RICS guidance on financial viability in planning · RICS guidance notes This is a guidance note. Where recommendations are made for specific professional tasks, these are intended

rics.org/standards

rics.org

RICS HQ

Parliament Square London SW1P 3ADUnited Kingdom

Worldwide mediaenquiries:

e pressoffi [email protected]

Contact Centre:

e [email protected] +44 (0)870 333 1600f +44 (0)20 7334 3811

Advancing standards in land, property and construction.

RICS is the world’s leading qualifi cation when it comes to professional standards in land, property and construction.

In a world where more and more people, governments, banks and commercial organisations demand greater certainty of professional standards and ethics, attaining RICS status is the recognised mark of property professionalism.

Over 100 000 property professionals working in the major established and emerging economies of the world have already recognised the importance of securing RICS status by becoming members.

RICS is an independent professional body originally established in the UK by Royal Charter. Since 1868, RICS has been committed to setting and upholding the highest standards of excellence and integrity – providing impartial, authoritative advice on key issues affecting businesses and society.

RICS is a regulator of both its individual members and fi rms enabling it to maintain the highest standards and providing the basis for unparalleled client confi dence in the sector.

RICS has a worldwide network. For further information simply contact the relevant RICS offi ce or our Contact Centre.

AsiaRoom 2203Hopewell Centre183 Queen’s Road EastWanchaiHong Kong

t +852 2537 7117f +852 2537 [email protected]

AmericasOne Grand Central Place60 East 42nd StreetSuite 2810New York 10165 – 2811USA

t +1 212 847 7400f +1 212 847 [email protected]

OceaniaSuite 2, Level 161 Castlereagh StreetSydney, NSW 2000Australia


Europe (excluding United Kingdom and Ireland)Rue Ducale 671000 BrusselsBelgium

t +32 2 733 10 19f +32 2 742 97 [email protected]

AfricaPO Box 3400Witkoppen 2068South Africa

t +27 11 467 2857 f +27 86 514 0655 [email protected]

Middle EastOffi ce G14, Block 3Knowledge VillageDubaiUnited Arab Emirates


India48 & 49 Centrum Plaza Sector RoadSector 53, Gurgaon – 122002India


United KingdomParliament SquareLondon SW1P 3ADUnited Kingdom

t +44 (0)870 333 1600f +44 (0)207 334 [email protected]

Ireland 38 Merrion SquareDublin 2Ireland


RICS Professional Guidance, England

1st edition, guidance note

Financial viability in planning

GN 94/2012

Financial viability in planningRICS guidance note

1st edition (GN 94/2012)

Published by the Royal Institution of Chartered Surveyors (RICS)

Surveyor Court

Westwood Business Park

Coventry CV4 8JE

UK

www.ricsbooks.com

No responsibility for loss or damage caused to any person acting or refraining from action as a result of the material included in thispublication can be accepted by the authors or RICS.

Produced by the Planning and Development Professional Group of the Royal Institution of Chartered Surveyors.

ISBN 978 1 84219 801 8

Royal Institution of Chartered Surveyors (RICS) August 2012. Copyright in all or part of this publication rests with RICS. No part of thiswork may be reproduced or used in any form or by any means including graphic, electronic, or mechanical, including photocopying,recording, taping or Web distribution, without the written permission of the Royal Institution of Chartered Surveyors or in line with the rulesof an existing license.

Typeset in Great Britain by Columns Design XML Ltd, Reading, Berks

Printed in Great Britain by Page Bros, Norwich

Contents

Acknowledgments ivRICS guidance notes 1Statement from Chair of Working Group 2Executive Summary 41 Introduction 6

1.1 Overview......................................................................................................................... 61.2 Viability in national planning policy context................................................................... 71.3 National Planning Policy Framework ............................................................................. 71.4 Community Infrastructure Levy Regulations.................................................................. 81.5 The use of viability appraisals in planning..................................................................... 8

2 Key features of a development viability assessment 102.1 Why are viability assessments important in planning? ................................................. 102.2 Appraisal framework ...................................................................................................... 112.3 Definition of Site value ................................................................................................... 122.4 Using a viability assessment to arrive at a professional judgment............................... 122.5 Indicative outline of what to include in a viability assessment ..................................... 13

3 Viability and Site Value benchmarks 153.1 Overview......................................................................................................................... 153.2 Model and approach...................................................................................................... 153.3 Developer’s return approach (where Site Value is a cost of development) .................. 153.4 Site Value approach (including an allowance for developer’s return as a cost of

development)..................................................................................................................17

3.5 Date of assessment ....................................................................................................... 193.6 Other material issues ..................................................................................................... 19

4 Further professional advice 234.1 Planning and viability ..................................................................................................... 234.2 Viability appraisals and evidence................................................................................... 234.3 Confidentiality................................................................................................................. 244.4 Mediation, expert determination and arbitration ........................................................... 244.5 Preparing and scrutinising a viability assessment......................................................... 25

Appendix A: Relevance of viability to planning 26Appendix B: Property market context overview 30Appendix C: Indicative outline of what to include in a viability assessment 32Appendix D: Refinements to viability methodology 34Appendix E: Application of underlying concepts within the guidance 37Appendix F: Glossary of terms 43Appendix G: FAQs for users of viability assessments 50References 55

FINANCIAL VIABILITY IN PLANNING | iii

Acknowledgments

This guidance was produced by the WorkingGroup supported by a consultant team.

Core Working Group

Simon Radford (Chair), Lothbury InvestmentManagement

Robert Fourt, Gerald Eve

Bruce Duncan, Huggins Edwards & Sharp

Nigel Jones, Chesterton Humberts

Charles Solomon, DVS

Jeremy Edge, Edge Planning and Development

Tony Mulhall, RICS

Consultants to the Working Group

GVA: Jacob Kut, Lorraine Hughes, StuartMorley

University of Reading: Neil Crosby, Peter Wyatt

Extended Working Group

Alan Gray, Planning Inspector

Simon Greenwood, Savills

Ben Hudson, Greenhill Brownfield

Georgiana Hibberd, RICS

In producing this guidance RICS hasundertaken extensive consultation with theplanning and development community in boththe public and the private sectors. A widerange of views was expressed and the workinggroup considered comments and submissionsfrom the following individuals and bodies.

We would like to express our thanks to all whoparticipated and state that inclusion in this listdoes not imply agreement with all aspects ofthe final guidance.

Arthur Whatling, RICS Red Book Editor;Graham Chase (Past President RICS); RobinPurchas QC; Homes and Communities Agency;Association of Chief Estates Surveyors; LawSociety; Royal Town Planning Institute; NationalHousing Federation; Planning Officers Society;Greater London Authority; Planning AdvisoryService; British Property Federation; PlanningInspectorate; Home Builders Federation;English Heritage; House Builders Association;Richard Asher, Jones Lang LaSalle; JamesBrown, Strutt & Parker; David Henry, Savills;Andrew Martinelli, Nottingham Trent University;Stephen Ashworth, SNR Denton; Tim Smith,Berwin Leighton Paisner; Michael Gallimore,Hogan Lovells; Simon Ricketts, SJ Berwin;Hugh Bullock, Gerald Eve; Yvonne Rydin,University College London; Michael Beaman,Michael Beaman Ltd.; Janet Montgomery,Brimble, Lea & Partners; Janice Morphet,University College London; Dominic Williams,Hewdon Consulting; Lawrence Chadwick; PeterMail, Land Securities; John Oldham,Countryside Properties; Kathleen Dunmore, 3Dragons; Anthony Lee, BNP Paribas RealEstate; Richard Wickins, Savills; AndrewGolland, Three Dragons (AG) Ltd; ChrisCobbold, DTZ; Keith Thomas, AECOM; GeraldHarford, Chesterton Humberts; Nicholas Falk,Urbed; Nigel Hawkey, Quintain.

iv | FINANCIAL VIABILITY IN PLANNING

RICS guidance notes

This is a guidance note. Whererecommendations are made for specificprofessional tasks, these are intended torepresent ‘best practice’, i.e.recommendations which in the opinion ofRICS meet a high standard of professionalcompetence.

Although members are not required to followthe recommendations contained in the note,they should take into account the followingpoints.

When an allegation of professional negligenceis made against a surveyor, a court or tribunalmay take account of the contents of anyrelevant guidance notes published by RICS indeciding whether or not the member had actedwith reasonable competence.

In the opinion of RICS, a member conformingto the practices recommended in this noteshould have at least a partial defence to anallegation of negligence if they have followedthose practices. However, members have theresponsibility of deciding when it isinappropriate to follow the guidance.

It is for each surveyor to decide on theappropriate procedure to follow in anyprofessional task. However, where members donot comply with the practice recommended inthis note, they should do so only for a goodreason. In the event of a legal dispute, a courtor tribunal may require them to explain whythey decided not to adopt the recommendedpractice. Also, if members have not followedthis guidance, and their actions are questionedin an RICS disciplinary case, they will be askedto explain the actions they did take and thismay be taken into account by the Panel.

In addition, guidance notes are relevant toprofessional competence in that each membershould be up to date and should haveknowledge of guidance notes within areasonable time of their coming into effect.

Document status defined

RICS produces a range of standards products.These have been defined in the table below.This document is a guidance note.

Type of document Definition StatusRICS practice statement Document that provides members with

mandatory requirements under Rule 4 of theRules of Conduct for members

Mandatory

RICS code of practice Standard approved by RICS, and endorsedby another professional body that providesusers with recommendations for acceptedgood practice as followed by conscientiouspractitioners

Mandatory orrecommended goodpractice (will beconfirmed in thedocument itself)

RICS guidance note Document that provides users withrecommendations for accepted goodpractice as followed by competent andconscientious practitioners

Recommended goodpractice

RICS information paper Practice based information that providesusers with the latest information and/orresearch

Information and/orexplanatorycommentary

FINANCIAL VIABILITY IN PLANNING | 1

Statement from Chair of Working Group

Financial viability has become an increasinglyimportant material consideration in the planningsystem. While the fundamental purpose ofgood planning extends well beyond financialviability, the capacity to deliver essentialdevelopment and associated infrastructure isinextricably linked to the delivery of land andviable development.

The Government’s recent National PlanningPolicy Framework (NPPF) emphasisesdeliverability and the provision of competitivereturns to willing land owners and developersto enable sustainable development to comeforward. This guidance note seeks to elaborateon how this can be achieved.

RICS acknowledges that the planning authorityis responsible for promoting policies forsustainable development and for decisiontaking on schemes based on their compliancewith sustainable development policies. We alsorecognise that where development proposalscan not be made to comply with sustainabledevelopment policies, the planning authoritymay refuse planning permission.

The NPPF sets out to achieve growth throughattracting investment and implementing plans.This guidance note starts from the premise thatthe private sector will continue to be reliedupon to deliver the majority of commercial,residential and mixed-use developments,together with consequential planningobligations. It further recognises thatdevelopment for which there is no plausiblebusiness case, on viability grounds or for otherreasons, will not take place which is clearlyrecognised in the NPPF. A sharedunderstanding of development viability forplanning purposes by all those involved is,therefore, essential to achieve consistency inboth approach and assessment.

Throughout the guidance we refer to themarket value which is a key benchmark to

investors in all areas of land transactions,development and investment. Whetherinvestors are using their own funds or arerelying on borrowings, their assessment ofviability will be based on obtaining a marketrisk adjusted return having regard to prevailingmarket conditions. Plan implementation andplanning objectives are delivered throughdevelopment projects which in turn need toachieve a competitive return. In this way planviability and delivery are closely linked to themarket.

The purpose of this guidance note is to enableall participants in the planning process to havea more objective and transparent basis forunderstanding and evaluating financial viabilityin a planning context. Arriving at an outcomewhich is satisfactory for all should be mucheasier where there is an agreed framework andbasis for evaluation. It is acknowledged thatthe market is constantly moving, however theprinciples set out in the guidance should beapplicable in all states of the economy andproperty sector.

While this guidance note provides practitionerswith advice in undertaking and assessingviability appraisals for planning purposes, it willalso be helpful to users of these assessments,be they planners, developers, investors,landowners, interested parties, individuals orcommunity groups.

Financial viability assessments for planningpurposes should be approached on anobjective and best practice basis to the extentthat the conclusions are capable of unbiasedobjective scrutiny. This may occur during allstages of the development managementprocess, including to an appeal at a publicinquiry, or, in the case of policy making,through to an examination in public.

