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Technical Consultation on the
Infrastructure Levy
Workshop
Rate setting
Charging and paying the levy
17 April 2023
Agenda
Aim
This is the first of three workshops which seek feedback and views on our proposals for an
infrastructure levy. This workshop focuses on how levy rates might be set and the levy charged
Agenda
1. Overview of the Infrastructure Levy
2. Levy rates and minimum thresholds (Chapter 2)
3. Breakout session 1
4. Charging and paying the levy (Chapter 3)
5. Breakout session 2
6. AOB and discussion
Overview: Infrastructure Levy
• Reforms to largely replace section 106 planning obligations and the Community Infrastructure
Levy (CIL) in England.
• Aiming to improve transparency, reduce delays, capture more value than the existing system and
deliver at least as much affordable housing.
• Levy chargeable on Gross Development Value (GDV) – above a minimum threshold
• Rates set and levy collected by charging authorities.
• Non-negotiable cash payment, with affordable housing delivered on site as an in-kind payment.
• The Levelling Up & Regeneration Bill provides the legislative framework – policy detail to be set
out in regulations (following consultation).
• Introduced through ‘test and learn’.
www.gov.uk/government
/consultations/technical-
consultation-on-the-
infrastructure-levy
Supporting research
• University worked with six local authorities to produce 24 illustrative
models of hypothetical development.
• Compared the existing system with the proposed IL
• Estimated lower and upper bounds for the rates that the IL might take
• Lower bound describes the IL rate equivalent to the scale of developer
contributions under the policy-compliant implementation of the
existing system (in reality, contributions may be negotiated down)
• Upper bound is the maximum rate at which the IL could be set whilst
maintaining benchmark land value and a profit of 15% Internal Rate of
Return (IRR) to the developer
• Effectively describes a ‘window’ of rates at which the IL might,
theoretically, be set locally
CIL
plus
s106
IL rate %
25% 87%
CIL +
S106
Max IL rate
With IRR (profit) 15%
BLV x 10 EUV
IL rate equivalent
to existing system
Max IL rate
University of Liverpool (2023) “Exploring the potential effects of
the proposed Infrastructure Levy”
• The range of values that IL could take could be very wide.
• Rural England, residential greenfield development, median house
price £2,500 per sqm) – 62 percentage points between the
estimated lower and upper bounds
• Assuming a Benchmark Land Value of £200,000/ha, maximum
rate at which the IL could be set whilst maintaining the BLV and
the profit motive to the developer of 15% IRR would be 87%.
• Smallest difference between the estimated lower and upper
bounds were brownfield developments.
• Sites typically have existing or previous commercial uses and
their Existing Use Values tend to be higher.
• Tend to be more complex with higher build/remediation costs.
• But remember – the lower bound here is based on policy
compliant developer contributions, and in reality they may
currently be negotiated downwards, meaning the window is
wider
Setting rates and minimum
thresholds
Rate setting - overview
• Liability based on gross development value
of the completed development
• A minimum threshold will be set by the
local authority, below which the levy will
not be charged
• The levy will be charged at a set percentage
of the value above the minimum threshold
• The levy rates and minimum thresholds
should be set at levels which are
appropriate to development in the local
area.
• Balance between the capture of land value
uplift and the viability of development.
• Requires careful judgement around
premium that is allowed for landowners
above existing use value, in order to
incentivise a landowner to bring their site
forward for development and developer
getting suitable return on their investment.
Simpson’s
Rate setting - overview
• Our approach to rate setting will be
delivered through a combination of
secondary legislation and statutory
guidance, as occurs with CIL now.
• We are testing the approach set out
here with LPAs, developers, chartered
surveyors and other stakeholders.
• We also intend to consult on draft
regulations
Simpson’s
Data requirements for viability assessment
and charging schedule for CIL
Build costs
• Base build costs (£psm)
• Site preparation costs (£psm)
• External works (% build cost)
• Contingency sums (% build cost)
Fees
• Professional fees (% build cost)
• Legal fees (% of GDV)
Land costs
• Existing use value of land (£psm)
Development value
• Property valuations (£psm)
• Representative sample of permitted and proposed
development in area
Fixed costs
Construction
Land payment
Developer
contributions
Sales value of
completed
development
(GDV)
Development value Development cost
Gross
residual
value
Profit
Fees & finance
Existing use
value of
land
+ % of uplift
Section 106
Proportion of
remainder as
CIL (incl.
viability
buffer)
+
To landowner
To local
authority
Homes & Community Agency – “For greenfield land benchmarks
tend to be in the range of 10 to 20 times agricultural value”.
LPA(1) viability assessment – “clear shift towards the lower
multiplier of around 10 times agricultural value”.
LPA(2) viability assessment – “EUV + 50% of remaining uplift”
Current approach to viability
assessment and determining scope
for developer contributions
With CIL LPAs can set different rates for
different development types (e.g.
residential or retail) and land typologies
(e.g. greenfield or brownfield) in their
local area.
