Report to London Legacy Development Corporation/media/lldc... · 2014-11-28 · Report to London...

Report to London Legacy Development Corporation

by Mike Moore BA(Hons) MRTPI CMILT MCIHT

an Examiner appointed by the London Legacy Development Corporation

Date: 27 November 2014

PLANNING ACT 2008 (AS AMENDED)

SECTION 212(2)

REPORT ON THE EXAMINATION OF THE DRAFT LONDON LEGACY DEVELOPMENT CORPORATION COMMUNITY INFRASTRUCTURE LEVY

CHARGING SCHEDULE

Charging Schedule submitted for examination on 6 August 2014

File Ref: PINS/M9584/429/1

London Legacy Development Corporation Draft CIL Charging Schedule, Examiners Report November 2014

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Non Technical Summary

This report concludes that the London Legacy Development Corporation Community Infrastructure Levy Charging Schedule provides an appropriate basis

for the collection of the levy in the area. The Legacy Corporation has sufficient evidence to support the schedule and can show that the levy is set at a level that will not put the overall development of the area at risk.

One modification is needed to meet the statutory requirements. This can be

summarised as follows:

Substitute new maps in the Charging Schedule that meet the requirements

of the Regulations.

The specified modification recommended in this report does not alter the basis of the Legacy Corporation’s overall approach or the appropriate balance achieved.

Introduction

1. This report contains my assessment of the London Legacy Development Corporation Community Infrastructure Levy (CIL) Charging Schedule in terms

of Section 212 of the Planning Act 2008. It considers whether the schedule is compliant in legal terms and whether it is economically viable as well as reasonable, realistic and consistent with national guidance (Planning Practice

Guidance – June 2014).

2. To comply with the relevant legislation the local charging authority has to

submit a charging schedule which sets an appropriate balance between helping to fund necessary new infrastructure and the potential effects on the economic viability of development across the area. The basis for the examination, which

took place through written representations, is the submitted schedule dated May 2014, which is unchanged from the document published for public

consultation that took place between May and July 2014.

3. The Legacy Corporation (LLDC) proposes single rates across the area of £60 per square metre (psm) for residential development and £100 psm for hotels

and for student accommodation. Convenience supermarkets and superstores and retail warehouses (over 1,000 sqm) would also have a rate of £100 psm

across the area. There would be a variable rate for comparison and all other retail (A1-A5 uses) between the ‘Stratford Retail Area’ at £100 psm and the rest of the area which would have a nil rate. All other uses would have a nil

rate. These rates are in addition to the Mayoral CIL which varies between £20 and £35 in different parts of the area and would apply to some uses where the

LLDC rate would be nil.


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Is the charging schedule supported by background documents containing

appropriate available evidence?

Infrastructure planning evidence

4. The LLDC was established in 2012 and comprises parts of the London

Boroughs of Newham, Tower Hamlets, Hackney and Waltham Forest. A single Local Plan for the area is in preparation and the CIL Charging Schedule has

been worked up alongside this. A draft plan may be used as the relevant plan for an examination if a joint examination of the plan and the Charging Schedule is proposed. However, that is not the case here, as the Local Plan

was not submitted for examination at the same time as the Charging Schedule. The relevant plan therefore comprises the adopted London Plan,

the Newham Core Strategy (2012), the Tower Hamlets Core Strategy (2010) and Fish Island Area Action Plan (2012), the Hackney Core Strategy (2010) and Hackney Wick Area Action Plan (2012), and the Waltham Forest Core

Strategy (2012) in so far as they apply to the LLDC area.

5. The LLDC has produced an Infrastructure Delivery Plan (IDP) to inform both

the emerging Local Plan and the Charging Schedule. The Local Plan will look forward to 2031, whereas the adopted plans have end dates between 2025 and 2027. However, the scale and pattern of development and the key

development sites are essentially the same and the IDP has derived information from the adopted plans. They include the main elements of

growth that will need to be supported by further infrastructure in the context of achieving the regeneration of the Olympic Park and its surrounding area, so maximising the legacy of the 2012 Olympic and Paralympic Games. As such,

the IDP and other aspects of the evidence base that are linked to the emerging Local Plan are an appropriate context for consideration of the

Charging Schedule.