The guidance note sets out a methodologyframework and set of principles for financial

2 | FINANCIAL VIABILITY IN PLANNING

viability in planning. These have beenformulated mainly for developmentmanagement purposes at a scheme-specificlevel but the principles apply equally to planmaking and to the viability testing thatunderpins Community Infrastructure Levy (CIL)charging schedules (area wide viability studies).

We have consulted widely within the industry inproducing the guidance note. It isfundamentally grounded in the statutory andregulatory planning regime as it should operatein England. We have deliberately avoidedreference to planning appeals and case lawwhere viability has been an issue, given thelack of previous guidance in this area fordecision makers to refer to and rely upon informulating their views. It will, however, beapparent that elements of the guidance closelyreflect certain decisions as financial viability inplanning has evolved.

The guidance note, for the first time, definesfinancial viability for planning purposes;separating the key functions of development,being land delivery and viable development (inaccordance with the NPPF). It highlights theresidual appraisal methodology; defines SiteValue for both scheme-specific and area-widetesting in a market rather than hypotheticalcontext; indicates what to include in viabilityassessments; defines terminology andsuggested protocols, and explains the uses offinancial viability assessments in planning.

The guidance note is also consistent with andhas regard to the recently released NPPF.

Importantly the guidance note does not seek tointroduce new approaches to such matters asSite Value, for example. Well understood andrecognised terminology and definitions arehighlighted and clarification provided within thecontext of the guidance.

This guidance note is divided into varioussections to assist both practitioners and users.Sections 1 and 2 and accompanyingappendices A, B, C, F and G should assistusers of viability assessments, but alsocontains important guidance for practitioners.Section 3 and accompanying appendices Dand E are principally aimed at practitioners.Section 4 provides further professional advice

on the production of viability assessments forboth users and practitioners. Appendix Gprovides a summary of FAQs together withreferences to various parts of the guidance.The guidance note proper starts with anexecutive summary which follows thisstatement and highlights a number of its keyaspects.

The working party wishes to highlight that it isnot the purpose of this guidance note to tellpractitioners how to carry out a financialviability assessment. This will inevitably vary ineach instance. The guidance, however,provides a framework, methodology andprinciples to apply, without seeking to beprescriptive. The guidance note, for example,does not suggest a particular financial model,ranges of input/benchmark outcomes, etc. It isup to the practitioners to advise accordingly ineach case. It is also intended that a ‘ViabilityCommunity’ will be established online by RICSto facilitate continued debate in this importantarea.

It is stressed that this guidance noteencourages practitioners at all times to bereasonable and objective in their approach,whether undertaking viability assessments orscrutinising them, and, where possible, to seekto resolve differences of opinion in order toassist the planning process where it is relyingon financial viability as a material consideration.

Finally, I would like to thank the consultants tothe working group, GVA and the University ofReading; my fellow members of the workinggroup and all those who contributed andprovided comments in producing this guidancenote.

Simon Radford, ChairRICS Working GroupFinancial Viability in Planning


Executive Summary

The guidance note provides all those involvedin financial viability in planning and relatedmatters with a definitive and objectivemethodology framework and set of principlesthat can be applied mainly to developmentmanagement. The principles are howeverapplicable to the plan making and CIL (area-wide) viability testing.

The National Planning Policy Framework(NPPF) sets out to achieve growth throughattracting investment and development. RICSacknowledges that the planning authority isresponsible for promoting policies forsustainable development. We also recognisethat where development proposals can not bemade to comply with sustainable developmentpolicies the planning authority may be obligedto refuse planning permission.

The guidance note is grounded in the statutoryand regulatory planning regime that currentlyoperates in England. It is consistent with theLocalism Act 2011, the NPPF and CommunityInfrastructure Levy (CIL) Regulations 2010.

The most common uses for financial viabilityassessments as set out in this guidance noteare for development management (includingaffordable housing, enabling development, landuse, Section 106 Agreement planningobligations) and plan making (policy and CILviability testing).

Financial viability for planning purposes isdefined by this guidance as follows:

An objective financial viability test of theability of a development project to meet itscosts including the cost of planningobligations, while ensuring an appropriateSite Value for the landowner and a marketrisk adjusted return to the developer indelivering that project.

(Where viability is being used to test andinform planning policy it will be necessaryto substitute ‘a development project’ intothe wider context)

The guidance note separates the two keycomponents of development: land delivery andviable development. This is in accordance withthe NPPF. Fundability is also an intrinsicelement of both.

The residual appraisal methodology for financialviability testing is highlighted where either thelevel of return or residual Site Value can be aninput and the consequential output (either aresidual land value or return respectively) canbe compared to a benchmark to assess theimpact of planning obligations or policyimplications on viability.

The guidance note does not recommend anyparticular financial model (bespoke orotherwise) or provide indications as to inputs oroutputs commonly used. It is up to thepractitioner in each case to adopt and justify asappropriate.

Site Value, either as an input into a scheme-specific appraisal or as a benchmark, isdefined in the guidance note as follows:

Site Value should equate to the marketvalue1 subject to the following assumption:that the value has regard to developmentplan policies and all other materialplanning considerations and disregardsthat which is contrary to the developmentplan.

When undertaking Local Plan or CIL (area-wide)viability testing, a second assumption needs tobe applied to the Site Value definition:

The Site Value (as defined above) mayneed to be further adjusted to reflect theemerging policy/CIL charging level. The


level of the adjustment assumes that sitedelivery would not be prejudiced. Wherean adjustment is made, the practitionershould set out their professional opinionunderlying the assumptions adopted.These include, as a minimum, commentson the state of the market and deliverytargets as at the date of assessment.

The guidance note encourages practitioners tobe reasonable, transparent and fair inobjectively undertaking or reviewing financialviability assessments. Where possible,practitioners should seek to resolve differencesof opinion.

In undertaking scheme-specific viabilityassessments, the nature of the applicantshould normally be disregarded, as shouldbenefits or disbenefits that are unique to theapplicant. The aim should be to reflect industrybenchmarks in both development managementand plan making viability testing.

Viability assessments will usually be datedwhen an application is submitted, or when aCIL charging schedule or local plan ispublished in draft; exceptions to this may bepre-application submissions and appeals.Viability assessments may occasionally need tobe updated due to market movements duringthe planning process.

The guidance note highlights where re-appraisals, i.e. viability reviews prior to schemeor phase implementation, or projection (growth)models may be appropriate as an alternative tocurrent day methodologies. It is assumed thatfor CIL charging schedules and local plantesting this will be undertaken on a current daybasis, subject to suitable margins/buffers.

It is strongly recommended that financialappraisals are sensitivity tested as a minimum,and with more complex schemes furtherscenario/simulation analysis should also beundertaken. This is to ensure that a soundjudgment can be formulated on viability.

The guidance note sets out what shouldusually be included in viability assessments,common terminology and definitions, togetherwith additional technical guidance forpractitioners.

Confidentiality protocols and suggested non-binding mediation/arbitration mechanisms forresolving disputes are set out in the guidancenote.


1 Introduction

Key issues: purpose of the guidance note;viability context in national and localplanning policy; use of viability appraisals inplanning, and an effective framework forviability testing.

1.1 Overview1.1.1 This guidance note provides all thoseinvolved in financial viability in planning andrelated matters with a definitive and objectivemethodology framework and set of principlesfor application to development management.

Box 1: Purpose of the guidance noteThe guidance note provides all thoseinvolved in financial viability in planning andrelated matters with a definitive andobjective methodology framework and set ofprinciples primarily for application todevelopment management.

1.1.2 The motivation for undertaking thisguidance note arose from the gap (partly as aresult of a lack of clear published guidance)that often occurs between what local planningauthorities consider viable to provide, and whatdevelopment proposals are actually capable ofsupporting financially, in terms of planningobligations, while seeking to meet policyrequirements. This does not just relate to the‘development management’ stage of theplanning process where section 106agreements are negotiated, but also to thebeginning of the spatial planning processwhere policy is formulated in local developmentplan documents. Viability is also relevant tolocal planning authorities when draftingCommunity Infrastructure Levy (CIL) chargingschedules. The Local Housing Delivery Grouprecently published advice on area-wide viabilitytesting entitled ‘Viability Testing Local Plans’.Both this and the RICS guidance can be seenas complementary. The RICS provides

significantly more technical guidance (seesection 3 of this guidance) on arriving at SiteValue and therefore meeting NPPF compliance,with regard to this matter, than the LHDGadvice which focuses more on policy andprocess.

1.1.3 The importance of enabling sustainabledevelopment has been underlined in theNational Planning Policy Framework. This RICSguidance recognises the role of the planningauthority in achieving sustainable developmentand supports the implementation ofdevelopment plans. The guidance does notseek to determine policy. It sets out to bringclarity to the decision making by facilitatingevaluation of the critical elements that mayimpact on viability and therefore delivery in anopen and explicit way.

1.1.4 The guidance aims to satisfy thefollowing requirements:

+ outline the statutory/regulatory/policybackground in considering viabilityassessments in a town planning context

+ clearly define terminology in a way that isconsistent with existing RICS usage

+ clearly define financial viability in thecontext of planning and development

+ enable an objective evaluation of financialviability to be made

+ set down the parameters within whichissues of financial viability are to beconsidered

+ establish the principles upon which thesewill be evaluated

+ be applicable at all stages in the economiccycle; and

+ be applicable to all scales of site whethergreenfield or urban.

1.1.5 The intention of this guidance note is toprovide local planning authorities, developers,investors, land owners, interested parties,


individuals or community groups and allprofessionals, including chartered surveyors,with definitive and impartial objective guidanceon viability in a development management andplan making context. In respect of developmentmanagement, this includes evaluating theimpact of planning obligations, includingaffordable housing and other section 106requirements, CIL including the application oftariffs/levies, and planning policy, on thefinancial viability of a proposed development.While the focus of this guidance is on thedevelopment management stage, dealing withsite specific applications, the principles can beapplied equally to area-wide viability in respectof local plans and CIL charging schedules.

1.2 Viability in nationalplanning policy context1.2.1 While always central in the developmentprocess, viability has become an increasinglyimportant consideration in town planning.Whether preparing policy or considering aspecific proposal scheme, viability is inherentlylinked to the ability to satisfy planning policy,and to deliver regeneration objectives andeconomic development. The significance ofviability has increased during periods ofeconomic downturn when the delivery of newdevelopment has been threatened and therelative burden of planning obligations andpolicy requirements on developers andlandowners has increased. Striking the rightbalance to deliver development in the rightplace at the right time is, therefore, essential.

1.2.2 In undertaking development, the privatesector is often called upon by local planningauthorities (LPAs) to deliver and/or contributetowards the provision of infrastructure andmitigate potential harm arising from a proposeddevelopment. Scheme viability is a materialconsideration in deciding the appropriate levelof contribution. It is important, therefore, forLPAs to have a greater understanding ofviability as it is relevant to planning in both theformulation of planning policy, as well as in thedetermination of planning applications. In theformer, the emphasis is upon deliverability ofan authority’s vision/infrastructure or

community requirements during the planperiod; the latter relates to an authority’swillingness to allow a scheme to proceed afterrelaxation of policy and/or planning obligationsin the context of viability. A full assessment ofthe implications for planning is provided inAppendix A and a summary is provided in 1.3.

1.2.3 Reference is made throughout thisguidance note to national planning guidanceset out in the NPPF, the CIL Regulations andother relevant national policy.

1.3 National Planning PolicyFramework1.3.1 In the context of achieving sustainabledevelopment the Draft NPPF refers to ensuringviability and deliverability at sections 173–177.

… To ensure viability, the costs of anyrequirement likely to be applied todevelopment, such as requirements foraffordable housing, standards, infrastructurecontributions or other requirements should,when taking into account of the normal costof development and mitigation, providecompetitive returns to a willing land ownerand willing developer to enable thedevelopment to be deliverable

(NPPF, 2012, paragraph 173)

1.3.2 The NPPF also refers to the use ofplanning conditions and obligations at sections203–206 and advises that where obligations arebeing sought:

…local planning authorities should takeaccount of changes in market conditionsover time and, wherever appropriate, besufficiently flexible to prevent planneddevelopment being stalled.