CIL viability assessment, charging schedule
and setting zones and differential rates
Viability Assessment - Maximum Residential CIL Rates per sqm
Charging zone Mixed
residential
Apartments Family
Housing
Executive
Housing
1.Low
Greenfield
Brownfield
£85
£1
-£241
-£265
£94
£9
£176
£106
2.Medium
Greenfield
Brownfield
£88
£1
-£185
-£228
£94
£4
£215
£56
3.High
Greenfield
Brownfield
£152
£68
-£126
-£169
£159
£73
£208
£127
4.Very High
Greenfield
Brownfield
£296
£212
£44
£2
£305
£218
£353
£266
Example output from CIL viability assessment
Example CIL rates
and zones in charging
schedule
Residential CIL
Apartments £0 per sqm
Low Zone £0 per sqm
Medium Zone £45 per sqm
High Zone £70 per sqm
Very High Zone £100 per sqm
Commercial CIL
Retail A1-A5 £100 per sqm
All other uses £0 per sqm
Data requirements for viability assessment and
charging schedule for the Infrastructure Levy
Data requirements will be
basically the same as for CIL
Build costs
• Base build costs (£psm)
• Site preparation costs (£psm)
• External works (% build cost)
• Contingency sums (% build cost)
Fees
• Professional fees (% build cost)
• Legal fees (% of GDV)
Land costs
• Existing use value of land (£psm)
Development value
• Property valuations (£psm)
• Representative sample of permitted and proposed
development in area
Construction
Land payment
Infrastructure Levy
Sales value of
completed
development
(GDV)
Development value Development cost
Profit
Fees & finance
Proposed approach to viability assessment and
determining scope for infrastructure levy
EUV
Minimum
Threshold
Recap
• Aim to maximise Levy revenues whilst maintaining the viability of
development in their area
• Purpose of minimum threshold – costs that a developer has to
make to deliver a development should not be taxed
• LPAs will be able to set different rates and/or minimum thresholds
for different development uses and land typologies in their local
area – e.g. lower rates for brownfield development to reflect
higher existing use values and construction costs
• Allow authorities to set ‘stepped’ rates which increase at specified
future points. That will enable rates to be set with a greater buffer
initially, but which can be stepped up over time.
• Questions around what should be included in the minimum
threshold.
Residual
Amount
subject to
levy rate
The minimum threshold
Construction
Fees & finance
EUV
Minimum
Threshold
It is proposed that the minimum threshold will comprise the main (non-
land) construction-related development costs and the value of the land in its
existing use
• base build costs
• site preparation costs (including demolition)
• costs of external works
• professional fees
• contingency allowance
• the existing use value of land
• Levy is charged only on the additional value of a development
• Infrastructure ‘integral’ to the successful functioning of a site (e.g. play
areas or drainage systems), will be delivered by developers.
• The expected cost of integral infrastructure should be accounted for when
setting rates, to ensure development remains viable.
Levy rates, land value and
developer profits
• The portion of the GDV above the minimum threshold is subject to the
levy – based on the rate set by the LPA
• Three components:
• The Infrastructure Levy
• Additional payment to the landowner for the land (above the EUV)
• The return to the developer (profit) based an Internal Rate of Return
(IRR)
• Viability assessment used to determine a levy rate that gives the
developer:
• an appropriate return on their investment (e.g. an IRR of 15%)
• sufficient sum to encourage a landowner to sell their land (i.e. above
the benchmark land value)
• A development is unviable at a levy rate that results in the amount
available to pay the landowner being less than the benchmark land value
Land payment
Infrastructure Levy
Profit
Residual
Amount
subject to
levy rate
Cash flow:
(Revenue minus costs)
per set period (e.g. annually)
Costs (£m-2)
Base build costs
Site preparation
External works
Professional fees
Contingency allowance
Net present value of cash
flow using target internal
rate of return [discount]
(e.g. 15% per year)
Surplus available for
land purchase
Land purchase
fee
Developer profits
Sum of cash flow
(including cost of land
purchase)
over development period
Estimated
land value
Revenue (£m-2)
Actual gross
development value of
development
IL cash payments
S106 payments
Sales and marketing
fees
Calculating developer profits and land value at a
particular levy rate to determine what rates are viable
for the purposes of preparing a charging schedule
• Increasing levy rate reduces
developer profit and amount
available for land purchase
• If the sum available for land
purchase (after deducting land
purchase fee) is greater than
‘benchmark land value’ levy rate
is viable
• Authorities will need to balance
the levy rate with the need to
ensure that development remains
viable. The premium that is
allowed for landowners above
existing use value, must
incentivise a landowner to bring
their site forward for
development.
Example: Greenfield site currently in agricultural use.
