There is a limited range of guidance available specifically to assist with the viability assessment, as there is no specific methodology or approach advocated by
Government to undertake this work. They also set out differing approaches that may be taken, as will be discussed below. This is a challenge to local authority planners, seeking to improve their knowledge in this area, yet at the same time need to make the appropriate decision. Before the different types of guidance are discussed and compared, it is worthwhile briefly setting out the general nature of the viability assessment that needs to be carried out both for the CIL rate setting but which also relates to the Viability Testing of Development Plans.
The Viability Assessment undertakes an area wide appraisal of the economic viability of development across a whole local authority area and across various land uses it includes two elements the area-wide assessment and the assessment of threshold land value.
2.8.1 Area-wide Appraisal
The area wide appraisal employs the residual valuation approach, commonly used on a site specific basis to appraise specific development projects by developers to decide what land value they can afford to pay for the land purchase. The residual land value is calculated by deciding the Gross Development Value of a completed development, this end use value usually being based on comparable evidence of values established for a particular type of property in a specific location. From this valuation of the completed development is taken the costs of carrying out the proposed development, which includes the building costs, the finance costs, professional fees and marketing costs and an amount for developers profit for
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carrying out the project and the risk involved. The residual figure, is the amount left for the developer to be able to buy the land from the landowner.
In some respects land values are derived from the value of completed development, based on the assumption that the demand for land is derived from demand for property. However, the delay in supply coming forward due to the timescale of the development process means this is also not that efficient. In addition, the price of land is not always that transparent depending on the nature of the transaction agreed between the parties and the competition between developers for the land.
The residual valuation of a specific site for a specific proposed development is relatively straightforward, however when applied on an area wide basis this is more problematic. Firstly, a decision has to be made as to the geographical variation in values across the area for completed developments. Then assuming the same development costs for all the developments, a derived pattern of land values can be produced. Secondly, this has to be varied again by differing uses, so that a
geographical spread of residual land values can be produced for various different uses across the area. This is usually done by selecting a range of typical
hypothetical sites with hypothetical schemes to attempt to model the area in valuation terms. Which leads on to the third and final problem, that the costs of development of sites vary with their location, they are not all the same for a variety of reasons, not just ground conditions or physical issues but perhaps other issues, this may mean that by taking an average some sites will make more profit than the hypothetical appraisals show and others will appraise at less and will not proceed to be developed.
2.8.2 Assessment of Threshold Land Value
The second part of the viability assessment involves the assessment of the threshold land value (TLV), which is defined as “the value at which a typically willing landowner is likely to release land for development” (Local Housing Delivery Group, 2012). This assessment of the TLV is particularly challenging and several approaches to this have been advocated in the different guidance as discussed more fully below, if market evidence is available this is helpful, but it is vital to be aware of the full details, of the transactions in the evidence.
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Frequently evidence of land transactions is not available and then evidence of non-development land values have to be used, with some form of uplift assumed as an incentive to the land owner to sell at above the current or existing use value. Much of the assessment of TLV also reflects the land ownership patterns of an area, the differing expectations of different land owners and the relationships between actors in locations all of which impact on land values in the area
2.8.3 Calculation of Headroom
The overall viability assessment then involves making a comparison between the area wide residual land values and the threshold land value, see figure 2.1.
Figure 2.1 Viability assessment diagram from Harman Report (Local Housing Delivery Group, 2012 p25)
Essentially the task is to calculate the economic rent on the land and how it could be divided up between the parties. The uplift in land value over the current or existing land use value which is created by the right to develop granted by planning
permission is the starting point. This has to be divided between the landowner, developer and the community or public sector. The two calculations one of the
derived residual land value from end use property values shows the land value taking into account the developers return as profit as this is included in the residual
valuation. The threshold land value is an assessment of what uplift above current or existing use land value a landowner needs to be persuaded to sell their land. If there is a gap between the two land values, this is the headroom available for the
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community or public sector to take as it is the economic rent in total. How this economic rent is shared is the result of the CIL decision making process and the subject of this research.
A key challenge here is that not only are there a lot of variables involved all of which can be contested, there is also the question of using market evidence which is by its nature historical, to inform assessments about the judgements and behaviours of actors who are looking forward into the future. It has also been suggested the use of the appraisal to make an assessment as to the level of the policy burden (i.e. levels of affordable housing, s106 and CIL) that can be supported by development projects and land values in which judgements are being made about these levels introduces the issue of circular arguments which is not adequately addressed by the current guidance (Crosby et al., 2013).