Viability

Background

The viability of a development scheme has been given greater emphasis in recent years with such pressures as the unstable housing market, increasing levels of planning obligations and land decontamination having a significant impact on what a development can afford in terms of section 106 agreements.

The planning obligation Circular 05/2005 acknowledges that it 'may not be feasible for the proposed development to meet all the requirements set out in local regional and national planning policies and still be economically viable' (para B10). In such cases it is for the local planning authority to decide which obligations are more essential, given local pressures, and determine the application based on what the scheme can contribute towards in terms of community infrastructure. If the local authority wishes to encourage development it may decide to provide infrastructure itself, with the level of contributions based on negotiation that can be demonstrated as reasonable to be made.

Policy HG/3 Affordable Housing of the Development Control Policies DPD states that 'Within individual developments, the proportion and type of affordable housing will be the subject of negotiation with applicants. Account will be taken of any particular costs associated with the development (e.g. site remediation, infrastructure provision) and other viability considerations, whether there are other planning objectives which need to be given priority, and the need to ensure balanced and sustainable communities'.

Policy DP/3 Development Criteria states 'All development proposals should provide, as appropriate to the nature, scale and economic viability financial contributions towards the provision and, where appropriate, the maintenance of infrastructure, services and facilities required by the development in accordance with Policy DP/4'.

Applicant's responsibilities

An open book economic appraisal of the costs of development and of the returns will be necessary to demonstrate the level of planning obligations that can be generated from the development. It is assumed that unless this information is provided that full and appropriate levels of planning obligations, including affordable housing shall be delivered. It is the duty of the applicant to demonstrate otherwise.

In order for viability appraisals to be produced, applicants need to understand the level of expected planning obligations to make the development acceptable in planning terms. This can be done through pre-application discussions, reading the adopted policies or contacting the Council's relevant officers. This should conclude with a heads of terms drafted and submitted along with the application.

Should there be any concern regarding the viability of a scheme, independent appraisals will be necessary to confirm the level of obligations that can be offered. Although independent experts or mediators may be required to progress negotiations, the responsibility for the final determination of the application remains with the local planning authority.

The methodology, underlying assumptions and any software used to undertake this appraisal should be agreed with the Council, with the normal approach being the methodology endorsed by the Homes and Communities Agency, the economic appraisal tool prepared by GVA Grimley and Bespoke Property Group.

HCA economic appraisal tool

HCA economic appraisal tool user manual

Appraisals should be presented on a residual land value basis and include a reasonable profit margin, valuation on current (or last) use and details of any abnormal development costs associated with the site. The appraisal should not include purchase price or hope value.

The District Council does accept the use of alternative appraisal tools as long as they comply with the HCA good practice note 'responding to the downturn'.

HCA Investment and planning good practice note (This link will open in a new window)

An alternative appraisal tool may include the development appraisal tool as published by the Homes and Communities Agency to cover the investment programme from 2011-15.

HCA development appraisal tool (This link will open in a new window)

A summary of the viability appraisal inputs has been provided to assist in the process, and should be used in conjunction with the financial model.

Schedule of appraisal inputs

Should viability issues affecting the delivery of affordable housing units be evident from preliminary work, it is beneficial for the applicant to provide 2 appraisals one assuming affordable housing delivery grant will be secured on the scheme and the second assuming no grant will be secured.

Where the Council needs independent advice to validate a viability appraisal, that seeks to justify a variation on the 40% or more affordable housing provision, reasonable costs will be met by the developer/applicant. Such costs may be factored into the viability appraisal itself.

Where the Council is satisfied that financial viability of a development would be jeopardised by full provision of the affordable housing target, and taking into account any other planning obligations, it will first negotiate over varying the preferred mix and tenure of dwellings with a view to establishing whether this would enable the 40% target to be met, and if this cannot be achieved in a way that addresses needs in an acceptable way, the Council will then negotiate over varying the percentage of affordable housing being sought.

South Cambridgeshire District Council may refuse to register a planning application where an insufficient viability study has been submitted, as the necessary section 106 negotiation may result in the application not being determined within the necessary timescales.

Supporting evidence

Whilst an economic appraisal tool may be submitted to the Council, it should be accompanied by additional information to substantiate the assumptions within the model. Such evidence that will be required as a minimum are:

Confirmation from at least 3 registered providers as to likely affordable housing offers
Direct quotes from at least 3 financial providers (not brokers) as to the borrowing fees
Full details of any site abnormals
Detailed assessment of sales revenues of market activity from previous 12 months (including based on a per square metre basis)
Full details of any existing use value

For larger schemes the local planning authority may also require copies of the development board report to support the viability appraisal.

Consultation

The local planning authority will consult with external bodies on the heads of terms, as a material planning consideration. Site negotiation will take place with all stakeholders, taking into account local circumstance and most urgent need.

Discussions will conclude with the production of several alternative heads of terms, forming the principle of the section 106 agreement.

Determination

Schemes experiencing such viability constraints that the full level of necessary planning obligations cannot be met should be determined by planning committee.

The Planning committee will be asked to consider the viability appraisal and the alternative 'packages'. Should Committee be minded to approve the scheme, it is asked to give weight to the most appropriate obligations and opt for the most appropriate heads of terms provided with the committee report.

Section 106 agreement

The affordable housing SPD outlines the adopted approach to take for major developments with a long build out period. 'If an initial percentage of less than 40% is agreed, the S106 Agreement will include provisions for a review mechanism such that if the development is not completed within 3 years of the date of the planning permission, a further consideration of viability will be carried out at that stage (and every 3 years thereafter) for the purposes of determining whether the percentage of affordable housing should increase for the balance of the development still to be completed and any revision should not be limited to 40% but may increase to cover a shortfall of less than 40% on an earlier part of the development'.

Smaller developments will use the mechanism of commuted sums in lieu of on-site provision, should the development not be able to satisfy affordable housing policy. In this scenario section 106 agreements will be drafted to take account of any upturn in market value, with a proportion of the increased value (usually no less than 50%) being provided as a commuted sum contribution to the District Council.

In order to calculate the uptake in sales value regular monitoring will be necessary with information being supplied to the District Council at agreed intervals. The off-site sum will be capped to ensure the applicant only provides for the level of affordable housing that would have been necessary as on-site provision and does not constitute the District Council as applying a betterment levy to development.