Average new build sale price for residential dwellings = £3,000m-2
Base build costs = £1,300m-2
Other ‘normal’ construction costs (incl. fees)= £374m-2
Existing Use Value of agricultural land = £20,000 per hectare (£2 m-2)
A development of 6 residential units of 100 m2 each on a 5000m2 plot
EUV per square metre of development =
Plot area x EUV (£m−2)
𝐺𝐼𝐴 𝑜𝑓 𝑑𝑒𝑣𝑒𝑙𝑜𝑝𝑚𝑒𝑛𝑡
=
5000 x £2
600
= 10000/600 = £16.67m-2
Minimum threshold = £1,300 + £374 + £17 = £1,692
Rate setting example
Construction
(£1300)
Fees & finance
(£374)
EUV (£17)
Land payment
Infrastructure
Levy
Profit
GDV
(£3000)
Minimum Threshold
£1692 m-2
Residual amount
= £3,000 – £1,692
= £1,308 m-2
A Levy rate of 30% would give a levy liability of £392.50 m-2 (£1,308 x 30%)
Running the case flow model at a levy at 30% and an Internal Rate of Return
of 15% would give the following outcome for the six-dwelling development:
GDV = £1,800,00 (£3,000 x 6 x 100)
Levy liability = £235,500 (£392.5 x 6 x 100)
Developer profits = £185,504
Surplus available to purchase land = £318,864
Benchmark Land Value = 10 x EUV = £100,000
The development would therefore be viable
LPAs will be able to set different rates and
thresholds for different development types (e.g.
residential or retail) and land typologies (e.g.
greenfield or brownfield) in their local area.
IL viability assessment, charging schedule
and setting zones and differential rates
Viability Assessment - Residential IL Rate range and threshold
Greenfield minimum threshold (all residential) - £1,550 per sqm
Brownfield minimum threshold (all residential) - £2,500 per sqm
Charging zone Mixed
residential
Apartments Family
Housing
Executive
Housing
Viable levy rate range
1.Low
Greenfield
Brownfield
25%-58%
5%-15%
10%-15%
0
22%-54%
16%-20%
32%-56%
18%-22%
2.Medium
Greenfield
Brownfield
25%-60%
6%-15%
10%-15%
2%-4%
22%-70%
10%-20%
22%-70%
12%-20%
3.High
Greenfield
Brownfield
28%-60%
10%-17%
10%-15%
5%-10%
26%-60%
11%-20%
28%-70%
10%-17%
4.Very High
Greenfield
Brownfield
30%-65%
10%-17%
10%-30%
10%-17%
30%-60%
10%-18%
28%-75%
10%-19%
Completely hypothetical output from a Levy viability assessment
Example IL rates
and zones (greenfield)
Residential IL Rates
Apartments 5%
Low Zone 25%
Medium Zone 30%
High Zone 30%
Very High Zone 35%
Commercial IL
Retail A1-A5 10%
All other uses 5%
CIL
• With CIL – the existing ‘lawfully in-use’ floorspace can be offset (whether reused or
demolished) and there is no CIL charge for that floorspace
Infrastructure Levy
• With the Infrastructure Levy – we are considering the possibility of some developer
contributions being sought
• Rates will be substantially lower than the rates that will be applied to new floorspace and
the threshold will be higher
Change of use rate: A specific rate applied to the conversion or repurposing of existing floorspace
Replacement rate: A specific rate applied when floorspace is demolished and replaced
Existing use threshold: Higher than the main threshold (recognising higher build costs)
Treatment of existing floorspace
• PDRs which create additional floorspace can be subject to developer
contributions currently. However, most PDRs relate to small householder
development or do not create additional floorspace so may not fall within
the scope of developer contributions.
• Possible approaches include:
• Exemption from the Levy
• LPAs set their own rates
• Need to balance collecting more value and maintaining viability -
especially given these conversions constitute brownfield development
• One way would be to only charge the Levy when the value of the scheme
(per square metre) is over a certain threshold?
• The minimum threshold could be set through regulations with LPAs able
to set higher minimum thresholds. Schemes that do not create significant
uplift in land value would not be charged.
• A maximum Levy charge could be set for permitted development
schemes to protect viability. LPAs would retain the ability to charge the
Levy at that maximum amount, or at a lower rate, if they choose to do so.
Permitted development rights (PDRs)
Addressing the variability of Brownfield Land
• The scope for developer contributions to be exacted
on residential brownfield development is constrained
to higher value settings – equally true of the current
system.
• Local authorities will be able to set different rates for
different areas and typologies of development, and
offset existing floorspace, and the Levy will expand the
type of development upon which contributions are
sought.
• Possible risk if brownfield land values vary
substantially from those assumed in rate setting
• Mitigations might include additional offsets from the
Levy if specific circumstances are met – e.g. where
there is substantial variation between the existing use
value used to set rates, and the existing use value of a
particular site.
Getting the balance right
• Consistent theme – ensuring land value capture does not affect
viability. Land comes forward and developers want to develop.
• Research demonstrates potential to capture more value – particularly
on greenfield sites
• How should a local authority determine what is appropriate to pay a
landowner for their land
• Things to think about…
• Where should the rate be set: 25% or 87%?
• What do you get through the current system? What do landowners
currently expect to get? If you move to far, too fast, what are the risks?
• Testing your way, possibly through a stepped approach?
• What factors should be taken into account?
• What tools can help?
Charging schedule preparation process
• Developing evidence base in collaboration with key stakeholders
including neighbouring and overlapping authorities
• Public consultation. Opportunity for interested parties to submit
evidence that challenges the local authority’s assumptions
underpinning rates or minimum thresholds.
