Posted on March 07, 2013

One of the challenges in establishing the economic viability of CIL is how one arrives at the land value to input into the appraisal model.  The National Planning Policy Framework (NPPF) defines viability, but there is no statutory formula or guidance for establishing the land value assumption to determine viability.

Various bodies have published professional guidance and reports to facilitate this process including the Homes and Communities Agency (HCA), the Local Housing Delivery Group (Harman Report) and the RICS, but some of this is ambiguous and contradictory.   Valuation concepts and terminology is familiar territory to Chartered Surveyors (and especially Registered Valuers), but for others it can be confusing and open to misinterpretation.

This blog distils the best practice from the guidance and a sample of 16 emerging CIL Economic Viability Appraisals from across the country.

Paragraph 173 of the NPPF (March 2012) refers to viability and deliverability.  It states,

“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.” (our emphasis)

The significance of viability in planning policy has been increasing since the credit crunch.  The HCA were one of the first agency’s to recognise this and in July 2009, they published a good practice guidance manual, ‘Investment and Planning Obligations – Responding to the Downturn’.

This defines viability as follows:

“a viable development will support a residual land value at level sufficiently above the site’s existing use value (EUV) or alternative use value (AUV) to support a land acquisition price acceptable to the landowner”. (page 21)  

The HCA guidance was really targeted at development management where developers were seeking to appeal or renegotiate S106 planning obligations.  Various planning appeal decisions have referenced existing use value and provided guidance on the extent to which the residual land value should exceed existing use value to be considered viable:

– Barnet & Chase Farm: “the appropriate test is that the value generated by the scheme should exceed the value of the site in its current use. The logic is that, if the converse were the case, then sites would not come forward for development” (APP/Q5300/A/07/2043798/NWF)

– Bath Road, Bristol: “The difference between the RLV [residual land value] and the existing site value provides a basis for ascertaining the viability of contributing towards affordable housing.”  (APP/P0119/A/08/2069226)

– Beckenham: “without an affordable housing contribution, the scheme will only yield less than 12% above the existing use value, 8% below the generally accepted margin necessary to induce such development to proceed.”  (APP/G5180/A/08/2084559)

– Oxford Street, Woodstock: “The main parties’ valuations of the current existing value of the land are not dissimilar but the Appellant has sought to add a 10% premium. Though the site is owned by the Appellants it must be assumed, for valuation purposes, that the land is being acquired now. It is unreasonable to assume that an existing owner and user of the land would not require a premium over the actual value of the land to offset inconvenience and assist with relocation. The Appellants addition of the 10% premium is not unreasonable in these circumstances.” (APP/D3125/A/09/2104658)

Whilst this approach is somewhat academic, is does provide a framework for negotiation where the Council is dealing with a specific application on a specific site which has a specific existing use value.   The HCA guidance was not really designed for CIL and Local Plan viability modelling.

This existing use value + premium approach has considerable difficulties at the Development Plan and CIL policy making level where the Authority is dealing with ‘hypothetical’ sites and development typologies across the District.

In this scenario the existing use value is not known and cannot be known because the Authority does not know the particular site/scheme to which the policy is being applied in advance.

The Harman report and the RICS guidance are both useful reports and best practice in the wider area of plan making.  However, the two reports do conflict.  The Harman report advocates an existing use value (EUV) plus premium approach whereas the RICS advocates a Market Value (MV) approach less a discount to reflect the emerging planning policy requirements.  Both approaches have their challenges and limitations.

The Harman Report (June 2012)

The Harman report ‘Viability Testing Local Plans’ refers to the concept of “Threshold Land Value”.  We adopt this terminology as it is a precise description of the important value concept.

Harman states that the ‘Threshold Land Value should represent the value at which a typical willing landowner is likely to release land for development.’ (page 28) (our emphasis)

The Harman report also advocates that when considering the appropriate Threshold Land Value, consideration should be given to ‘the fact that future plan policy requirements will have an impact on land values and owners’ expectations’. (page 29)  In this context Harman is concerned that ‘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’. (page 29).

Harman does still acknowledge that reference to market values will still provide a useful “sense check” on the Threshold Land Values that are being used, however,  ‘it  is not recommend that these are used as the basis for input into a model’. (page 29)

Harman recommends that ‘the Threshold Land Value is based on a premium over current use values and ‘credible’ alternative use values’. (page 29)  However, the report accepts that ‘alternative use values are most likely to be relevant in cases where the Local Plan is reliant on sites coming forward in areas (such as town and city centres) where there is competition for land among a range of alternative uses.’ (page 29)

The Harman report does not state what the premium over existing use value should be, but states that this should be “determined locally” – but then goes on to state ‘it is important that there is evidence that it represents a sufficient premium to persuade landowners to sell’ (page 29).  This takes us back to considerations of Market Value (see RICS guidance below).