6. The IDP identifies that there will be some 20,403 net additional dwellings and

931,722 sqm net additional commercial floorspace in the LLDC area by 2031. This would result in about an additional 48,132 residents and 37,269 jobs. Infrastructure to support that growth would include primary, secondary and

early years education, primary healthcare, sport and leisure, open space, children’s play space, local and strategic transport schemes, utility

improvements and flood mitigation and alleviation.

7. The LLDC has published a draft Regulation 123 list which sets out the projects that it intends to fund from CIL. These are limited to children’s play space,

transport schemes and flood mitigation. The IDP has identified other infrastructure which is typically funded through pooled contributions from

planning obligations, particularly in relation to education, and therefore on the face of it would seem more appropriate to CIL. However, the LLDC has produced a Planning Obligations Supplementary Planning Document (SPD)

which, amongst other things, sets out the on-site planning obligations that are likely to be sought after CIL is introduced. It identifies a number of significant

developments that are subject to existing s106 agreements. The draft Regulation 123 list takes account of this. The Regulation 123 list is a matter for the charging authority and not subject to my examination but as it stands

it is consistent with the intended approach to planning obligations. Existing planning permissions may lapse and any new proposals would then be subject


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to CIL. Accordingly, the LLDC has indicated that adding education, in

particular, to the Regulation 123 list would be a matter to be considered when it was reviewed.

8. The projects identified in the IDP would have a total cost of about £136

million. With identified funding (including s106 contributions) of £32.8 million and anticipated further funding of £39.4 million this would leave a shortfall of

some £63.8 million. The LLDC estimates that in the next 10 years the residential CIL would generate about £7,095,270. Even taking account of the non-residential CIL and the remaining years of the plan period, in the light of

the information provided the proposed charge would make only a modest contribution towards filling the likely funding gap. The figures demonstrate

the need to levy CIL.

Economic viability evidence

9. The submitted Charging Schedule is accompanied by a CIL Viability Study

(VS), prepared by BNP Paribas Real Estate and dated December 2013, which was commissioned by the LLDC. This is an update of an initial report, dated

May 2013, which was published as part of the consultation on the preliminary Charging Schedule. The VS uses a standard residual valuation approach to test the impact on viability of a range of levels of CIL.

10. For residential development, the VS appraises a series of development typologies reflecting the range of sales/capital values, sizes and types of

development and densities across the LLDC’s limited area. Reasonable standard assumptions have been made for a range of factors such as building costs (including Code for Sustainable Homes requirements), profit levels, fees,

finance costs and site specific planning obligations. Alternative assumptions about affordable housing have been tested and allowance has been made for

the Mayoral CIL.

11. Much of the development land in the LLDC area comprises former industrial

and commercial uses, cleared sites or land in community use. A number of benchmark land values have been used based on local data that reflect this picture. The VS compares the residual land values with the appropriate

benchmarks and, having regard to a 20% premium that would be an incentive for the landowner to release the site.

12. For commercial development a series of development typologies have been examined, reflecting a range of use classes at average rent levels achieved on lettings of commercial space in actual developments. The VS assumes an

intensification of use of the site based on three types of commercial development.

13. There is some concern that a Market Value approach should have been adopted and also that there should have been more market testing or sense checking between the land values that have been assumed and those evident

from the market. However, the benchmarks used in the VS are derived from local information including rents and yields. I am satisfied that the overall

approach in the VS is consistent with that supported in the Harman Report (Local Housing Delivery Group: Viability Testing for Local Plans: Advice for planning practitioners, June 2012). Representations have been made in


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respect of some of the detailed individual assumptions, which I give further

consideration to below.