• Independent examination of draft schedule in public before
publishing recommendations
• Charging schedule published
Issues
• Aware of concerns that examinations will become much more
challenging than existing CIL examinations
• We will seek to design the process of examination to balance the
ability for landowners/developers to challenge inaccurate
assumptions, while also providing local authorities confidence
that proposed rates will not be argued down to ‘lowest common
denominator’ rates.
• We will also consider what areas to focus examination challenges
on.
Standardised approached?
• We are considering what elements of the rate
setting process could be standardised.
• Using uniform inputs and standard rate setting
models, with inputs being varied on a local basis?
Test and learn
• We will work with local authorities through
responses to this consultation and through the ‘test
and learn’ process to make sure tools provide
sufficient support.
• What additional support and tools will you need?
• Are there things you think are important to test
through test and learn?
Developing
evidence base
Public
consultation
Independent
examination
Questions on setting rates and minimum thresholds
• Question 9: Do you agree that the Levy should capture value uplift associated with permitted
development rights that create new dwellings? Are there some types of permitted
development where no Levy should be charged?
• Question 10: Do you have views on the proposal to bring schemes brought forward through
permitted development rights within scope of the Levy? Do you have views on an appropriate
value threshold for qualifying permitted development? Do you have views on an appropriate
Levy rate ‘ceiling’ for such sites, and how that might be decided?
• Question 11: Is there is a case for additional offsets from the Levy, beyond those identified in
the paragraphs above to facilitate marginal brownfield development coming forward?
• Question 12: Do you agree that the following components of Levy design will help collect
more than the existing system:
• Charging the Levy on final sale GDV of a scheme?
• The use of different Levy rates and minimum thresholds on different development uses
and typologies?
• Ability to set ‘stepped’ Levy rates?
• Separate Levy rates and thresholds for existing floorspace that is subject to change of
use, and floorspace that is demolished and replaced
Breakout groups: Setting rates and minimum
thresholds
1. What do you consider to be the biggest changes in the process for setting rates?
2. What do you consider to be the key challenges and concerns?
3. What could government do to help address those challenges?
Charging and paying the Levy
Charging and paying the Levy - overview
CIL
• CIL liabilities are set at the point planning permission is granted.
• Payment broadly alongside commencement.
• Does not reflect changes in the market that occur throughout scheme delivery.
Infrastructure Levy
• Liability will be based on GDV at completion reflected in the sales price of the development, or a valuation of the market price if
the development is not sold
• Responsive to market conditions
• Estimates of the final liability will be required earlier in the process of developing a site.
• Provide both developers and local authorities with an indication of the amounts they are likely to pay and receive respectively
• Enables the registering of that liability against the site as a land charge.
• Three-step process:
Final
adjustment
payment
Indicative
liability
Provisional
liability
Planning
permission
granted
Development
commences
First
occupation
‘Indicative liability’
calculated by LPA
based on floorspace
and rates in charging
schedule (prior to
planning permission
being granted)
Charging schedule
published setting out
rates, thresholds and
an assumed value for
different
development types
in different
areas/zones.
Developer or
other party
assumes
liability
Indicative
liability
registered as
local land
charge
Local land charge removed
from those parts of
development where
provisional liability paid.
Occupation restrictions
removed from parts of
development where
provisional liability paid.
Development
sold (or
completed)
Either party can
require a final
adjustment
calculation to reflect
actual market value –
‘final liability’ [RICS
red book]
Prior to completion of the
scheme a provisional
liability can be paid by
developer (at a point of
their choosing prior to
completion and sale). A
valuation may be required
if (i) a development is not
to be sold, or (ii) the LPA or
developer consider the
actual liability may be
significantly higher or
lower than indicative
liability.
Final settlement –
developer might
have to make further
payment or LPA
return an
overpayment
Proposed Infrastructure Levy process
Application for
planning permission
Example calculation of the
levy liability
• The charging schedule states that in
Zone A:
• Minimum threshold = £2000 psm
• Levy Rate is 35%
• A small residential development in
Zone A has six dwelling each with a
Gross Internal Area of 100sqm and a
sales price of £400,000 each.
GDV psm =
£400,000
100
= £4,000 psm
Taxable amount = GDV – Threshold
= £4,000 - £2,000 = £2,000
Levy liability = £2,000 x £35% = £700psm
Total liability for development
= £700 x (100 x 6) = £420,000
Simple!
Even with a string of section 73 permissions. The
final GIA and GDV determine the liability.
Questions on charging and paying the Levy (1)
Timing of levy payments
• Question 14: Do you agree with the process outlined in the flowchart (Table 3 in consultation
document) is an effective way of calculating and paying the levy?
• Question 15: Is there an alternative payment mechanism being more suitable for the Infrastructure
Levy?
Imposition of a local land charge
• Question 16: Do you agree with the proposed application of a land charge at commencement of
development and removal of a local land charge once the provisional levy payment is made?
• Question 17: Will removal of the local land charge at the point the provisional Levy liability is paid
prevent avoidance of Infrastructure Levy payments?
Questions on charging and paying the Levy (2)
Possibility for payment on account
• Question 18: Do you agree that an LPA should be able to require that payment of the
Levy (or a proportion of the Levy liability) is made prior to site completion?