(NPPF, 2012, paragraph 205)

1.3.3 This RICS guidance fully recognises thewider role of the planning authority in achievingsustainable development and that the planningauthority may refuse planning permission inorder to achieve its objectives.


1.4 Community InfrastructureLevy Regulations1.4.1 Since April 2010, the tests fordetermining the lawfulness of planningobligations are set out in regulation 122 of theCommunity Infrastructure Levy Regulations2010. The 2010 Regulations provide that aplanning obligation may only constitute areason for granting planning permission if it is:(a) necessary to make the developmentacceptable in planning terms; (b) directlyrelated to the development; and (c) fairly andreasonably related in scale and kind to thedevelopment. These three prerequisites are thesame as three of the five policy tests forplanning obligations in Annex B to Circular 05/2005.

1.4.2 CIL should be set at a level that assumesthe development plan requirements are beingdelivered and not prejudiced. Also, in setting anappropriate CIL, a local authority as thedecision maker may conclude it is acceptablethat some development will not be viable.Further background information on the CILRegulations and other relevant planningconsiderations upon which this guidance notehas been based are set out in Appendix A.

Box 2: Legal and policy basisThe guidance note is grounded in thestatutory and regulatory planning regime thatcurrently operates in England. It is consistentwith the Localism Act 2011, NationalPlanning Policy Framework of 2012 andCommunity Infrastructure Levy (CIL)Regulations 2010.

1.5 The use of viabilityappraisals in planning1.5.1 Viability appraisals may be used inconnection with a number of planning-relatedissues in respect of both policy assessmentand development control. It is usual to apply a‘reasonableness’ test in development control;this may take the form, for example, of themaximum reasonable amount of affordablehousing in terms of the economic viability of adevelopment. Reasonableness should be

considered of utmost importance in allinstances where viability appraisals areundertaken. In certain instances, financialviability may also be relevant in the context ofseeking to depart from planning policy. This isemphasised in paragraph 187 of the NPPF.

1.5.2 The most common uses of viabilityappraisals include:

+ assessing the nature and level of planningobligation contributions/requirements

+ establishing the level of affordable housing

+ identifying the split between affordablehousing tenures

+ establishing off-site affordable housinglevels including the quantification ofoverprovision and affordable housingcredits

+ assessing contributions in lieu payments foraffordable housing

+ the timing of planning obligationscontributions and affordable housingdelivery

+ applications incorporating enablingdevelopment

+ assessing the bulk, scale and massing (andspecification relative to cost and value) of aproposed scheme

+ reviewing land uses

+ assessing continuing existing uses in termsof obsolescence and depreciation

+ dealing with heritage assets andconservation issues

+ formulating planning policy through localdevelopment plans; and

+ consideration by local authorities whendrafting and viability testing CIL chargingschedules.


Box 3: Uses of viability assessmentsThe most common uses for financial viabilityassessments as set out in the guidance noteare for development management (includingaffordable housing, enabling development,land use, section 106 Agreement planningobligations) and plan making (policy and CILviability testing). The guidance note has aparticular focus on developmentmanagement (scheme specific assessments)although the principles set out are equallyapplicable to plan making and CIL (area-wide) viability testing.

1.5.3 In many instances a viability assessmentwill have regard to not just single policyimpacts but a cumulative impact of policy andplanning obligations as illustrated in figure 1.

1.5.4 This guidance note is intended to providean effective framework within which financialviability may be assessed, having regard to theregulatory regime in place and at whateverstage of the economic cycle the evaluation isbeing carried out (Appendix B provides aproperty market context overview). It seeks toprovide a rigorous approach to evaluatingfinancial viability and reaching an appropriateprofessional judgment in the context ofassessing the introduction of planningobligations, formulating planning policy andestablishing CIL charging schedules.

Figure 1: Cumulative impact of policy and planning obligations


2 Key features of a development viabilityassessment

Key issues: definition of viability for planningpurposes; an appraisal framework; definitionof Site Value for scheme specific appraisalsand area wide studies; using a viabilityassessment to arrive at a professionaljudgment; and indicative outline of what toinclude in a viability assessment.

2.1 Why are viabilityassessments important inplanning?2.1.1 Viability, in the context of undertakingappraisals of financial viability for the purposesof town planning decisions, can be defined as:

An objective financial viability test of theability of a development project to meet itscosts including the cost of planningobligations, while ensuring an appropriateSite Value for the landowner and a marketrisk adjusted return to the developer indelivering that project.

(Where viability is being used to test and informplanning policies or CIL charging schedules, itwill be necessary to substitute ‘project’ in tothe wider context of development for whichviability is being assessed).

2.1.2 The fundamental issue in consideringviability assessments in a town planningcontext is whether an otherwise viabledevelopment is made unviable by the extent ofplanning obligations or other requirements. Thisis illustrated in figure 2 (opposite) in terms ofcomparative development viability. As can beseen, the development economics of Scenario1 is such that policy can be met in deliveringall planning obligations while meeting a SiteValue for the land, all other development costsand a market risk adjusted return for thedevelopment. In this case it is unlikely a

financial viability assessment would berequired. Under Scenario 2, costs haveincreased, while development values haveremained static. In arriving at Site Value, thedevelopment return, and the ability to meet theplanning obligations, a financial viabilityassessment would be required to objectivelyresolve what could viably deliver thedevelopment while meeting the viabilitydefinition in 2.1.1. It follows, for example, thatland value is flexible and not a fixed figure tothe extent that Site Value has to be determinedas part of the viability assessment.

Box 4: Financial viability definitionFinancial viability for planning purposes isdefined as follows:‘An objective financial viability test of theability of a development project to meet itscosts including the cost of planningobligations, while ensuring an appropriateSite Value for the landowner and a marketrisk adjusted return to the developer indelivering that project.’2

2.1.3 A proper understanding of financialviability is essential in ensuring that:

+ land is willingly released for developmentby landowners

+ developers are capable of obtaining anappropriate market risk adjusted return fordelivering the proposed development

+ the proposed development is capable ofsecuring funding

+ assumptions about the quantum ofdevelopment that can be viably deliveredover the course of the plan period arerobust; and

+ CIL charging schedules are set at anappropriate level.


Figure 2: Comparative development viability

2.1.4 Where planning obligation liabilitiesreduce the Site Value to the landowner andreturn to the developer below an appropriatelevel, land will not be released and/ordevelopment will not take place. This isrecognised in the NPPF (see paragraph 1.3above and Appendix A).

Box 5: Land delivery and viabledevelopmentThe guidance note separates out the twokey components of development: landdelivery and viable development. This isconsistent with the NPPF. Fundability is alsoan intrinsic element of both.

2.2 Appraisal framework2.2.1 An objective test of financial viability forprojects should be placed in the context of awell-established set of appraisal techniquesand their applications. An accepted method ofvaluation of development schemes and land isset out in RICS Valuation Information Paper(VIP) 12. This approach, called the residualmethod, recognises that the value of adevelopment scheme is a function of a numberof elements: the value of the completeddevelopment (gross development value (GDV));the direct costs of developing the property(gross development cost (GDC)); the return to

the developer for taking the development riskand delivering the scheme; the cost of anyplanning obligations, and the cost or value ofthe site. The residual approach is used fordevelopment situations where the directcomparison with other transactions is notpossible due to the individuality ofdevelopment projects. However, practitionerswill seek to check residual developmentappraisals with market evidence.

2.2.2 The residual appraisal method can beused in two basic ways; first, to assess thelevel of return generated from the proposedproject where site cost is an input into theappraisal, and second, to establish a residualSite Value by inputting a predetermined level ofreturn.

2.2.3 The financial viability test can use thelevel of developer’s return or the Site Value asthe benchmark for assessing the impact ofplanning obligations on viability. While themajority of financial viability assessments usethe residual approach, there may be certaincircumstances where other appraisalmethodologies are appropriate and should beused by the practitioner (for example, whenassessing continuing existing uses in terms ofobsolescence and depreciation an investmentappraisal may be more appropriate). In order tomaintain the residual approach as a market


based exercise, as the NPPF also advocatesthrough seeking a competitive return, it will beimportant to both benchmark and have regardto the available comparable market basedevidence. The practitioner may have to analyseand form a judgment on this evidence asappropriate to the circumstances.

Box 6: Residual appraisalThe residual appraisal methodology forfinancial viability testing is normally used,where either the level of return or Site Valuecan be an input and the consequentialoutput (either a residual land value or returnrespectively) can be compared to abenchmark having regard to the market inorder to assess the impact of planningobligations or policy implications on viability.

2.3 Definition of Site Value2.3.1 Site Value either as an input into ascheme-specific appraisal or as a benchmarkis defined as follows:

Site Value should equate to the marketvalue3 subject to the following assumption:that the value has regard to developmentplan polices and all other material planningconsiderations and disregards that which iscontrary to the development plan.

2.3.2 Any assessment of Site Value, however,will have regard to prospective planningobligations and the point of the viabilityappraisal is to assess the extent of theseobligations while also having regard to theprevailing property market. This point isdiscussed further in Section 3.

Box 7: Site Value definitionSite Value either as an input into a schemespecific appraisal or as a benchmark isdefined in the guidance note as follows:‘Site Value should equate to the marketvalue4 subject to the following assumption:that the value has regard to developmentplan policies and all other material planningconsiderations and disregards that which iscontrary to the development plan.’

2.3.3 When undertaking Local Plan or CIL(area-wide) viability testing, a secondassumption needs to be applied to thedefinition of Site Value in 2.3.1:

Site Value (as defined above) may need tobe further adjusted to reflect the emergingpolicy/CIL charging level. The level of theadjustment assumes that site delivery wouldnot be prejudiced. Where an adjustment ismade, the practitioner should set out theirprofessional opinion underlying theassumptions adopted. These include, as aminimum, comments on the state of themarket and delivery targets as at the date ofassessment.

Box 8: Site Value – area-wideassessmentsWhen undertaking Local Plan or CIL (area-wide) viability testing, a second assumptionneeds to be applied to the above:‘Site Value (as defined above) may need tobe further adjusted to reflect the emergingpolicy / CIL charging level. The level of theadjustment assumes that site delivery wouldnot be prejudiced. Where an adjustment ismade, the practitioner should set out theirprofessional opinion underlying theassumptions adopted. These include, as aminimum, comments on the state of themarket and delivery targets as at the date ofassessment.’

2.4 Using a viabilityassessment to arrive at aprofessional judgment2.4.1 Valuation and formulating appropriatejudgments is an intrinsic part of appraisals thatcontain a significant number of variables. Thesevariables may change over time and will reflectthe movement in the property market generally(see Appendix B). The appraisal date shouldtherefore be clearly stated and inevitableuncertainty addressed through sensitivity orsimilar analysis. It is for the practitioner todecide in each specific case if the advicebeing provided falls within the ambit of theRICS Valuation – Professional Standards(Red Book) or its exceptions.


2.4.2 The residual approach can be appliedwith differing levels of information andsophistication and it is for the practitioner todecide upon the most appropriate applicationof any financial model, bespoke or otherwise.

2.4.3 The basic residual concept isstraightforward, but difficulties can arise, notonly in the method itself, but also in estimatingthe values of the many variables that go intothe appraisal. The residual answer can also besensitive to small changes in some variables. Itis appropriate and strongly recommended,therefore, for some form of sensitivity (scenarioand/or simulation) analysis to be undertaken.This would examine the effect of changes inthe level of individual variables on the residualland value (or developer’s return) to test the keyassumptions in order to ensure that they aresoundly based, before a judgment is finalisedand the residual land value (or return required)is finally determined and a full picture ofdevelopment viability ascertained. As explainedin 2.2.3 the residual approach should bemarket based as envisaged by the NPPF inundertaking viability assessments.

Box 9: Sensitivity testingIt is strongly recommended that financialappraisals are sensitivity tested, as aminimum, and with more complex schemes,further scenario/simulation analysis shouldalso be undertaken. This is to ensure that asound judgment can be formulated onviability.

2.4.4 It is also recommended that additionalchecks are undertaken on the estimatedresidual land value when this is the purpose ofthe calculation. These checks should includecomparison with the sale price of land forsimilar development, where such evidenceexists, based on land value per hectare or perunit of development, particularly for greenfielddevelopment, and calculation of the ratio of theresidual land value to the capital value of thescheme and how this ratio compares to otherevidence of similar transactions.

