Developer contributions – which way next?

Stephen Ashworth and Roy Pinnock respond to the government’s recently published CIL review, and put forward their own alternative ideas for fixing a broken system The housing White Paper promises a new approach to developer contributions, to be announced in the Autumn Budget. But the government’s parallel review of the community infrastructure levy (CIL), published in February, is illustrative of a confused regime. The future for developer contributions deserves a clearer path, so planning can focus on place-making, not value capture. The history of CIL CIL had a long and difficult birth, a product of too many parents and no adequate midwife. Since 1947 the planning system has been structured both to change the value of land, and to capture, directly or indirectly, some of that change in value. Its success has waxed and waned. By the early 2000s there was a general consensus, reflected in the 2004 Barker review (Delivering Stability: Securing our Future Housing Needs), that a more systematic approach was needed. Barker suggested “planning gain supplement” (PGS), a charge on the increase in value of land associated with the grant of planning permission. In part this was a response to the increasing and ad hoc number of requests of developers for funding for infrastructure, largely being made on a site-by-site basis. Developers were also faced with a growing number of tariffs supported by supplementary planning guidance, ranging from the rigorous and sensible (such as the Milton Keynes roof charge) to the ridiculous. Central government guidance had failed to keep pace and some tariffs were being supported in appeal decisions; others not. As a response to the variability and uncertainty of tariffs, and to try to prevent the imposition of PGS, a simple form of CIL was proposed by the property industry – one that sat within the planning system, was local and discretionary and which effectively legitimised the tariff approach, provided there was appropriate public examination of the proposals. That simple idea, which mirrored the Milton Keynes approach, was then bastardised. Government made it rigid and inflexible, largely because of a concern about the ability of local planning authorities to manage such a regime. The property industry lost courage and asked for tweaks, such as the ability to set off existing floorspace and existing consents. Politicians intruded and decided that part of CIL should be given to the local community and that affordable housing, extensions and self-build houses should all be exempted. This combination of influences made the eventual regime far more complicated than it ever needed to be and grafted on misleading provisions aiming first to limit the perception that developers might be being asked to pay twice (under CIL and with continuing planning obligations) and second to prevent the continuation of tariff-type approaches. CIL oddities Careful phasing is needed to avoid large initial payments triggered by basic works Floorspace offsets require significant evidence to establish and can be easily lost due to timing of demolition or new consents Crediting CIL already paid is complex and on multi-phase sites can be a risk Social housing relief can be lost easily (including by badly timed land deals) An accountability gap results as there is only 28 days to challenge a liability notice and development starting can void review/appeal applications Basement and plant room areas may incur high-level residential charges, despite having no residential use Changes under section 96A of the Town and Country Planning Act 1990 are often treated by authorities as “invisible” to CIL The flaws The Community Infrastructure Regulations 2010 (“the Regulations”) are deeply flawed. Six sets of amendments and transitional measures have left them functional but fraught with complexity. The offsets for demolished and retained floorspace (different rules apply) create headaches. Nasty CIL surprises reflect an unholy trinity of regulatory complexity, sector apathy and poor advice. The (early) trigger for paying CIL is frequently criticised. While the scope to use phasing to ease cashflow and contain liability is underused, it also is another source of complexity. The charge-setting process is relatively quick and simple but uneven engagement has done little to hold it to account and lax assumptions have consequences for delivery. Some authorities have also been too eager to trade affordable yield for CIL revenue when setting the levy (and then compound problems by applying high residential charges to swathes of basement and other non-saleable floorspace in a way that was never properly modelled). These practices have eroded affordable yield and, in places, slowed down major applications. CIL should create greater certainty when buying land on the element of land value that is genuinely residual. The ongoing role for planning obligations under section 106 of the Town and Country Planning Act 1990 is still causing puzzlement, though. The lack of up-to-date allocations means there is still too much room for debate on the mitigation genuinely required to deliver major schemes. The “pooling” and “double-dipping” restrictions in regulation 123 are not clear but have pushed authorities with generalised infrastructure tariffs into becoming more specific since the April 2015 pooling deadline. Equally, the restrictions are nowhere near as drastic as often suggested and rarely present a real barrier to sensible decisions. At the same time, restrictions in the Regulations on borrowing against CIL have limited forward funding against large allocated schemes, undermining the real -world scope for developers to deliver critical infrastructure. On the largest schemes, this causes headaches. But while all this has – in places – slowed down applications, truly insoluble problems are rare, even with the current “crazy paving” set of Regulations. CIL Review key findings Once CILs in process are completed there will be just under 60% uptake among charging authorities CIL not fulfilling aim of a “faster, fairer, simpler, more certain and more transparent” way of ensuring that all development contributes something towards cumulative infrastructure need CIL disrupts and complicates section 106 arrangements which “worked reasonably well” Industry confusion about what CIL is intended to be/achieve Divorced from the local plan process Commercial rate problems Large site CIL is inflexible (although low-rate mayoral CIL is not a problem) Too many exemptions and reliefs Greater yield overall, but reduced for some larger sites Not funding enough of the gap Shifting delivery from developers to inadequately resourced authorities Inconclusive findings on affordable housing “Mixed evidence” on whether