• Question 19: Are there circumstances when an LPA should be able to require an early
payment of the Levy or a proportion of the Levy?
Valuations
• Question 20: Do you agree that the proposed role for valuations of GDV is proportionate
and necessary in the context of creating a Levy that is responsive to market conditions
Breakout groups: Charging and paying the
levy
1. What do you consider to be the biggest changes in the process for charging and
paying for the levy?
2. What do you consider to be the key challenges and concerns?
3. What could government do to help address those challenges?
Questions and general discussion

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Infrastructure Levy Technical Consultation (Workshop 1 Setting rates and charging the levy).pptx

  • 1. Technical Consultation on the Infrastructure Levy Workshop Rate setting Charging and paying the levy 17 April 2023
  • 2. Agenda Aim This is the first of three workshops which seek feedback and views on our proposals for an infrastructure levy. This workshop focuses on how levy rates might be set and the levy charged Agenda 1. Overview of the Infrastructure Levy 2. Levy rates and minimum thresholds (Chapter 2) 3. Breakout session 1 4. Charging and paying the levy (Chapter 3) 5. Breakout session 2 6. AOB and discussion
  • 3. Overview: Infrastructure Levy • Reforms to largely replace section 106 planning obligations and the Community Infrastructure Levy (CIL) in England. • Aiming to improve transparency, reduce delays, capture more value than the existing system and deliver at least as much affordable housing. • Levy chargeable on Gross Development Value (GDV) – above a minimum threshold • Rates set and levy collected by charging authorities. • Non-negotiable cash payment, with affordable housing delivered on site as an in-kind payment. • The Levelling Up & Regeneration Bill provides the legislative framework – policy detail to be set out in regulations (following consultation). • Introduced through ‘test and learn’.
  • 4. www.gov.uk/government /consultations/technical- consultation-on-the- infrastructure-levy Supporting research • University worked with six local authorities to produce 24 illustrative models of hypothetical development. • Compared the existing system with the proposed IL • Estimated lower and upper bounds for the rates that the IL might take • Lower bound describes the IL rate equivalent to the scale of developer contributions under the policy-compliant implementation of the existing system (in reality, contributions may be negotiated down) • Upper bound is the maximum rate at which the IL could be set whilst maintaining benchmark land value and a profit of 15% Internal Rate of Return (IRR) to the developer • Effectively describes a ‘window’ of rates at which the IL might, theoretically, be set locally CIL plus s106 IL rate % 25% 87% CIL + S106 Max IL rate With IRR (profit) 15% BLV x 10 EUV IL rate equivalent to existing system Max IL rate
  • 5. University of Liverpool (2023) “Exploring the potential effects of the proposed Infrastructure Levy” • The range of values that IL could take could be very wide. • Rural England, residential greenfield development, median house price £2,500 per sqm) – 62 percentage points between the estimated lower and upper bounds • Assuming a Benchmark Land Value of £200,000/ha, maximum rate at which the IL could be set whilst maintaining the BLV and the profit motive to the developer of 15% IRR would be 87%. • Smallest difference between the estimated lower and upper bounds were brownfield developments. • Sites typically have existing or previous commercial uses and their Existing Use Values tend to be higher. • Tend to be more complex with higher build/remediation costs. • But remember – the lower bound here is based on policy compliant developer contributions, and in reality they may currently be negotiated downwards, meaning the window is wider
  • 6. Setting rates and minimum thresholds
  • 7. Rate setting - overview • Liability based on gross development value of the completed development • A minimum threshold will be set by the local authority, below which the levy will not be charged • The levy will be charged at a set percentage of the value above the minimum threshold • The levy rates and minimum thresholds should be set at levels which are appropriate to development in the local area. • Balance between the capture of land value uplift and the viability of development. • Requires careful judgement around premium that is allowed for landowners above existing use value, in order to incentivise a landowner to bring their site forward for development and developer getting suitable return on their investment. Simpson’s
  • 8. Rate setting - overview • Our approach to rate setting will be delivered through a combination of secondary legislation and statutory guidance, as occurs with CIL now. • We are testing the approach set out here with LPAs, developers, chartered surveyors and other stakeholders. • We also intend to consult on draft regulations Simpson’s
  • 9. Data requirements for viability assessment and charging schedule for CIL Build costs • Base build costs (£psm) • Site preparation costs (£psm) • External works (% build cost) • Contingency sums (% build cost) Fees • Professional fees (% build cost) • Legal fees (% of GDV) Land costs • Existing use value of land (£psm) Development value • Property valuations (£psm) • Representative sample of permitted and proposed development in area