2.4.5 The value of development land (forestablishing Site Value) has regard to what canbe developed on that land and the value, costand timing of that development. Furthermore,

the value of that development is not directlyrelated to its cost, but is created by theinterplay of market forces. These market forcesinclude the supply of and demand fordevelopment properties and land in the market(see also Appendix E, figure 5 and paragraphE.1.13). This, in turn, is influenced by theplanning system, the availability of fundingthrough the financial system, residential andoccupier demand, and the property investmentand capital markets.

2.4.6 Where the residual appraisal method hasassessed the level of return, it will benecessary to form a professional judgment asto that return’s acceptability in respect of theproposed development. This will have regard toboth market forces as described above and theintrinsic risks associated with the schemebeing appraised (see also Appendix E,paragraph E.3.2.1). A market risk adjustedreturn may fall within a prescribed range ormay be required to seek to achieve a minimumtarget level for a proposed development. Thejudgment formulated will, in practice, need tobe justified having regard to 2.4.3 and 2.4.4.

2.5 Indicative outline of whatto include in a viabilityassessment2.5.1 As an illustration of what a viabilityassessment should comprise, Appendix Cprovides a checklist. It is stressed that the leveland detail of information forming the viabilityassessment will vary considerably from schemeto scheme, and in the case of plan making andCIL charging schedules. It is up to thepractitioner to submit what they believe isreasonable and appropriate in the particularcircumstances and for the local authority ortheir advisers to agree whether this is sufficientfor them to undertake an objective review.

2.5.2 When determining planning applications,LPAs are concerned with the merits of theparticular scheme in question. They shoulddisregard who is the applicant, except inexceptional circumstances such as personalplanning permissions, as planning permissionsrun with the land. It follows that in formulating


information and inputs into viability appraisals,these should disregard either benefits ordisbenefits that are unique to the applicant,whether landowner, developer or both; forexample, internal financing arrangements. Theaim should be to reflect industry benchmarksas applied to the particular site in question fora planning application or as appropriate for thewider area in the context of the preparation ofpolicy or the setting of the CIL chargingschedules. Clearly, there must be consistencyin viability principles and application acrossthese interrelated planning matters.

Box 10: Industry benchmarksIn undertaking scheme specific viabilityassessments, the nature of the applicantshould normally be disregarded as shouldbenefits or disbenefits that are unique to theapplicant. The aim should be to reflectindustry benchmarks having regard to theparticular circumstances in bothdevelopment management and plan makingviability testing.

2.5.3 This guidance note does not recommendany particular financial model (bespoke orotherwise) or provide indications as to inputs oroutputs commonly used. It is up to thepractitioner in each case to adopt and justify asappropriate.

2.5.4 While this section has outlined the basicapproach to assessing development viabilitythat is commonly used in practice, Appendix Dcontains refinements to the basic residualmethod of assessing development viability. Thisincludes cash flows and DCF analysis (internalrate of return (IRR) and net present value (NPV)approaches) and the effects of inflation andforecasting are set out. Section 3 provides adetailed consideration of development viabilityand Site Value benchmarks to determinewhether the scheme, or planning policy, isviable or not, and therefore the level ofplanning obligations that can be afforded orcompliance with policy met.

2.5.5 Appendix E, sections E.2 and E.3 providedetails of the types of developer and theconstituent parts of the development appraisalmodel.


3 Viability and Site Value benchmarks

Key issues: principles that practitionersshould take into account; model andapproach; developer’s return approach; SiteValue approach; date of assessment; actualpurchase price; holding costs; third partyinterests; vacant possession and relocationcosts; reappraisals, and projection models.

3.1 Overview3.1.1 This section is intended to provide amore detailed consideration of financial viabilityassessments for the purposes of thepractitioner. It provides an approach toassessing viability, rather than specifying aprescriptive tool or financial model. It thereforedoes not remove the need for developers, localplanning authorities and other interested partiesto seek advice from appropriately qualifiedprofessionals when undertaking or reviewingviability assessments.

3.1.2 This guidance follows the usual approachof setting down a set of principles thatpractitioners should take into account. It doesnot give specific examples but leaves thisdiscretion to the professionals in providingsuitably appropriate advice.

3.1.3 As part of providing a viability frameworkit is necessary to set out clear guidance on SiteValue to be used in viability assessments.Much of this section is focused on schemespecific decision taking but the principles areequally applicable to area-wide viability testing.Appendix D sets out further refinements toviability methodology having regard tocashflow, inflation in costs and values andmore complex developments.

3.1.4 While the guidance does not specify aprescriptive tool or financial model it doesemphasise the importance of using marketevidence as the best indicator of the behaviour

of willing buyers and willing sellers in themarket. It will be necessary for practitioners toexamine the available evidence, analyseaccordingly and form an appropriate judgment.

3.2 Model and approach3.2.1 In assessing the impact of planningobligations on the viability of the developmentprocess, it is accepted practice that a residualvaluation model is most often used. Thisapproach uses various inputs to establish aGDV from which GDC is deducted. GDC caninclude a Site Value as a fixed figure resultingin the developer’s residual profit (return)becoming the output, which is then consideredagainst a benchmark to assess viability.Alternatively, the developer’s return (profit) is anadopted input to GDC, leaving a residual landvalue as the output from which to benchmarkviability, i.e. being greater or less than whatwould be considered an acceptable Site Value.

3.3 Developer’s returnapproach (where Site Value isa cost of development)3.3.1 When a developer’s return is adopted asthe benchmark variable, a scheme should beconsidered viable, as long as the costimplications of planning obligations are not setat a level at which the developer’s return (afterallowing for all development costs includingSite Value) falls below that which is acceptablein the market for the risk in undertaking thedevelopment scheme. If the cost implicationsof the obligations erode a developer’s returnbelow an acceptable market level for thescheme being assessed, the extent of thoseobligations will be deemed to make a


development unviable as the developer wouldnot proceed on that basis (see figure 2).

3.3.2 The benchmark return, which is reflectedin a developer’s profit allowance, should be ata level reflective of the market at the time ofthe assessment being undertaken. It willinclude the risks attached to the specificscheme. This will include both property-specificrisk, i.e. the direct development risks within thescheme being considered, and also broadermarket risk issues, such as the strength of theeconomy and occupational demand, the levelof rents and capital values, the level of interestrates and availability of finance. The level ofprofit required will vary from scheme toscheme, given different risk profiles as well asthe stage in the economic cycle. For example,a small scheme constructed over a shortertimeframe may be considered relatively lessrisky and therefore attract a lower profit margin,given the exit position is more certain, than alarge redevelopment spanning a number ofyears where the outturn is considerably moreuncertain. A development project will only beconsidered economically viable if a market riskadjusted return is met or exceeds a benchmarkrisk-adjusted market return.

3.3.3 When considering what Site Value toinclude, the relevant value should also be inaccordance with the definition of viability forplanning purposes in 2.1, which is defined asfollows:

Site Value should equate to the marketvalue subject to the following assumption;that the value has regard to developmentplan polices and all other material planningconsiderations and disregards that which iscontrary to the development plan.

3.3.4 In arriving at a Site Value based on thedefinition in 3.3.3, regard should be given toprospective planning obligations. The purposeof the viability appraisal is, of course, to assessthe extent of these obligations while alsohaving regard to the prevailing property market.This point is discussed further in 3.4 below.

3.3.5 When undertaking Local Plan or CIL(area-wide) viability testing, a secondassumption, as outlined in 2.3.3 needs to beapplied to the definition of Site Value above.

Site Value (as defined above) may need tobe further adjusted to reflect the emergingpolicy/CIL charging level. The level of theadjustment assumes that site delivery wouldnot be prejudiced. Where an adjustment ismade, the practitioner should set out theirprofessional opinion underlying theassumptions adopted. These include, as aminimum, comments on the state of themarket and delivery targets as at the date ofassessment.

3.3.6 The amendment to market value for CILor Local Plan viability testing has not yethappened in the market, i.e. the effect on themarket value of land of the new policy (orchanges to existing) or the burden of CILcharge. There is of course a spectrum rangingfrom CIL testing where there is no planningpolicy change through to a whole-scale policychange within the local Plan. It follows that ifthe latter end of the spectrum is being tested,the first assumption in the definition of SiteValue would fall away, whereas with the former,it would be necessary to retain thisassumption. There must, however, be a‘boundary’ placed on the effect on land, toreflect new policy or the burden of CIL charge,in terms of restricting any reduction so that itdoes not go below what land would willinglytransact at in order to provide a competitivereturn to a willing landowner.5

3.3.7 The above definition is therefore notprescriptive and leaves the practitioner to makean appropriate judgment which must bereasonable, having regard to the workings ofthe property market (see also 3.4.1 below).Clearly, if sites are not willingly delivered atcompetitive returns to the market, developmentwill not take place, i.e. it will not be deliverable.


Box 11: Site Value definitionSite Value either as an input into a schemespecific appraisal or as a benchmark isdefined in the guidance note as follows:‘Site Value should equate to the marketvalue6 subject to the following assumption:that the value has regard to developmentplan policies and all other material planningconsiderations and disregards that which iscontrary to the development plan.’

Box 12: Site Value – area-wideassessmentsWhen undertaking Local Plan or CIL (area-wide) viability testing, a second assumptionneeds to be applied to the above:‘Site Value (as defined above) may need tobe further adjusted to reflect the emergingpolicy/CIL charging level. The level of theadjustment assumes that site delivery wouldnot be prejudiced. Where an adjustment ismade, the practitioner should set out theirprofessional opinion underlying theassumptions adopted. These include, as aminimum, comments on the state of themarket and delivery targets as at the date ofassessment.’

3.4 Site Value approach(including an allowance fordeveloper’s return as a cost ofdevelopment)3.4.1 To date, in the absence of any guidance,a variety of practices have evolved, which areused by practitioners to benchmark land value.One approach has been to exclusively adoptcurrent use value (CUV) plus a margin or avariant of this, i.e. existing use value (EUV) plusa premium. The problem with this singularapproach is that it does not reflect theworkings of the market as land is not releasedat CUV or CUV plus a margin (EUV plus).

The margin mark-up is also arbitrary and ofteninconsistently applied in practical application asa result. Figure 3 (overleaf) illustrates how EUVplus a premium can over-value and under-valuesites compared to market value with anassumption, and the resultant impact onplanning obligations that can be viablyafforded. Appendix E sets out further detail onwhy a CUV approach is not recommended. It isof course possible to show how Site Value (asdefined in the guidance), when it has beenestablished, can be disaggregated andexpressed in terms of ‘CUV plus a premium’.This guidance recognises that somepractitioners and users may find this helpful aspart of the decision taking process. AgainAppendix E comments upon this further.

3.4.2 In a market without planning obligations,the maximum value of a developmentopportunity would be the residual value of thesite with the proposed planning permissionafter development profit and all developmentexpenses have been deducted from the GDV ofthe proposed scheme. In this situation, if thisvalue was above the CUV (defined in AppendixF, Glossary of terms) of the site, landowners aremore likely to deliver a site for development.The level of uplift arising, which would result inland being released for development, couldvary considerably between individual sites.

3.4.3 The residual land value (ignoring anyplanning obligations and assuming planningpermission is in place) and current use valuerepresent the parameters within which toassess the level of any planning obligations.Any planning obligations imposed will need tobe paid out of this uplift but cannot use up thewhole of this difference, other than inexceptional circumstances, as that wouldremove the likelihood of the land beingreleased for development.


Figure 3: Market value (with assumption) v existing use (plus)

3.4.4 For a development to be financiallyviable, any uplift from current use value toresidual land value that arises when planningpermission is granted should be able to meetthe cost of planning obligations while ensuringan appropriate Site Value for the landownerand a market risk adjusted return to thedeveloper in delivering that project (the NPPFrefers to this as ‘competitive returns’respectively). The return to the landowner willbe in the form of a land value in excess ofcurrent use value but it would be inappropriateto assume an uplift based on set percentagesas detailed above and in Appendix E, given thediversity of individual development sites.

3.4.5 The Site Value will be based on marketvalue, which will be risk-adjusted, so it willnormally be less than current market prices fordevelopment land for which planningpermission has been secured and planningobligation requirements are known. Thepractitioner will have regard to current usevalue, alternative use value, market/transactional evidence (including the propertyitself if that has recently been subject to adisposal/acquisition), and all materialconsiderations including planning policy inderiving the Site Value.