Conclusion

14. The draft Charging Schedule is supported by detailed evidence of community

infrastructure needs and of economic viability. On this basis, and subject to more detailed comments below, the evidence which has been used to inform

the Charging Schedule is robust, proportionate and appropriate.

Is the charging rate informed by and consistent with the evidence?

CIL rates for residential development

15. The residential rate of £60 psm across the area reflects the recommendation of the VS. In coming to this conclusion, the VS adopts a base scenario that

35% of new housing would be affordable homes with a tenure mix of 70% affordable rent/social rent and 30% intermediate. This would align with the minimum target of 35% in the emerging Local Plan but would differ from the

potentially higher requirements, subject to viability, in the adopted Core Strategies of the four Boroughs.

16. It is not the role of a CIL Charging Schedule to revisit affordable housing policy. However, those plans relate to the individual Boroughs as a whole and it is appropriate that the LLDC CIL should be based on the characteristics of its

own area. Typically affordable housing levels of between only 10 and 20% have been achieved there in recent schemes. The development appraisals in

the VS assess the effects of a wide range of proportions of affordable housing, which embrace those within the adopted plans. Sensitivity testing on the viable level of affordable housing based on the £60 psm charge shows that the

proposed CIL would typically account for less than 2% of scheme value and is unlikely to be an overriding factor in overall viability. Having regard to these

factors, I am satisfied that the affordable housing assumptions used are appropriate to inform the charging rate.

17. Construction cost assumptions used in the VS are based on the RICS Building Cost Information Service (BCIS) data for the four relevant London Boroughs. The VS indicates that the highest of these have been used. While it has been

suggested that these may be too low, no substantive evidence has been put forward that would provide alternative figures. The estimates used take on

board the implications of the Code for Sustainable Homes Level 4 and include a 5% contingency. They provide a reasonable basis for the levy charge.

18. Developers profit has been assumed by the VS to be 20% for market housing

and 6% for affordable homes. While in practice larger schemes that take place over many years may use an internal rate of return approach to

profitability no other specific assumptions have been suggested that would replace those used.

19. Professional fees are included at 10% for smaller schemes and 12% for larger,

with a further 3% for marketing and 0.5% for legal fees. These are factored into the development appraisals which also include an overall contingency

allowance. There is no persuasive evidence that the assumptions used are


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inappropriate in the current market.

20. The VS assumes that finance costs will be 7%. It has been suggested that these should take into account both senior and mezzanine debt costs and other fees. As most financial institutions are not lending more than 55 to 60%

of total project costs it is also proposed that the opportunity cost of a developer’s own capital or private equity should be taken into consideration.

However, the VS assumption is generally in accord with market practice and no specific alternative assumptions have been promoted.

21. The residential rate is based on £1,000 per unit for costs associated with s278

and residual s106 contributions. It is suggested that this may be inadequate and that it is not entirely clear how it has been derived. However, for larger

typologies there is a further allowance of £5,000 per unit to reflect the additional site preparation and infrastructure costs associated with such developments. It is likely that requirements will vary considerably between

sites and the VS has based the assumed contributions on experience in other London Boroughs. In the absence of any evidence that would support

different assumptions and having regard to the LLDC’s approach to on-site infrastructure set out in the Planning Obligations SPD, I am satisfied that these are reasonable assumptions.

22. The Charging Schedule does not distinguish between different types of residential development. However, there is no evidence that would indicate

that a differential approach to rates would be justified. In the case of gypsy and traveller sites these are normally regarded as a sui generis use for which a nil rate is proposed. In any event, the stationing of caravans is a use of land

and CIL only applies to buildings, with various exemptions including minor developments of less than 100 sqm.