  • 10. Fixed costs Construction Land payment Developer contributions Sales value of completed development (GDV) Development value Development cost Gross residual value Profit Fees & finance Existing use value of land + % of uplift Section 106 Proportion of remainder as CIL (incl. viability buffer) + To landowner To local authority Homes & Community Agency – “For greenfield land benchmarks tend to be in the range of 10 to 20 times agricultural value”. LPA(1) viability assessment – “clear shift towards the lower multiplier of around 10 times agricultural value”. LPA(2) viability assessment – “EUV + 50% of remaining uplift” Current approach to viability assessment and determining scope for developer contributions
  • 11. With CIL LPAs can set different rates for different development types (e.g. residential or retail) and land typologies (e.g. greenfield or brownfield) in their local area. CIL viability assessment, charging schedule and setting zones and differential rates Viability Assessment - Maximum Residential CIL Rates per sqm Charging zone Mixed residential Apartments Family Housing Executive Housing 1.Low Greenfield Brownfield £85 £1 -£241 -£265 £94 £9 £176 £106 2.Medium Greenfield Brownfield £88 £1 -£185 -£228 £94 £4 £215 £56 3.High Greenfield Brownfield £152 £68 -£126 -£169 £159 £73 £208 £127 4.Very High Greenfield Brownfield £296 £212 £44 £2 £305 £218 £353 £266 Example output from CIL viability assessment Example CIL rates and zones in charging schedule Residential CIL Apartments £0 per sqm Low Zone £0 per sqm Medium Zone £45 per sqm High Zone £70 per sqm Very High Zone £100 per sqm Commercial CIL Retail A1-A5 £100 per sqm All other uses £0 per sqm
  • 12. Data requirements for viability assessment and charging schedule for the Infrastructure Levy Data requirements will be basically the same as for CIL Build costs • Base build costs (£psm) • Site preparation costs (£psm) • External works (% build cost) • Contingency sums (% build cost) Fees • Professional fees (% build cost) • Legal fees (% of GDV) Land costs • Existing use value of land (£psm) Development value • Property valuations (£psm) • Representative sample of permitted and proposed development in area
  • 13. Construction Land payment Infrastructure Levy Sales value of completed development (GDV) Development value Development cost Profit Fees & finance Proposed approach to viability assessment and determining scope for infrastructure levy EUV Minimum Threshold Recap • Aim to maximise Levy revenues whilst maintaining the viability of development in their area • Purpose of minimum threshold – costs that a developer has to make to deliver a development should not be taxed • LPAs will be able to set different rates and/or minimum thresholds for different development uses and land typologies in their local area – e.g. lower rates for brownfield development to reflect higher existing use values and construction costs • Allow authorities to set ‘stepped’ rates which increase at specified future points. That will enable rates to be set with a greater buffer initially, but which can be stepped up over time. • Questions around what should be included in the minimum threshold. Residual Amount subject to levy rate
  • 14. The minimum threshold Construction Fees & finance EUV Minimum Threshold It is proposed that the minimum threshold will comprise the main (non- land) construction-related development costs and the value of the land in its existing use • base build costs • site preparation costs (including demolition) • costs of external works • professional fees • contingency allowance • the existing use value of land • Levy is charged only on the additional value of a development • Infrastructure ‘integral’ to the successful functioning of a site (e.g. play areas or drainage systems), will be delivered by developers. • The expected cost of integral infrastructure should be accounted for when setting rates, to ensure development remains viable.
  • 15. Levy rates, land value and developer profits • The portion of the GDV above the minimum threshold is subject to the levy – based on the rate set by the LPA • Three components: • The Infrastructure Levy • Additional payment to the landowner for the land (above the EUV) • The return to the developer (profit) based an Internal Rate of Return (IRR) • Viability assessment used to determine a levy rate that gives the developer: • an appropriate return on their investment (e.g. an IRR of 15%) • sufficient sum to encourage a landowner to sell their land (i.e. above the benchmark land value) • A development is unviable at a levy rate that results in the amount available to pay the landowner being less than the benchmark land value Land payment Infrastructure Levy Profit Residual Amount subject to levy rate
  • 16. Cash flow: (Revenue minus costs) per set period (e.g. annually) Costs (£m-2) Base build costs Site preparation External works Professional fees Contingency allowance Net present value of cash flow using target internal rate of return [discount] (e.g. 15% per year) Surplus available for land purchase Land purchase fee Developer profits Sum of cash flow (including cost of land purchase) over development period Estimated land value Revenue (£m-2) Actual gross development value of development IL cash payments S106 payments Sales and marketing fees Calculating developer profits and land value at a particular levy rate to determine what rates are viable for the purposes of preparing a charging schedule • Increasing levy rate reduces developer profit and amount available for land purchase • If the sum available for land purchase (after deducting land purchase fee) is greater than ‘benchmark land value’ levy rate is viable • Authorities will need to balance the levy rate with the need to ensure that development remains viable. The premium that is allowed for landowners above existing use value, must incentivise a landowner to bring their site forward for development.