3.4.6 The assessment of Site Value in thesecircumstances is not straightforward, but it will

be, by definition, at a level at which alandowner would be willing to sell which isrecognised by the NPPF.

3.4.7 Sale prices of comparable developmentsites may provide an indication of the landvalue that a landowner might expect, but it isimportant to note that, depending on theplanning status of the land, the market pricewill include risk-adjusted expectations of thenature of the permission and associatedplanning obligations. If these market prices areused in the negotiation of planning obligationsthen account should be taken of anyexpectation of planning obligations that areembedded in the market price, or valuation inthe absence of a price. In many cases, relevantand up-to-date comparable evidence may notbe available, or the diversity of developmentsites requires an approach not based on directcomparison. The importance, however, ofcomparable evidence cannot be over-emphasised, even if the supporting evidence isvery limited, as seen in court and land tribunaldecisions.

3.4.8 This guidance has sought to reflect moreappropriately the workings of the market. Witha definition of viability established, it has beenconsidered appropriate to look at terms theindustry is familiar with, rather than invent newones. Accordingly, the well understood


definition of market value has been adopted asthe appropriate basis to assess Site Value,subject to planning policy as set out above inboth site specific and area wide assessments.

3.4.9 It has become very common forpractitioners to look at alternative use value(AUV) as a land value benchmark. This willcome with its own set of planning obligationsand requirements. Reviewing alternative uses isvery much part of the process of assessing themarket value of land and it is not unusual toconsider a range of scenarios for certainproperties. Where an alternative use can bereadily identified as generating a higher value,the value for this alternative use would be themarket value. Again, comparable evidence mayprovide information to assist in arriving at anAUV. Accordingly, in assessing the marketvalue of the land there may well be a range ofpossible market values for different uses, whichcould be applicable to the land and buildings,from current use through to a number ofalternative use options, each having its ownplanning obligation requirements. These will beused to derive the ‘market value withassumption’ (the option with highest valuebeing the Site Value) for input into a viabilityassessment.

Box 13: Site Value and comparableevidenceThe assessment of Site Value withassumption is not straightforward but must,by definition, be at a level which makes alandowner willing to sell, as recognised bythe NPPF. Appropriate comparable evidence,even where this is limited, is important inestablishing Site Value for scheme specificas well as area wide assessments.

3.5 Date of assessment3.5.1 The date upon which the planningauthority, or the Secretary of State, (see below)resolves to grant or refuse a planningapplication is the date upon which all relevantinformation is considered. In practical terms,reports and supporting documentation areprepared well in advance of this date. It followsthat the ‘appraisal date’ should be carefullyconsidered and agreed. If the viability

assessment is provided pre-application, thenthe date of the assessment will clearly be priorto the submission of an application. Theviability assessment may subsequently requireupdating when the application is submitted. Ifthe viability assessment is submitted with aplanning application, the date of the application(not the date of registration) may be theappropriate date but it is important to note thatthe decision of the LPA on a planningapplication needs to be based on the materialconsiderations at the date of determination,hence the conclusions of a viability assessmentundertaken at the date of application will stillhold good at the date of decision. Viabilityassessments may, therefore, occasionally needto be updated to market movements during theplanning process.

3.5.2 There are occasions where the appraisalswill require revisions. In certain circumstances,as a result of, for example, fundamental marketchanges or changes in density of the scheme,between submission of the viabilityassessment, application and consideration bythe planning authority, it will be necessary toreview and update the appraisal. This should,however, relate to changes in the market, orchanges specific to the scheme, that would nothave been known at the time of the originalsubmission. Where there is a planning appeal,the date should be agreed between the partiesor taken as the date of the hearing/writtenrepresentations.

Box 14: Date of assessmentViability assessments will usually be datedwhen an application is submitted (or when aCIL charging schedule or Local Plan ispublished in draft). Exceptions to this maybe pre-application submissions and appeals.Viability assessments may occasionally needto be updated due to market movements orif schemes are amended during the planningprocess.

3.6 Other material issues

3.6.1 Actual purchase price

3.6.1.1 Site purchase price may or may not bematerial in arriving at a Site Value for the


assessment of financial viability. In somecircumstances, the use of actual purchaseprice should be treated as a special case. Thefollowing points should be considered.

+ A viability appraisal is taken at a point intime, taking account of costs and values atthat date. A site may be purchased sometime before a viability assessment takesplace and circumstances might change.This is part of the developer’s risk. Landvalues can go up or down between thedate of purchase and a viability assessmenttaking place; in a rising market developersbenefit, in a falling market they may loseout.

+ A developer may make unreasonable/over-optimistic assumptions regarding the typeand density of development or the extent ofplanning obligations, which means that ithas overpaid for the site.

+ Where plots have been acquired to formthe site of the proposed development,without the benefit of a compulsorypurchase order, this should be reflectedeither in the level of Site Value incorporatedin the appraisal or in the developmentreturn. In some instances, site assemblymay result in synergistic value arising.

+ The Site Value should always be reviewedat the date of assessment and comparedwith the purchase price and associatedholding costs and the specificcircumstances in each case.

3.6.1.2 It is for the practitioner to consider therelevance or otherwise of the actual purchaseprice, and whether any weight should beattached to it, having regard to the date ofassessment and the Site Value definition setout in this guidance.

Box 15: Purchase price and historic costsIt is for the practitioner to consider therelevance or otherwise of the actualpurchase price, and whether any weightshould be attached to it, having regard tothe date of assessment and the Site Valuedefinition as set out in this guidance. Wherehistoric costs (for example remediationworks) are stated it is important that theseare not reflected in the Site Value (i.e. doublecounted).

3.6.2 Holding costs

3.6.2.1 The site will be valued at the date ofassessment. Holding costs attributable to thepurchase of the site should, therefore, notnormally be allowed, as the Site Value will beupdated. In phased schemes where land isvalued at the beginning of the developmentand land is drawn down for each phase, it maybe appropriate to apply holding costs. Also,where plots of land have been assembled andsubject to assessment, it may also beappropriate to include related holding costs.Where holding costs are applicable they shouldbe offset by any income received from theproperty.

3.6.2.2 Other relevant costs subsequent topurchase, including professional fees and othercosts incurred in bringing the applicationforward, and holding the site includingremediation measures, should be reflected inthe development appraisal as appropriate andreasonable.

3.6.2.3 Where there has been historicexpenditure on a development site prior toreceiving planning permission, these can beincluded in a development appraisal. This ishighly relevant with certain regeneration sites,where cost is not reflected in Site Value. Care,however, must be taken in arriving at a SiteValue that the effect of this expenditure shouldbe ignored. In many instances the practitionerwill note the expenditure as being reflected inthe Site Value arrived at and therefore thehistoric cost (for example remediation works)will not appear explicitly in the appraisal.Clearly, the objective is that there should be nodouble counting.

3.6.3 Third party interests, vacantpossession and relocation costs

3.6.3.1 Often, in the case of development andsite assembly, various interests need to beacquired or negotiated in order to be able toimplement a project. These may include:buying in leases of existing occupiers or payingcompensation; negotiating rights of light claimsand payments; party wall agreements,oversailing rights, ransom strips/rights,agreeing arrangements with utility companies;


temporary/facilitating works, etc. These are allrelevant development costs that should betaken into account in viability assessments. Forexample, it is appropriate to include rights oflight payments as it is a real cost to thedeveloper in terms of compensation for loss ofrights of light to neighbouring properties. Thisis often not reflected in Site Value given thedifferent views on how a site can bedeveloped.

3.6.4 Re-appraisals (viability reviews)

3.6.4.1 The re-appraisal approach, which maybe more applicable to certain schemes, allowsfor planning applications to be determined butleaving, for example, the level of affordablehousing to be fixed prior to implementation ofthe scheme. Such re-appraisals are generallysuited to phased schemes over the longer termrather than a single phase scheme to beimplemented immediately, which requirescertainty.

3.6.4.2 Where long life planning permissionsare granted (five years plus) reappraisals mayalso be appropriate. As such re-appraisalmechanisms should only be considered inexceptional cases. These appraisals wouldusually be undertaken during the reservedmatters application stage. Careful considerationwould need to be given as to how this is setout in a section 106 agreement, although it willbe important to the LPA and applicant toexpress a range for the assessment, i.e. for theapplicant to state the level of obligation abovewhich they would not be expected to exceedand for the LPA to state the level of obligationbelow which the development will beunacceptable, regardless of the benefits thatarise from it.

3.6.4.3 The methodology may include, forexample, specifying: the process involved, thebasis of model, inputs, basis of return, and SiteValue. It is stressed that the re-appraisal shouldalways be undertaken prior to theimplementation of a scheme or phase in orderto fully account at the time for the risk thedeveloper is undertaking, and, therefore, theappropriate return. From a technicalperspective, so-called ‘overage’ arrangements(post-development appraisals) are not

considered appropriate, as development risk atthe time of implementation cannot beaccounted in respect of the inevitableuncertainty of undertaking a development orindividual phase. It also undermines the basisof a competitive return as envisaged by theNPPF by introducing uncertainty post theimplementation of the development. This maymake funding the scheme difficult or unlikely inmany cases.

3.6.4.4 It is important to ensure that thedrafting of re-appraisal provisions do not resultin the earlier phases becoming uncertain as tothe amount of development to be provided onsite. This would have the unfortunate effect ofstifling development. Each phase requiressufficient certainty to be able to provide therequired returns and secure developmentfunding.

Box 16: Re-appraisalsRe-appraisals may be appropriate for longerterm/multi phased schemes and should beundertaken prior to the implementation of ascheme or phase.

3.6.5 Validity of projection models forcapturing future market growth

3.6.5.1 An alternative approach to the re-appraisal approach (and current day appraisals)is the use of projection models. In more volatilemarket conditions, many planning applicationsmay not be viable for the schemes proposedusing present-day values and costs. Thisreflects a variety of factors that would includethe relationship of likely end values to the costsof building the scheme. Inevitably, when suchschemes go forward for discussion with theLPA, applicants may look at growth models(see Appendix D) and the likelihood of theproposed development becoming viable overthe short to medium term, with the acceptancethat it may not be currently viable. This isnormally more relevant to large schemes to bebuilt over the medium to longer term than forshort term projects.

3.6.5.2 Current day methodologies, for largeschemes of a medium to longer term build outduration, may at times give the LPA cause forconcern as the case is made that the site is


not currently viable. As a result they may notachieve the desired outturn in terms ofplanning obligations, etc. The principle andapplication of projection models is for sites thatare non-viable today but where the likelihood isthat development would occur at some futuredate in the life of a planning permission, orwhere the development is likely to be over asufficiently long period of time during which themarket conditions may vary.

3.6.5.3 It is important to distinguish in caseswhere projection modelling is used betweenmarket value growth and site regenerativegrowth when preparing appraisals. Largerschemes may be subject to intrinsic/internalvalue growth as a result of development,achieving a critical mass that may or may notbe reflected in the broader market.

3.6.5.4 Projection models are valid in terms ofassessing the viability of the site. Advisers forboth applicant and local authority should putthemselves in the position of looking at thepotential of the site in the future and assessthe likely obligations and commitments that aparticular site can make based on thoseforecasts, rather than on current dayassessments. Such an approach might enablethe LPA to achieve a number of its objectivesby adopting the ‘looking forward’ approach,and for both the LPA and applicant to achievecertainty over the level of planning obligationsattached to the planning permission. AppendixD provides further information on the effects ofinflation and forecasting.

Box 17: Projection modelsProjection (growth) models are an alternativeto current day and reappraisal approachesfor assessing the viability of a site. A ‘lookingforward’ approach for the LPA and applicantcan provide certainty in terms of definingplanning obligations for both at the time ofgranting a planning permission.

3.6.6 Sensitivity testingCounterfactuals

3.6.6.1 As highlighted in section 2 it is stronglyrecommended that financial appraisals aresensitivity tested (including where appropriatescenario and simulation analysis) in order to

examine key variables and ensure that a soundjudgment can be formulated on viability. Whenprojection models are used, this is particularlyimportant given the reliance upon forecastingcosts and values.

