central to the consideration of viability is the assessment of land or site value. Land value should:• reflect emerging policy requirements and planning

obligations and, where applicable, any CIL charge;• provide a competitive return to willing developers

and land owners; and• be informed by comparable, market-based evidence

wherever possible. Where transacted bids are significantly above the market norm, they should not be used as part of this exercise.

PPG: Competitive return to developers and land owners• This return will vary significantly between projects to reflect

the size and risk profile of the development and the risks to the project. A rigid approach to assumed profit levels should be avoided and comparable schemes or data sources reflected wherever possible.

• A competitive return for the land owner is the price at which a reasonable land owner would be willing to sell their land for the development. The price will need to provide an incentive for the land owner to sell in comparison with the other options available.  Those options may include the current use value of the land or its value for a realistic alternative use that complies with planning policy.

PPG: Vacant building credit• ..where a vacant building is brought back into any lawful use, or is

demolished to be replaced by a new building, the developer should be offered a financial credit equivalent to the existing gross floorspace of relevant vacant buildings when the LPA calculates any affordable housing contribution which will be sought. Affordable housing contributions would be required for any increase in floorspace.

• Where there is an overall increase in floorspace in the proposed development, the local planning authority should calculate the amount of affordable housing contributions required from the development as set out in their Local Plan.

• A ‘credit’ should then be applied which is the equivalent of the gross floorspace of any relevant vacant buildings being brought back into use or demolished as part of the scheme and deducted from the overall affordable housing contribution calculation.

• The vacant building credit applies where the building has not been abandoned.

Planning Appeals

Barnet: APP/Q5300/A/07/2043798/NWF

Bristol: APP/P0119/A/08/2069226

Beckenham: APP/G5180/A/08/2084559

Woodstock: APP/D3125/A/09/2104658

Shinfield: APP/X0360/A/12/2179141

Oxenholme: APP/M0933/ A/13/ 2193338

We shall discuss these in detail later!

The Residual Valuation based approachStep 1:

Gross Development Value(The combined value of the complete development)

LESS

Cost of creating the asset, including a profit margin

(Construction + fees + finance charges + Developer’s Profit, CIL, s106, CfSH etc.)

 =

RESIDUAL VALUE 

Step 2:

Residual Value v Existing Use Value

Gross Development ValueAll income from a Scheme

Construction Site Remediation

AbnormalsEtc.

FeesDesign

EngineerSalesEtc.

ProfitDevelopers

Builders

LandExisting /

Alternative Use Value+ premium

(TLV/EUV+)

Policies/CILCIL, affordable housing, CfSH,

open space etc.

The big question• For a site to be viable, by how much must the

Residual Value exceed the EUV?• The ‘cushion’? • What does ‘competitive return’ mean?

You must understand the model, be able to interrogate the assumptions, be able to follow the calculation and challenge the ‘test'. The ‘cushion’ is central to developer behaviour. The Residual Method is very sensitive to inputs and assumptions.