Student accommodation

23. The VS identifies two distinct markets for student accommodation. Firstly,

there is that let at private sector market rents and, secondly, there are schemes let at reduced rents and subsidised by universities. A single rate of £100 psm is proposed for all such accommodation. The VS has appraised the

private market accommodation based on the likely rents for schemes with existing planning permissions in the LLDC area and the proposed rate has

allowed for an appropriate buffer relative to the maximum CIL that could be charged. The rates proposed in Hackney and Tower Hamlets are significantly higher than this but those Charging Schedules are still subject to examination

and that for the LLDC is consistent with the local evidence.

24. In terms of the unviable subsidised accommodation there is no obvious way of

differentiating this from the market rent provision in the Charging Schedule rates. Nevertheless, the VS and other evidence indicate that, as universities have charitable status, such developments would be exempt from CIL. There

are also powers under the Regulations to give discretionary relief in exceptional circumstances, including where there would be an unacceptable

impact on economic viability. Even so, these are matters for the LLDC to determine, based on the circumstances of the individual case. I note that the LLDC considers that at this point it would not be appropriate to make

exceptional circumstances relief available but has also indicated that this can


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be reviewed relatively easily. As a result there is some uncertainty as to the

position for subsidised accommodation. However, the LLDC will wish to ensure that the ability to develop viably is not threatened. The evidence before me does not indicate that the degree of risk is so great that the provision of

student accommodation would be prejudiced or that the overall CIL rate would be inappropriate.

Hotels

25. While the evidence on recent hotel sales in the area is limited, this is nonetheless a reasonable basis on which to determine whether a charge

should be levied on this form of development. The rate of £100 psm takes account of an appropriate buffer, is well below the maximum CIL that could be

set and is consistent with the evidence.

Commercial rates

26. In setting variable rates for retail uses the Charging Schedule has incorporated

clear and usable definitions of the different development types.

27. Convenience supermarkets and superstores and retail warehouses over

1,000 sqm across the whole area would be charged at a rate of £100 psm. However, the VS recommends that this floorspace threshold should be 280 sqm. It is clear from the evidence that below 280 sqm it is likely that a

significant amount of development would be unviable. The VS has also explored the effect of a 1,000 sqm threshold using a range of different

appraisals, but has not looked at options in between. In the absence of clear evidence on developments in this intermediate size range, particularly where there would be occupiers of low covenant strength, it would be unwise to

conclude that CIL should be imposed below 1,000 sqm. However, at this higher level and allowing for a suitable buffer the available evidence supports

the rate set.

28. The Stratford Retail Area includes the Westfield Shopping Centre which is a

prime location achieving very high rents. Outside this within the Retail Area rental levels are somewhat lower. The Charging Schedule does not make any distinction between the different forms of retail use (Use Classes A1 to A5)

when setting a rate of £100 psm for comparison and all other retail in the Area.

29. In representations it is contended that the various retail uses generate significantly different income and are therefore able to support very different land and rental values. This should be reflected in the Charging Schedule by

either applying differing rates over an appropriate threshold or a maximum contribution on individual units. However, no specific alternative rates for the

Retail Area have been put forward and there are no appraisals of the separate retail Use Classes. The rate for the Retail Area reflects the recommendation of the VS. It is based on a cautious approach to rental levels and applies a

suitable buffer. Taking the available evidence into account the CIL rate of £100 psm is justified.

30. In terms of the proposed nil rate for comparison and all other retail in the rest of the LLDC area, the VS shows that rents are so low that a scheme would not


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generate a positive residual value.

31. The VS appraisals indicate that new office developments are unlikely to be sufficiently viable to absorb CIL. Industrial and warehouse developments would have residual values that are too low to absorb any CIL above that

levied by the Mayor. The VS also considers D1 and D2 floorspace but it is likely that this would be providing infrastructure, require public subsidy or not

accommodate revenue generating operations. The nil rates for all these uses are therefore consistent with the evidence.

Does the evidence demonstrate that the proposed charge rate would not

put the overall development of the area at serious risk?