3.6.6.2 It is often helpful when demonstratingthe capability of a scheme to meet planningobligations, to also test the viability of otherdevelopment scenarios. These are commonlyreferred to as ‘counterfactual scenarios’ andreflect a hypothetical alternative developmentof a site or property. This should not beconfused with sensitivity (scenario orsimulation) analysis associated with the actualscheme being proposed, but can help illustratethe rationale for the application scheme infinancial terms and an appropriate level ofplanning obligations. Counterfactual scenariosshould also be subject to sensitivity (scenarioor simulation) analysis where appropriate so asto be consistent with the testing of the actualproposed scheme. Counterfactual scenariosshould not be viewed as alternatives to thedevelopment being proposed but can be usedto assist in the consideration of the overallviability case.

3.6.6.3 It is recommended that whenundertaking area wide viability assessmentsthat sensitivity testing is also undertaken. Thisis of particular relevance in establishingappropriate variances around the setting ofpolicy and CIL levels, having regard to themarket cycle.

3.6.6.4 It is important that the practitioner setsout and explains the sensitivity testingundertaken in justifying the conclusions arrivedat, in either development management or areawide viability assessments.


4 Further professional advice

Key issues: planning and viability; viabilityappraisals and evidence; preparing andscrutinising a viability assessment;confidentiality; and mediation and arbitration

4.1 Planning and viability4.1.1 While this guidance note acknowledgesthe current reform of the planning process inEngland, the consideration of financial viabilitywill in many but not all cases remain anessential element in the determination ofplanning applications in the application ofplanning policy and the negotiation of section106 agreements. Some planning applicationsare accompanied by a full financial justificationassessment, demonstrating, for example, thelevel of affordable housing that may be viable,and this is linked to the balance of otherrequirements of the scheme.

4.1.2 A certain degree of knowledge andunderstanding is required of planners anddecision-makers as to the viability implicationsof all of the requirements placed ondevelopment, and independent expert viabilityinput is usually advisable. Certain section 106contributions and obligations and otherrequirements may also be necessary tomitigate the impact of development, sometimesreferred to as essential planning mitigation,which, if not undertaken, would result in arefusal of planning permission, notwithstandingfinancial viability considerations. Decision-makers, however, should balance these againstensuring development is deliverable, havingregard to scheme viability.

4.2 Viability appraisals andevidence4.2.1 It is important that viability assessmentsbe supported by adequate comparable

evidence. For this reason it is important thatthe appraisal is undertaken by a suitablyqualified practitioner and ideally a suitablyqualified surveyor who has experience of theuse, scale and complexity of developmentbeing reviewed. Equally, with appraisalssupporting the formulation of core strategies inlocal development frameworks a suitablyqualified practitioner is recommended. Thisensures that appropriate assumptions areadopted and judgment formulated in respect ofinputs such as values, yields, rents, salesperiods, costs, profit levels and finance rates tobe assumed in the appraisal.

4.2.2 It is common practice for the practitionerto rely upon and form opinions in respect ofvarious components of a viability assessment;for example, it may be appropriate that buildcost information is prepared by a quantitysurveyor (QS). This may be essential for non-standard developments and complex schemeswhere to adopt build costs quoted by theBuilding Cost Information Service (BCIS) maylack the level of detail and robustness required.In general, a QS input will be necessary inmany instances, to ensure that the costelement of the appraisal is viewed as fullyindependent.

4.2.3 Planning advice in respect of section 106(Town and Country Planning Act 1990)assumptions and obligations may needspecialist advice; for example, the changingnature of affordable housing may requireexpertise in terms of tenure split, unit size,grant availability and general pricing. This canbe achieved by seeking a bid from a registeredprovider or by appointing a practitioner withexpertise in this area as assumptions vary on acase-by-case basis. Reference should be madeto the RICS guidance Valuation of land foraffordable housing.


Box 18: Supporting evidenceViability assessments should beaccompanied with supporting informationand evidence. The practitioner will rely uponand form opinions of the variouscomponents of a viability assessment inorder to arrive at an appropriate professionaljudgment.

4.3 Confidentiality4.3.1 Pre-application discussions usuallyproceed on the basis of treating commercialinformation provided by a developer (applicant)or their consultant as confidential. In order toencourage openness and transparency in theviability process both at pre- and post-application, it is also often the case that theviability reports submitted to a local planningauthority are required to be classified asconfidential in part or as a whole. This is toencourage the applicant to disclose themaximum amount of information, which canthen be reviewed and reported upon. LPAsshould therefore be asked to treat and hold thisinformation on a similarly reciprocal basis andrespect that disclosure of confidentialinformation could be prejudicial to thedeveloper (applicant) if it were to enter thepublic domain. Information will usually bedisclosed to the LPA adviser but not to thegeneral public as it may be commerciallysensitive.

4.3.2 Transparency and fairness by all partiesis to be recommended in assisting in thisprocess.

4.3.3 All parties should be aware of theprovisions of the Freedom of Information Actand Environmental Information Regulations andalso mindful of any conflicts of interest thatcould taint their advice. Reports shouldtherefore contain the following wording:

‘This viability report is provided on aconfidential basis to the Council. Wetherefore request that the report should notbe disclosed to any third parties (other thanconsultants instructed by the Council toreview this report) under the Freedom of

Information Act 2000 (sections 41 and 43(2))or under the Environmental InformationRegulations’.

Box 19: ConfidentialityIt is often the case that viability assessmentsare required to be classified as confidentialin part or as a whole as information withinthem, if disclosed in the public realm, wouldbe prejudicial. LPA advisors, subject to aconfidentiality agreement, would be able toscrutinise and report accordingly on suchviability assessments.

4.4 Mediation, expertdetermination and arbitration4.4.1 Where disputes are unable to beresolved between the applicant’s and the LPA’srespective consultants, the parties may seekthe opinion of a third party. This could bethrough either mediation, expert determinationor arbitration and could arise at various stagesin the planning process. The following pointshighlight the two basic instances.

+ In a live or pending appeal, the outcome ofany mediation/arbitration can form part ofthe statement of common ground (SCG).The Inspector (or Secretary of State) is notbound to accept it but parties, if theydepart from an SCG, may be at risk of acost claim.

+ If a dispute arises before an appeal,mediation/arbitration could be available tothe parties but this would be non-bindingon the LPA.

4.4.2 Planning performance agreements (PPAs)may include provisions for resolving viabilitydisputes. Reasonableness and objectivity aretherefore inherent within this process, whichthis guidance note advocates at all times.

Box 20: Planning performanceagreementsPlanning Performance Agreements maycontain provisions for resolving financialviability issues albeit this would be non-binding on the LPA (inspector or Secretary ofState)


4.5 Preparing and scrutinisinga viability assessment4.5.1 A practitioner, on behalf of a developer orinvestor, will review all information within aviability assessment and formulate aprofessional judgment based on an analysis ofthe results arising from the appraisal.

4.5.2 Many local authorities will require, inrespect of individual developments, an impartialand objective review of the viability assessmentsubmitted as part of a planning application.These should be prepared by suitably qualifiedpractitioners as set out in 4.2. It isrecommended that once these reports havebeen prepared, the applicant is provided with acopy (in draft and final forms) to enableresponses, if any, to be made to either the LPAor directly to the consultant undertaking theindependent review.

4.5.3 Practitioners should be reasonable,transparent and fair in objectively undertakingor reviewing financial viability assessments.Where possible, practitioners should seek toresolve differences of opinion.

4.5.4 This guidance note discourages thepractice of performance related or contingentfees as this would clearly impair objectivity andthe ability to resolve differences of opinion toassist the planning process.

4.5.5 Viability in the context of this guidancenote should be distinguished from providingvaluations as defined by the RICS Valuation– Professional Standards 2012 (Red Book).Those undertaking viability appraisals inaccordance with this guidance are free to makeall reasonable and necessary assumptions andforecasts in formulating a judgment as to theviability of a proposed development or inconnection with supporting the formulation ofdevelopment plan documents in localdevelopment frameworks. Where deviating fromthe guidance note, it is recommended that thisis fully justified and reasoned.

Box 21: TransparencyThe guidance note encourages practitionersto be reasonable, transparent and fair inobjectively undertaking or reviewing financialviability assessments. Where possible,differences of opinion should be resolved.


Appendix A: Relevance of viability to planning

A.1 Preparation of planningpolicyA.1.1 The National Planning Policy Framework(NPPF) emphasises the link between deliveryand viability. It states that:

‘ … to ensure viability, the costs of anyrequirements likely to be applied todevelopment, such as requirements foraffordable housing, standards, infrastructurecontributions or other requirements should,when taking into account of the normal costof development and mitigation, providecompetitive returns to a willing land ownerand willing developer to enable thedevelopment to be deliverable’

(para. 173, NPPF, 2012)

A.1.2 Good spatial planning should aim tocreate a framework for private investment andtherefore encourage appropriate developmentin the right locations. If viability is notappropriately considered in setting planningpolicy objectives and strategies thendevelopment can become unnecessarilyconstrained and policy targets may becomeundeliverable. Local Plans need to be viableand deliverable in order to be effective andconsistent with the NPPF. Key to the conceptof effectiveness of planning policy is therequirement that it must be ‘flexible’ and‘deliverable’. In order to achieve this it isnecessary for the viability implications ofplanning policy objectives to be understood toensure that they can be delivered. In thissense, the concept of viability is highly relevantto spatial planning.

A.1.3 Under the NPPF, Local Plans areconsidered viable and deliverable by beingfounded on a robust and credible evidencebase as well as being the most appropriatestrategy when considered against reasonablealternatives. Viability considerations should

form a critical part of the evidence base behindplanning policies. In particular, viability is a keyconsideration when setting affordable housingpolicy and targets so that targets aredeliverable and flexible and set with regard to arobust and credible evidence base including anassessment of economic viability.

A.1.4 Certainty and clarity in policy-making isimportant, however, at the same time, policiesshould be able to adapt to changing marketcircumstances. For example, in consideringappropriate levels of affordable housing,policies should allow account to be taken ofscheme viability on a site-by-site basis.

A.1.5 The principles of the guidance containedwithin the NPPF is also relevant to other typesof policy documents and guidance, other thansimply affordable housing, including in theformulation of area action plans, masterplansand development briefs/frameworks. The mix ofland uses advocated and the enabling worksset out as being required by area specificguidance documents should be informed by anassessment and understanding of viability.

A.1.6 In recent years it has become commonpractice for many LPAs to set ‘tariffs’ or‘standard charges’ for section 106contributions on new developments throughsupplementary planning documents (SPDs).Circular 05/2005: Planning Obligations (July2005) is now superseded by virtue ofRegulation 122 of the Community InfrastructureLevy Regulations (CIL) 2010 and paragraphs203 to 206 of the National Planning PolicyFramework (NPF). It is therefore necessary tounderstand how viability is assessed so thatobligations are flexible and responsive tochanging market circumstances and schemespecific requirements.

A.1.7 The CIL Regulations 2010 also requirethat by April 2014 tariff-based charges only belevied against development through CIL. With


the exception of affordable housing and site-specific mitigation, in general terms theintention will not be to use section 106obligations to deliver these kinds of benefits. Aprerequisite to the charging of CIL is theadoption by the LPA of a charging schedule.The charging schedule must itself be subjectedto an independent examination prior toadoption, and questions of viability will berelevant to determining the credibility of theevidence base used in drawing it up. Clearlythere will be certain circumstances whereincluding a planning obligation will still berelevant.

A.2 Determination of planningapplications (developmentmanagement)A.2.1 Scheme viability is a materialconsideration in the determination of planningapplications as it is inherently linked to‘delivery’. To ensure delivery of planningobjectives at all stages of the economic cycle,it is essential that not only planning policyremains flexible but that town planners andother decision-makers have an understandingof how viability is assessed so that consistentdecisions can be taken and appropriate weightaccorded to viability considerations.

A.2.2 The consideration of financial viability indetermining planning applications is particularlyimportant in the context of negotiating section106 contributions/obligations, includingaffordable housing. In order for schemes to bedelivered, willing landowners require a‘competitive return’ to release land in the formof uplift in land value reflective of its marketvalue while allowing the developer anappropriate level of developer profit. Section106 obligations are often a development costwhile the level of affordable housing soughtaffects the GDV. These in turn impact uponresidual land value and profit. Particularlywhere Local Authorities have allocated land fordevelopment it is important for all parties tounderstand these impacts when negotiatingsection 106 agreements to ensure thatdevelopment remains attractive. This is

recognised in the NPPF. An inconsistentapproach to section 106 negotiations canincrease development risk, which can deterdevelopment coming forward.