The Harman report further recognises that in certain circumstances, particularly in areas where landowners have ‘long  investment horizons’ (e.g. family trusts, The Crown, Oxbridge Colleges, Financial Institutions), ‘the premium will be higher than in those areas where key landowners are more minded to sell’ (page 30). An example of this is in relation to large urban extensions where a prospective seller is potentially making a once-in-a-lifetime decision over whether to sell an asset. In this scenario the uplift on current use value will invariably be significantly higher than those in an urban context. In reconciling such issues, Harman stresses the importance of using local market evidence as a means of providing a sense check (see our previous blog about greenfield and brownfield land).

The Harman report clearly favours an approach to benchmarking which is based on current / existing use value plus a premium.  However, this is subjective and ambiguous.  At numerous points throughout the report, Harman advocates, that the outcome of this approach will need to be “sense checked” against local market evidence. (page 29, 30, 31, 34, 36, 40)

Indeed the report does acknowledge that, ‘if resulting Threshold Land Values do not take account [local market knowledge], it should be recognised that there is an increasing risk that land will not be released and the assumptions upon which a plan is based may not be found sound.’ (page 30).

Financial Viability in Planning (RICS) (August 2012)

The RICS guidance on ‘Financial Viability in Planning’ was published after the Harman report and it is much more market facing and less academic in its approach.

The RICS guidance is grounded in the statutory and regulatory planning regime that currently operates in England and is consistent with the Localism Act 2011, the NPPF and Community Infrastructure Levy (CIL) Regulations.

Whilst the RICS guidance and that from the Local Housing Delivery Group can be seen as complimentary the RICS guidance provides more technical guidance on determining an appropriate site / benchmark value.

The RICS guidance defines financial viability for the purposes of town planning decisions as:

 “An objective financial viability test of the ability of development to meet its costs including the cost of planning obligations, whilst ensuring an appropriate site value for the landowner and a market risk adjusted return to the developer” (paragraph 2.1.1) (our emphasis)

In assessing the impact of planning obligations on the viability of the development process, the RICS guidance does not specify a prescriptive tool or financial model, albeit it does recognise that it is accepted practice to use a residual valuation model as the appraisal framework (page 16).

However, it does emphasise the ‘importance of using market evidence as the best indicator of the behaviour of willing buyers and willing sellers in the market’ (paragraph 3.1.4).

The RICS guidance warns that:

‘where planning obligation liabilities reduce the Site Value to the landowner and return to the developer below an appropriate level, land will not be released and/or development will not take place. This is recognised in the NPPF.’  (paragraph 2.1.4)

The RICS guidance also defines “site value”, whether this is an input into a scheme specific appraisal or as a [threshold land value] benchmark, as follows:

“Site value should equate to the Market Value [i.e. as defined in the RICS Red Book] subject to the following assumption: that the value has regard to development plan policies and all other material planning consideration and disregards that which is contrary to the development plan.” (Box 7) (our emphasis)

The guidance also advocates that any assessment of site value will need to consider prospective planning obligations and recommends that a second assumption be applied to the aforementioned definition of site value, when undertaking Local Plan or CIL (area wide) viability testing. This is set out below:

“Site value (as defined above) 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…..” (Box 8)

This is an acknowledgement of the need for landowners to adjust their expectations in these constrained times where there is limited public sector funding for infrastructure.  In this respect, the Inspector in the report on the examination of the London Mayoral CIL (January 2012) commented that:

Finally the price paid for development land may be reduced. As with profit levels there may be cries that this is unrealistic, but a reduction in development land value is an inherent part of the CIL concept. It may be argued that such a reduction may be all very well in the medium to long term but it is impossible in the short term because of the price already paid/agreed for development land. The difficulty with that argument is that if accepted the prospect of raising funds for infrastructure would be forever receding into the future. In any event in some instances it may be possible for contracts and options to be re-negotiated in the light of the changed circumstances arising from the imposition of CIL charges. (paragraph 32) (our emphasis)

Summary

The early practice has tended to use the existing use value plus premium approach to land value.  This is useful to help ‘triangulate’ the market value for a particular site, but the emphasis does have to be on market evidence of current Market Values if the CIL Charging Schedule and / or Local Plan is to be grounded in reality and therefore deliverable.  We therefore commend the RICS Guidance.