  • 17. Example: Greenfield site currently in agricultural use. Average new build sale price for residential dwellings = £3,000m-2 Base build costs = £1,300m-2 Other ‘normal’ construction costs (incl. fees)= £374m-2 Existing Use Value of agricultural land = £20,000 per hectare (£2 m-2) A development of 6 residential units of 100 m2 each on a 5000m2 plot EUV per square metre of development = Plot area x EUV (£m−2) 𝐺𝐼𝐴 𝑜𝑓 𝑑𝑒𝑣𝑒𝑙𝑜𝑝𝑚𝑒𝑛𝑡 = 5000 x £2 600 = 10000/600 = £16.67m-2 Minimum threshold = £1,300 + £374 + £17 = £1,692 Rate setting example Construction (£1300) Fees & finance (£374) EUV (£17) Land payment Infrastructure Levy Profit GDV (£3000) Minimum Threshold £1692 m-2 Residual amount = £3,000 – £1,692 = £1,308 m-2 A Levy rate of 30% would give a levy liability of £392.50 m-2 (£1,308 x 30%) Running the case flow model at a levy at 30% and an Internal Rate of Return of 15% would give the following outcome for the six-dwelling development: GDV = £1,800,00 (£3,000 x 6 x 100) Levy liability = £235,500 (£392.5 x 6 x 100) Developer profits = £185,504 Surplus available to purchase land = £318,864 Benchmark Land Value = 10 x EUV = £100,000 The development would therefore be viable
  • 18. LPAs will be able to set different rates and thresholds for different development types (e.g. residential or retail) and land typologies (e.g. greenfield or brownfield) in their local area. IL viability assessment, charging schedule and setting zones and differential rates Viability Assessment - Residential IL Rate range and threshold Greenfield minimum threshold (all residential) - £1,550 per sqm Brownfield minimum threshold (all residential) - £2,500 per sqm Charging zone Mixed residential Apartments Family Housing Executive Housing Viable levy rate range 1.Low Greenfield Brownfield 25%-58% 5%-15% 10%-15% 0 22%-54% 16%-20% 32%-56% 18%-22% 2.Medium Greenfield Brownfield 25%-60% 6%-15% 10%-15% 2%-4% 22%-70% 10%-20% 22%-70% 12%-20% 3.High Greenfield Brownfield 28%-60% 10%-17% 10%-15% 5%-10% 26%-60% 11%-20% 28%-70% 10%-17% 4.Very High Greenfield Brownfield 30%-65% 10%-17% 10%-30% 10%-17% 30%-60% 10%-18% 28%-75% 10%-19% Completely hypothetical output from a Levy viability assessment Example IL rates and zones (greenfield) Residential IL Rates Apartments 5% Low Zone 25% Medium Zone 30% High Zone 30% Very High Zone 35% Commercial IL Retail A1-A5 10% All other uses 5%
  • 19. CIL • With CIL – the existing ‘lawfully in-use’ floorspace can be offset (whether reused or demolished) and there is no CIL charge for that floorspace Infrastructure Levy • With the Infrastructure Levy – we are considering the possibility of some developer contributions being sought • Rates will be substantially lower than the rates that will be applied to new floorspace and the threshold will be higher Change of use rate: A specific rate applied to the conversion or repurposing of existing floorspace Replacement rate: A specific rate applied when floorspace is demolished and replaced Existing use threshold: Higher than the main threshold (recognising higher build costs) Treatment of existing floorspace
  • 20. • PDRs which create additional floorspace can be subject to developer contributions currently. However, most PDRs relate to small householder development or do not create additional floorspace so may not fall within the scope of developer contributions. • Possible approaches include: • Exemption from the Levy • LPAs set their own rates • Need to balance collecting more value and maintaining viability - especially given these conversions constitute brownfield development • One way would be to only charge the Levy when the value of the scheme (per square metre) is over a certain threshold? • The minimum threshold could be set through regulations with LPAs able to set higher minimum thresholds. Schemes that do not create significant uplift in land value would not be charged. • A maximum Levy charge could be set for permitted development schemes to protect viability. LPAs would retain the ability to charge the Levy at that maximum amount, or at a lower rate, if they choose to do so. Permitted development rights (PDRs)
  • 21. Addressing the variability of Brownfield Land • The scope for developer contributions to be exacted on residential brownfield development is constrained to higher value settings – equally true of the current system. • Local authorities will be able to set different rates for different areas and typologies of development, and offset existing floorspace, and the Levy will expand the type of development upon which contributions are sought. • Possible risk if brownfield land values vary substantially from those assumed in rate setting • Mitigations might include additional offsets from the Levy if specific circumstances are met – e.g. where there is substantial variation between the existing use value used to set rates, and the existing use value of a particular site.
  • 22. Getting the balance right • Consistent theme – ensuring land value capture does not affect viability. Land comes forward and developers want to develop. • Research demonstrates potential to capture more value – particularly on greenfield sites • How should a local authority determine what is appropriate to pay a landowner for their land • Things to think about… • Where should the rate be set: 25% or 87%? • What do you get through the current system? What do landowners currently expect to get? If you move to far, too fast, what are the risks? • Testing your way, possibly through a stepped approach? • What factors should be taken into account? • What tools can help?