A.2.3 The NPF states in the followingparagraphs that:

‘204. Planning obligations should only besought where they meet all of thefollowing tests:

+ necessary to make thedevelopment acceptable inplanning terms

+ directly related to the development,and

+ fairly and reasonably related inscale and kind to the development.

205. Where obligations are being soughtor revised, local planning authoritiesshould take account of changes in marketconditions over time and, whereverappropriate, be sufficiently flexible toprevent planned development beingstalled.

206. Planning conditions should only beimposed where they are necessary,relevant to planning and to thedevelopment to be permitted, enforceable,precise and reasonable in all otherrespects.’

Financial viability is a key consideration inthe above, particularly in determiningwhether a planning obligation is ‘fairlyrelated in scale and kind to the proposeddevelopment’.

A.2.5 LPAs should therefore be aware of thecumulative impact of all planning obligationsand scheme requirements sought ondevelopment viability. It is not just section 106obligations and CIL that can impact on schemeviability. Other scheme requirements andplanning benefits sought can have a significanteffect, including, for example, sustainabilityrequirements. It is acknowledged that a numberof section 106 and other such obligations maybe necessary to mitigate the impact ofdevelopment and make it ‘acceptable’ and‘sustainable’. It is for decision-makers to


recognise the requirement for sustainabledevelopment whilst also ensuring developmentis ‘deliverable’ in accordance with the NPPF.However, European and domestic regulatoryrequirements will have to be met.

A.2.6 Summarised below are key elements thatmay be required by decision-makers to makethe development acceptable but may alsoimpact on scheme viability:

(i) obligations and levies

(ii) the provision of site specific highwayimprovements

(iii) design standards, including sustainabilitymeasures

(iv) land use mix; and

(v) abnormal scheme costs, includingremediation of ground contamination andcosts associated with managing heritageassets.

A.2.7 Given the range of potential demands ona development scheme, the decision-maker willhave to balance these competing requirementswithin the scope of what is viable to ensurethat what is deliverable is sustainable andotherwise acceptable in planning terms.

A.2.8 CIL may also be charged by LPAs whohave adopted a CIL charging schedule. AfterApril 2014 LPAs will no longer be able to usesection 106 obligations to secure planningobligations that are covered by CIL and so thelikelihood is that more LPAs will be adoptingcharging schedules in the run up to 2014 toenable them to recover through CIL.

A.3 Wider contextA.3.1 In addition to section 106 contributionsrequired to mitigate the impact of development,in recent years there has been an increasingrequirement for developments to contributetowards more general local infrastructureimprovements. This has been seen as a way ofplugging funding gaps such as through a CIL,and other levies, such as the introduction ofthe Crossrail levy in London, and other moregeneral standard charges/tariffs forinfrastructure. Any basis for tariffs needs to relyon sound evidence, and imposed charges need

to take account of viability to ensure thatinfrastructure requirements do notunreasonably prejudice the delivery ofotherwise desirable development proposals.

A.3.2 Decisions of the Secretary of State andinspectors have suggested that changingeconomic circumstances are relevant in thenegotiation of affordable housing in assessingviability. Other cases have shown that viabilityassessments should allow for a reasonableuplift in land value for development to be viableand in order to incentivise ‘delivery’. Careshould be taken before relying too heavily onguidance from previous cases and appealdecisions.

A.3.3 In the context of development plans,some recent appeal decisions pointed to theimportance of considering viability when settingaffordable housing policy and targets. Thesecases established the requirement foraffordable housing targets to be deliverable andflexible and set with regard to a robust andcredible evidence base, including anassessment of economic viability.

A.3.4 Case law demonstrated the importanceof allowing flexible policy application to takeaccount of changing market circumstances, sothat in one case, in considering the‘soundness’ of a council’s core strategy, theinspector concluded that a policy requiring ‘atleast’ 30 per cent of new dwellings to beaffordable was not ‘justified’ on the basis of arobust evidence base and could not thereforebe proved to be ‘deliverable’. The inspectorrecommended that the text be amended todelete the words ‘at least’ and that wordingwas added to allow site-by-site negotiation,thereby providing for flexibility. This, therefore,allows sufficient flexibility to take account ofchanging market circumstances, enablingdevelopers the opportunity to negotiate thelevel of affordable housing to be offered on asite-by-site basis, taking into account schemeviability. Supplementary planning guidance inan adopted supplementary planning documentmay be appropriate to provide more detailedguidance within the scope of an overarchingpolicy in the core strategy or developmentpolicies DPD.


A.3.5 Appeals have been allowed where it hasbeen found that viability reports haveconvincingly demonstrated that the proposalscannot support any affordable housing and thesame held true for a financial contribution inlieu. However, in other instances, appeals havebeen dismissed if they do not have any, or onlyminimal levels, of affordable housing, as theywere not considered to be able to bringforward sustainable and well-balancedcommunities. The scale and nature of theproposals will, therefore, be a key influencingfactor as to whether no or very low levels ofaffordable housing can be justified in planningterms.

A.3.6 For smaller scale developments, whichmay be completed in a single phase, it wouldbe reasonable to consider what may be anappropriate affordable housing and section 106offer with regard to market conditions at thetime of the application. This is because there isno later phase to capture future value growth.Larger schemes may have longer build outperiods with multiple phases and, in suchcases, appeal decisions have indicated that itmay be reasonable for decision-makers toimpose requirements for the viability of thescheme to be considered on a phased basis aseach phase of the development comes to bedelivered.


Appendix B: Property market context overview

B.1 Development viability assessmentsnecessitate an accurate evaluation of the keyvariables in undertaking a development: theestimated value of a scheme when completed,and the building cost and other developmentcosts (including professional fees, finance costsand a return to the developer covering risk, i.e.profit) that will be incurred in delivering ascheme. An appropriate return to thelandowner or its equivalent, having regard tothe relevant market value of the site, will alsoneed to be taken into account. Clearly, asmarket conditions change the value and cost ofa scheme will also change. Hence, there areconsiderable risks involved in implementingdevelopment for which the developer mustmake allowances and be rewarded.

B.2 It is also evident that a developmentviability assessment undertaken when theproperty market is strong may produce aresidual Site Value (or residual profit when theland has already been acquired) that is verydifferent from when the market is weak. Anunderstanding of property market conditions

and their effect on development viability is,therefore, important from a planningperspective in both determining planningapplications and formulating planning policy.An economic context is also important inconsidering the impact of the setting of area-wide levies and tariffs (e.g. relating tocommunity infrastructure and affordablehousing targets, etc.), as well as site-specificplanning briefs, masterplans and other planningobligation requirements.

B.3 The property market, like the generaleconomy, tends to be cyclical. When economicgrowth is strong, companies expand and thisfeeds through to an increase in employment,an increase in consumer expenditure and anincrease in occupier demand for all types ofproperty. Rental and capital values increaseand this triggers an increase in planningapplications and general development activity.When development viability improves, theability to meet planning obligations andplanning policy is increased.

Figure 4: Macro-micro effect on development viability


B.4 This cycle goes into reverse wheneconomic growth slows or goes negative, andthe impact on the property developmentmarket is often magnified due to the time ittakes to physically construct buildings,particularly large schemes. Developmentschemes start to tail off at the end of a boom,when occupier demand is strong, and maycomplete in a much weaker economic climate,causing an over-supply of floor space whenoccupier demand is weak. This may causeproperty values to fall and development viabilityto suffer noticeably. When development viabilitysuffers, the ability to meet planning obligationsand planning policy is reduced.

B.5 All parties to the planning process need tobe aware of changing market conditions andthe effect on development viability. As mostdevelopment schemes will take a period of ayear or more to undertake, local planningauthorities need to consider how economic andproperty market conditions are likely to changeduring the development process and hence theinevitable uncertainty of development viability.In some instances, this may require forecastingor re-appraisals prior to implementation of adevelopment (see section 3 of this guidancenote).


Appendix C: Indicative outline of what to includein a viability assessment

Proposed scheme details

+ Floor areas:

– commercial: gross internal area (GIA)and net internal area (NIA)

– Residential: GIA and net sales area(NSA)

+ Residential unit numbers and habitablerooms including the split between privateand affordable tenures

Gross development value (GDV)

+ Any existing income that will continue to bereceived over the development period

+ Anticipated residential sales values andground rents (and supporting evidenceincluding deductions for incentives)

+ Anticipated rental values and supportingevidence

+ Yields for the commercial elements of thescheme and supporting evidence

+ Details of likely incentives, rent-freeperiods, voids

+ Anticipated sales rates (per month)

+ Anticipated grant funding for affordablehousing

+ Anticipated value of affordable units (withsupporting evidence/explanation of howthese have been valued and assumptions)

+ Deductions from commercial GDV to reachNDV (Stamp Duty Land Tax (SDLT), agents,legal + VAT)

Costs

+ Expected build cost (a full QS cost reportalso showing how costs have beenestimated)

+ Demolition costs

+ Historic costs (as reasonable andappropriate, see paragraph 3.6.2.3)

+ Site preparation costs

+ Vacant possession costs

+ Planning costs

+ Construction timescales, programme andphasing

+ Any anticipated abnormal costs

+ Rights of light payments/party walls/oversailing rights

+ Details of expected finance rates

+ Professional fees, including:

– Architect

– Planning consultant

– quantity surveyor

– structural engineer

– mechanical/electrical engineer

– project manager

– letting agent fee

– letting legal fee

+ Site Value (see Section 3 of the guidance)

+ Other costs

Additional details for future phases

+ Expected sales growth

+ Expected rental growth

+ Expected cost inflation

+ Credit rate

Development programme

+ Pre-build

+ Construction period

+ Marketing period


+ Viability cashflow

+ Income/value/capital receipt

+ Costs

+ Phasing (where appropriate)

Benchmark viability proxies

+ Profit on cost

+ Profit on value

+ Development yield

+ Internal rate of return (IRR)

Planning application details

+ Plans/sections/elevations (as relevant)

+ Design and access statement

Sensitivity Analysis

+ Two way sensitivity analysis

+ Scenario analysis

+ Simulation analysis

Accompanying Report (basic outline)

+ Executive summary

+ Contents outline

+ Introduction and background

+ Description of site location

+ Planning policy context

+ Description of scheme

+ Market information summary

+ Build cost and programme

+ Methodology and approach

+ Outputs and results

+ Sensitivity analysis

+ Concluding statement


Appendix D: Refinements to viability methodology

D.1 Development profitD.1.1 It is usual practice in a conventionaldevelopment appraisal to assume a requiredreturn in terms of a capital sum, and to includeit in the cash flow on the assumption that thedevelopment will be sold on completion and acapital profit received. In contrast, inmainstream capital budgeting theory and inproperty investment appraisal, the requiredprofit is expressed as a required rate of return.The expected cash flow, excluding land cost,finance costs and profit allowance, isdiscounted at the required rate of return inorder to assess the surplus available topurchase the land. Alternatively, the cash flow,including land price, can be discounted at adiscount rate which gives a zero net presentvalue (NPV). This discount rate represents thescheme’s internal rate of return (IRR), whichcan be compared with the developer’s requiredrate of return or as expressed in this guidance,the market risk adjusted rate of return.

D.2 Development financeD.2.1 Cash flow approaches are widely used inthe development appraisal to accurately reflectthe timing of development expenditure andrevenue so that the finance costs canaccurately reflect the net cash flows or amountthat needs to be borrowed at each stage of thedevelopment.

D.2.2 It is common practice in conventionaldevelopment appraisals to assume all-debtfinancing, i.e. all development costs arefinanced by borrowing. Again, this is in contrastto mainstream project appraisal where theviability of a project is assessed before financeand then the impact of financing on return isassessed separately. Typically, this is achievedby discounting the pre-finance cash-flow at atarget rate of return to determine whether the

project produces a positive NPV or to comparethe project IRR against the investor’s requiredreturn (or market risk adjusted rate of return).

D.2.3 To reflect the use of a combination ofdebt and equity finance, a tax-adjusted cash-flow can be discounted at a weighted averagecost of capital (WACC). Alternatively, a cash-flow adjusted for tax and finance costs can bediscounted at a required return on equity. Whilethese approaches are arguably suitable forappraising corporate investment opportunities,their application to development projectappraisal is debatable because there is littledirect connection between the rate at which acompany can borrow and the appropriatediscount rate to be applied to a particularproject. This is particularly so when theexpected cash flows are subject to a highdegree of risk, as in many propertydevelopments. This is why this guidance refersto a market risk adjusted rate of return whichcan be considered as an objective profitabilitybenchmark, as envisaged by the NPPF atparagraph 173 in terms of a ‘competitivereturn’.