32. The neighbouring parts of the London Boroughs of Tower Hamlets and

Hackney have proposed residential rates of £35 psm and £25 psm respectively. It has been argued that this could potentially harm the regeneration of the LLDC area where the CIL would be higher, especially

where there are other redevelopment sites close to the common boundary such as at Bromley-by-Bow or Hackney Wick. However, the A12 forms a

substantial barrier as well as boundary with these adjacent areas to the west. The areas administered by the LLDC will have more ready access to the transport hub and facilities at Stratford and the Queen Elizabeth Olympic Park.

In the context of these distinctive factors, residential development in the area would not be put at serious risk by the comparative rates.

33. The VS concludes that the residential CIL would be a marginal factor in scheme viability, typically accounting for less than 2% of total value in residential schemes. The LLDC’s decision to set differential rates is based on

reasonable assumptions about development values and likely costs. The evidence suggests that residential and commercial development will remain

viable across most of the area if the charge is applied. Only if development sales values are at the lowest end of the predicted spectrum would

development in some parts of the area be at risk.

Other Matters

34. Regulation 12(2)(c)(iii) requires that where a charging authority sets

differential rates the Charging Schedule must contain a map which, amongst other things, shows National Grid lines and reference numbers. These details

were not included on the maps in the submitted schedule. The LLDC has provided revised plans that remedy this. For the Charging Schedule to be legally compliant I must recommend that they be included (EM1).

35. At the same time as consultation took place on the Draft Charging Schedule the LLDC published its Planning Obligations SPD, the draft IDP, draft

Regulation 123 infrastructure list and policies towards instalment payments and exceptional relief. Some representations have been made on these. Concern over the effect of the instalments policy on strategic schemes and

their viability could be addressed through relating payments to the various phases of the development. However, these are matters for the LLDC and not

within the scope of this examination. Nonetheless, they have been taken into account in my consideration of the Charging Schedule in so far as they form part of the evidence base that supports it.


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Conclusion

36. In setting the CIL charging rates the LLDC has had regard to detailed evidence on infrastructure planning and the economic viability evidence of the development market in the area. The LLDC has tried to be realistic in terms of

achieving a reasonable level of income to address an acknowledged gap in infrastructure funding, while ensuring that a range of development remains

viable across the area in pursuit of the LLDC’s stated mission “to develop a dynamic new heart for east London, creating opportunities for local people and driving innovation and growth in London and the UK”.

37. The Charging Schedule indicates that the rates should apply for at least 3 years but that a review would be undertaken sooner if circumstances

changed materially. However, the London Legacy Development Corporation Local Plan will shortly be subject to examination. If the outcome results in a significantly different planning context from that on which the Schedule was

based then it would be appropriate to review the Schedule at that point. Otherwise, while it may be prudent for the LLDC to undertake a formal review

after the 3 year period, it should also monitor the factors that affect the levy and the expected development in the area so that this could be brought forward if necessary.

LEGAL REQUIREMENTS

National Policy/Guidance The Charging Schedule complies with national policy/guidance.

2008 Planning Act and 2010 Regulations (as amended)

The Charging Schedule complies with the Act and the Regulations (subject to modification EM1), including in respect

of the statutory processes and public consultation, consistency with the

relevant plan and the Infrastructure Delivery Plan and is supported by an adequate financial appraisal.

38. I conclude that subject to the modification set out in Appendix A the London

Legacy Development Corporation Community Infrastructure Levy Charging Schedule satisfies the requirements of Section 212 of the 2008 Act and meets

the criteria for viability in the 2010 Regulations (as amended). I therefore recommend that the Charging Schedule be approved.

M J Moore

Examiner

This report is accompanied by:

Appendix A (attached) – Modification that the examiner specifies so that the Charging Schedule may be approved.


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Appendix A

Modification recommended by the examiner so that the Charging Schedule may be approved.

Modification number

Modification

EM1 Substitute the accompanying maps for those in the submitted charging schedule.


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