  • 23. Charging schedule preparation process • Developing evidence base in collaboration with key stakeholders including neighbouring and overlapping authorities • Public consultation. Opportunity for interested parties to submit evidence that challenges the local authority’s assumptions underpinning rates or minimum thresholds. • Independent examination of draft schedule in public before publishing recommendations • Charging schedule published Issues • Aware of concerns that examinations will become much more challenging than existing CIL examinations • We will seek to design the process of examination to balance the ability for landowners/developers to challenge inaccurate assumptions, while also providing local authorities confidence that proposed rates will not be argued down to ‘lowest common denominator’ rates. • We will also consider what areas to focus examination challenges on. Standardised approached? • We are considering what elements of the rate setting process could be standardised. • Using uniform inputs and standard rate setting models, with inputs being varied on a local basis? Test and learn • We will work with local authorities through responses to this consultation and through the ‘test and learn’ process to make sure tools provide sufficient support. • What additional support and tools will you need? • Are there things you think are important to test through test and learn? Developing evidence base Public consultation Independent examination
  • 24. Questions on setting rates and minimum thresholds • Question 9: Do you agree that the Levy should capture value uplift associated with permitted development rights that create new dwellings? Are there some types of permitted development where no Levy should be charged? • Question 10: Do you have views on the proposal to bring schemes brought forward through permitted development rights within scope of the Levy? Do you have views on an appropriate value threshold for qualifying permitted development? Do you have views on an appropriate Levy rate ‘ceiling’ for such sites, and how that might be decided? • Question 11: Is there is a case for additional offsets from the Levy, beyond those identified in the paragraphs above to facilitate marginal brownfield development coming forward? • Question 12: Do you agree that the following components of Levy design will help collect more than the existing system: • Charging the Levy on final sale GDV of a scheme? • The use of different Levy rates and minimum thresholds on different development uses and typologies? • Ability to set ‘stepped’ Levy rates? • Separate Levy rates and thresholds for existing floorspace that is subject to change of use, and floorspace that is demolished and replaced
  • 25. Breakout groups: Setting rates and minimum thresholds 1. What do you consider to be the biggest changes in the process for setting rates? 2. What do you consider to be the key challenges and concerns? 3. What could government do to help address those challenges?
  • 27. Charging and paying the Levy - overview CIL • CIL liabilities are set at the point planning permission is granted. • Payment broadly alongside commencement. • Does not reflect changes in the market that occur throughout scheme delivery. Infrastructure Levy • Liability will be based on GDV at completion reflected in the sales price of the development, or a valuation of the market price if the development is not sold • Responsive to market conditions • Estimates of the final liability will be required earlier in the process of developing a site. • Provide both developers and local authorities with an indication of the amounts they are likely to pay and receive respectively • Enables the registering of that liability against the site as a land charge. • Three-step process: Final adjustment payment Indicative liability Provisional liability
  • 28. Planning permission granted Development commences First occupation ‘Indicative liability’ calculated by LPA based on floorspace and rates in charging schedule (prior to planning permission being granted) Charging schedule published setting out rates, thresholds and an assumed value for different development types in different areas/zones. Developer or other party assumes liability Indicative liability registered as local land charge Local land charge removed from those parts of development where provisional liability paid. Occupation restrictions removed from parts of development where provisional liability paid. Development sold (or completed) Either party can require a final adjustment calculation to reflect actual market value – ‘final liability’ [RICS red book] Prior to completion of the scheme a provisional liability can be paid by developer (at a point of their choosing prior to completion and sale). A valuation may be required if (i) a development is not to be sold, or (ii) the LPA or developer consider the actual liability may be significantly higher or lower than indicative liability. Final settlement – developer might have to make further payment or LPA return an overpayment Proposed Infrastructure Levy process Application for planning permission
  • 29. Example calculation of the levy liability • The charging schedule states that in Zone A: • Minimum threshold = £2000 psm • Levy Rate is 35% • A small residential development in Zone A has six dwelling each with a Gross Internal Area of 100sqm and a sales price of £400,000 each. GDV psm = £400,000 100 = £4,000 psm Taxable amount = GDV – Threshold = £4,000 - £2,000 = £2,000 Levy liability = £2,000 x £35% = £700psm Total liability for development = £700 x (100 x 6) = £420,000 Simple! Even with a string of section 73 permissions. The final GIA and GDV determine the liability.
  • 30. Questions on charging and paying the Levy (1) Timing of levy payments • Question 14: Do you agree with the process outlined in the flowchart (Table 3 in consultation document) is an effective way of calculating and paying the levy? • Question 15: Is there an alternative payment mechanism being more suitable for the Infrastructure Levy? Imposition of a local land charge • Question 16: Do you agree with the proposed application of a land charge at commencement of development and removal of a local land charge once the provisional levy payment is made? • Question 17: Will removal of the local land charge at the point the provisional Levy liability is paid prevent avoidance of Infrastructure Levy payments?
  • 31. Questions on charging and paying the Levy (2) Possibility for payment on account • Question 18: Do you agree that an LPA should be able to require that payment of the Levy (or a proportion of the Levy liability) is made prior to site completion? • Question 19: Are there circumstances when an LPA should be able to require an early payment of the Levy or a proportion of the Levy? Valuations • Question 20: Do you agree that the proposed role for valuations of GDV is proportionate and necessary in the context of creating a Levy that is responsive to market conditions
  • 32. Breakout groups: Charging and paying the levy 1. What do you consider to be the biggest changes in the process for charging and paying for the levy? 2. What do you consider to be the key challenges and concerns? 3. What could government do to help address those challenges?
  • 33. Questions and general discussion