fewer section 106 agreements are now being required and whether they are now less complex and taking less time to negotiate CIL Review recommendations Replace CIL with “a hybrid system of a broad and low level local infrastructure tariff (LIT)” 2020 proposed as the logical cut-off date for replacement of CIL Mandatory adoption, subject to a cost of collection cut-off LIT to be calculated using a national formula based on local market value (example rate of 1.75% to 2.5% of the average sales price per square metre of new build property) “No (or very few) exemptions” “Low or zero-rated” bands for agricultural buildings Separate charge for commercial development Mayoral-type strategic infrastructure tariff (SIT) for combined authorities Expenditure restricted to “a small number of major projects that will benefit the wider area” Simplified adoption/examination and monitoring No section 106 for 10 units or less, unless exceptional circumstances Additional section 106 arrangements for large strategic sites No pooling restrictions The CIL review The government’s recent review completed in October 2016 with the report, A new approach to developer contributions, published last month. The report is impressionistic. Some of the key findings reflect that the fact that it is still “early days”, but nonetheless flow into the recommendation to replace CIL with a series of tariffs. The review notes the “nostalgic fondness for the section 106 process, despite all the previous complaints about it”, but it does not question whether that is a product of the weaknesses or the strengths of CIL (in the sense of greater spread of contributions). The limited data shows a positive trend – collecting almost as much CIL in the last year (£140m) as in the first five combined (£170m). It would have been interesting to see the relative contributions by CIL and section 106 for different types of sites, which would seem a natural starting point. The review notes complaints on the examination process. Authorities complain of the burden of testing viability, developers complain the test is not detailed enough. In reality, the process is largely fair and proportionate and there are notably few reported complaints that the end result of the charge-setting process is wrong. Two of the report’s key findings on delivery are arguably unfair: first, that CIL has “increased uncertainty over delivery of infrastructure (by transferring funding and construction risk from developers to local authorities)” and “only” meets 5-20% of infrastructure funding; secondly, that “5% -20% of… new infrastructure funding is from CIL, leaving the balance to be found elsewhere”. In both cases, this mistakes the original purpose of CIL, which was to contribute to, not wholly fund, infrastructure needed for growth. The myth that CIL would replace scheme-specific mitigation has been corrosive. Nonetheless, for the schemes where critical infrastructure is genuinely reliant on CIL, change is needed (not least in recognising that strategic infrastructure requires strategic solutions and central government support). Better to repair than replace CIL is the only land value or contribution capture mechanism to survive a change of government. The efforts now needed to justify costs above CIL are a step forward. Binning it, rather than reforming it, would be wasteful. If the infrastructure funding gap is a shock, a reduced-level local infrastructure tariff (LIT) approach is not going to make it any better (and is likely to lead to a return to the search for planning gain). In any sane world, CIL would be updated and simplified to address the issues raised in the review and allow local authorities to decide locally, in public, what level of charge developments can bear. In the uncertain world of politics there is a danger that we may end up with something like LIT and strategic infrastructure tariff (SIT). In responding to the review, the sector needs to be clear about the issues that it sidesteps. First, how do you really deal with the transition? The review covers this in four paragraphs. The introduction of CIL confirms that the transition is hard – dealing with existing consents, changes to consents and variations have caused real problems. But what should local authorities do now in the lead up to the proposed 2020 date? Should CIL charging schedules be advanced or not? Should existing schedules be reviewed? The answer is that they should, but that is a brave local call. Second, there is an assumption that the local charge will be simple to set, being based on the value of a standard residential or other property. As the rates revaluation debate is showing, property values – and changes – can lead to heated arguments. Different uses have very different values. South Kensington and North Kensington have different characteristics. So, too, different qualities of development have different values. And they all change over time. Debate about the value used for LIT could be worse than CIL testing. Third, the review acknowledges that there will need to be waivers and exemptions – kept to a minimum. It notes that viability may be a reason for relaxation, but this will be difficult in practice. The government remains committed in the White Paper to protecting self-build homes from CIL and other charges. As soon as the LIT allows different charges for different areas for different uses – with exemptions and exceptions – it loses even the purported benefit of simplicity. In fact it starts to sound a bit like CIL. It is worth taking a step back and looking afresh at CIL. Everyone can agree that it is imperfect. Everyone accepts that part of the cost of infrastructure has to be paid for by development but that it will rarely fund all needs. But the real question is how best to achieve a sensible contribution. A few amendments would address the problems identified far more quickly and far more easily. Surely it is better to tailor CIL than to introduce another system that will breathe life back into unaccountable tariffs. Five ways to simplify CIL Cut the need to demonstrate that infrastructure is required and needs to be paid for by CIL – the examination should concentrate on viability issues Make CIL payable on floorspace without retained/demolished floorspace offsets, with a three-year transition Abolish all exemptions/exceptions, including affordable housing – it will balance out in the amounts paid for land Limit section 106 agreements – allow quick expert determination on whether conditions should be used instead and whether departure from standard forms is justified Allow local authorities a discretion to tailor CIL on strategic developments in exceptional circumstances – trust them Read the government’s CIL review >>  Stephen Ashworth and Roy Pinnock are partners at Dentons