D.3 Inflation of values andcostsD.3.1 In this guidance note it is emphasisedthat residual valuations can be sensitive tosmall changes in the key variables of value andbuilding cost, and how great care needs to betaken when undertaking a residual valuation.Mainstream corporate financial modelling, ormore complex property valuations, are equallysusceptible to input variables. There is, bydefinition, uncertainty in any viabilityassessment, as estimates have to be made ofthe value of the scheme as completed and thecosts of a scheme, which may vary as thedevelopment progresses. Where possible, adeveloper may try and pre-let/pre-sell all or


part of the scheme before developmentcommences and use a fixed price buildingcontract. If this is possible there will be muchgreater certainty about total scheme values andcosts, a lower required return and, hence,greater certainty regarding the residual sitevalue. However, it is rarely possible to achieveall these objectives and where it is possiblethere is a price to pay in terms of discounts onthe rental and capital value, in particular. Wherea developer anticipates an improving propertymarket, pre-lets and pre-sales may lessen risksbut also lessen the eventual return.

D.3.2 Paragraph D.3.1 highlights the impactthat inflation in values and costs can have on adevelopment appraisal. It is common, but notuniversal, practice that for smaller schemes,where the development period is limited to ayear or two, residual appraisals are undertakenusing current costs and values as these areeasier to estimate and are, therefore, assumedto be more certain/robust. However, theamount that developers allow for their returnfor risk and profit may vary to reflect howvalues and costs could potentially change.Nevertheless, this implicit approach issomewhat crude, as even if a scheme takes,for example, two years to develop, rental/capital values may be very different by the timethe scheme is completed from whenconstruction commenced. Implementation of adevelopment therefore carries a high degree ofspecific risk.

D.3.3 For large schemes with a lengthydevelopment period, or for even largerschemes where phased development is likely,the effect of inflation (or deflation) needs to beconsidered. In theory, if the total percentageincrease in building costs and capital values fora development are identical, the residual sitevalue should also increase by a similarpercentage amount (in practice this rarelyoccurs). It follows that where capital valuesincrease, in percentage terms by more than theincrease in building costs, there will be adisproportionate increase in the residual sitevalue, and where the reverse occurs, there willbe a disproportionate decrease in the residualsite value. It is commonly held that the formeris more likely to occur than the latter for

commercial schemes, as speculativedevelopments tend to be let and sold at theend of the development period, thereforebenefiting from growth in values through mostof the period, whereas building costs areincurred and paid at stages during thedevelopment period and land/site costs arepaid as a fixed cost before buildingcommences. The market cycle is clearly animportant factor particularly with long termdevelopments.

D.3.4 Predicting or forecasting values for rents,yields (for commercial/industrial schemes) andcosts is difficult, even over short time periods.The potential volatility of the market, and thedevelopment viability risks which result, arefactors that a developer has to consider, eitherexplicitly or implicitly when undertaking aresidual appraisal. This inevitable uncertainty isalso a factor that planners need to considerwhen ascertaining the level of affordablehousing and/or planning obligation paymentsthe development can support both now and inthe future. Development viability will clearly beaffected by the level and the movement ofcapital values and building costs.

D.3.5 For large-scale developments takingmany years, to undertake some form of trendforecasting of values and costs is desirable,plus some allowance for an increase up to, ordecrease down to, trend levels, so that theeffects of inflation can be correctly taken intoaccount in terms of the future market cycle. Ifcurrent values and costs are used, the residualland value or return on completion ofdevelopment, or phases of development, whendiscounted back to the present day will benoticeably lower than if the effects of inflationare taken into account. Arguably, this will notgive an accurate assessment of the viability ofa scheme.


D.4 Inflation, development,finance and discount ratesD.4.1 A related point to a consideration of theeffects of inflation in a development appraisal isthe finance or discount rate used.

D.4.2 It should be noted that where theguidance refers to the IRR of a project (see theglossary of terms in appendix G), this is on awithout-finance basis, or, in other words, aproject IRR being consistent with mainstreamcapital budgeting theory and therefore what isset out in this paragraph and those that followis only relevant where finance is taken intoaccount in the return or discount rate.

D.4.3 It is normal practice in a developmentappraisal to allow for the cost of borrowingmoney to pay for development costs as theyoccur (net costs in each cash flow period). Theaccumulated total costs are then subtractedfrom the estimated value of the scheme andthen this residual site value is discounted at thefinance rate to give the present day value ofthe site. This is the value of land that will bepaid when the site is acquired beforedevelopment commences. An alternativeapproach, which will give the same residual sitevalue, is to calculate the net cash flow in eachperiod (costs incurred less any sales incomereceived) and then discount each cash flowback to the present day at the appropriatefinance rate, i.e. the cost of borrowing money.

D.4.4 The finance rate charged by a bank willreflect current interest rates plus a margin toreflect the risk of lending, etc. The interestcharged will be repaid out of the actual incomereceived by the developer from sales ofcompleted parts of the development. Thesesales will reflect inflation, as will the interestrate charged. If inflation is not explicitly allowedfor in the residual valuation, it is, arguably,mathematically incorrect to allow for a financerate that reflects inflation. Over short timeperiods this inaccuracy may be small, but forlarger schemes, with lengthy developmentperiods, this inaccuracy could be much greater.

D.4.5 Two alternative approaches should beconsidered for major development schemes inparticular. One approach is that some form ofexplicit inflationary projection of costs andvalues should be undertaken, either with thesame expected inflation rate applied to valuesand costs or different rates applied wherespecific forecasts can be undertaken for valuesand costs separately, coupled with a marketfinance or discount rate (market risk adjustedrate). Alternatively, current values and costsshould be used together with a net of inflationfinance rate or discount rate prior to schemeimplementation. It will be up to the practitioneras to which of the two approaches is moreapplicable to the scheme in question. Section 3of the guidance comments upon this further.


Appendix E: Application of underlying conceptswithin the guidance

This appendix is aimed at providing furtherunderstanding of the guidance in terms of SiteValue. There are many uses for viabilityappraisals in both a policy and developmentcontrol context (see paragraph 1.5.2 of theguidance). Not all rely upon residual appraisals,but many do use this approach andmethodology.

This appendix is set out as follows:

1 Market value and land supply

2 Types of developer; and

3 Constituent parts of the residual appraisal.

Where appropriate, reference is made to themain text of the guidance in respect ofterminology and principles.

E.1 Market value and landsupplyE.1.1 The RICS Valuation – ProfessionalStandards 2012 (Red Book) definition of marketvalue is as follows:

‘The estimated amount for which an assetor liability should exchange on the valuationdate between a willing buyer and a willingseller in an arm’s-length transaction afterproperly marketing and where the partieshad each acted knowledgeably, prudentlyand without compulsion.’

E.1.2 The Red Book also deals with thesituation where the price offered by prospectivebuyers generally in the market would reflect anexpectation of a change in the circumstancesof the property in the future. This element isoften referred to as ‘hope value’ and should bereflected in market value. The RICS Valuation –Professional Standards 2012 provides twoexamples of where the hope of additional value

being created or obtained in the future mayimpact on the market value:

+ ‘the prospect of development wherethere is no current permission for thatdevelopment’; and

+ ‘the prospect of synergistic valuearising from merger with anotherproperty or interests within the sameproperty at a future date.’

E.1.3 Section 3.3 of this guidance seeks toprovide further clarification in respect of E.1.2bullet point 1, by stating ‘that the (site) valuehas regard to development plan policies and allother material planning considerations anddisregards that which is contrary to thedevelopment plan.’

E.1.4 Bullet point 2 of paragraph E.1.2 isparticularly relevant where sites have beenassembled for a particular development. Theguidance refers to this at paragraph 3.6.1.1.

E.1.5 It should be noted that ‘hope value’ isnot defined in either the Valuation Standards orthis guidance (it is referred to in the glossary ofterms in Appendix F). That is because it is nota basis of value but more a convenient way ofexpressing the certainty of a valuation, wherevalue reflects development for whichpermission is not guaranteed to be given, but ifit was, would produce a value above currentuse.

E.1.6 It follows that even where requirementsare restrictive in respect of the planning statusof the land, there could be proposeddevelopments that (due to a mix of commercialand residential, the impact of, for example, theaffordable housing element), could beabsorbed, even where the land value of thatpart is nil or even negative; it all depends onthe circumstances.


E.1.7 To date, in the absence of any guidance,a variety of practices have evolved, which areused by a limited number of practitioners tobenchmark land value. The most commonapproach has been to adopt CUV plus amargin or a variant of this, for example, EUVplus a premium. The margin often is anarbitrary figure ranging from, for example, 10 to40 per cent above CUV but higher percentageshave been used, particularly in respect ofgreenfield and rural land development.

E.1.8 In formulating this guidance, wellunderstood valuation definitions have beenexamined as contained within the Red Book. Inarriving at the definition of Site Value (beingmarket value with an assumption), the WorkingGroup/Consultant Team of this guidance havehad regard to other definitions such as EUVand AUV in order to clarify the distinctionnecessary in a financial viability in a planningcontext. Existing use value (EUV) is defined bythe Red Book as follows:

‘The estimated amount for which an assetor liability should exchange on the valuationdate between a willing buyer and a willingseller in an arm’s-length transaction afterproperly marketing and where the partieshad each acted knowledgeably, prudentlyand without compulsion assuming that thebuyer is granted vacant possession of allparts of the property required by thebusiness and disregarding potentialalternative uses and any othercharacteristics of the property that wouldcause market value to differ from thatneeded to replace the remaining servicepotential at least cost.’

E.1.9 It is clear the definition in E.1.8 isinappropriate when considered in a financialviability in planning context. It is an accountingdefinition of value for business use and, assuch, hypothetical in a market context.Property does not transact on an EUV basis.

E.1.10 It follows that most practitionersrecognise and agree that CUV does not reflectthe workings of the market as land does notsell for its CUV, but rather at a price reflectingits potential for development. While the use ofCUV plus a margin does, in effect, recognise

hope value by applying a percentage increaseover CUV, it is a very unsatisfactorymethodology when compared to the marketvalue approach set out in the guidance. This isbecause it assumes land would be released fora fixed percentage above CUV that is arbitrary,inconsistently applied and, above all, does notreflect the workings of the market.

E.1.11 Accordingly, the guidance adopts thewell understood definition of market value asthe appropriate basis to assess Site Value,subject to an assumption. This is consistentwith the NPPF, which acknowledges that‘willing sellers’ of land should receive‘competitive returns’. Competitive returns canonly be achieved in a market context (i.e.market value) not one which is hypotheticallybased with an arbitrary mark-up applied, as inthe case of EUV (or CUV) plus. Once a SiteValue (as defined in the guidance) has beenestablished, and therefore has regard to themarket, it is of course possible to show (‘backout’) how this can be disaggregated in terms ofEUV plus the premium element. Practitionersand users will see the significant variance thatcan occur between different schemes inrespect of the ‘premium’ element. This is whythe practice of applying a singular approach,i.e. in the absence of market testing, of socalled standard mark ups (the ‘premium’) toEUV is arbitrary, does not reflect the market,and can result in the over or under valuing ofthe site in question (see figure 3, section 3).

E.1.12 So far as alternative use value isconcerned, the Red Book at VS6.7 states:‘where it is clear that a purchaser in the marketwould acquire the property for an alternativeuse of the land because that alternative usecan be readily identified as generating a highervalue than the current use, and is bothcommercially and legally feasible, the value forthis alternative use would be the market valueand should be reported as such’.

E.1.13 In other words, hope value is alsoreflected and the answer is still market value.Again, in arriving at market value via alternativeuse value, the planning status of the land/building should be applied. This is consistentwith the NPPF for ‘willing sellers’ to receive‘competitive’ returns.


Figure 5: Price of development land

where:

P = the market value of the land

Q = land supplied (delivered) to the market

D0 = demand for land at price (P0) and supply at Q0, assuming 35% affordablehousing



S0 = the supply curve for the delivery of land to the market

P3 = where market value is equal to current use value

E.1.14 Figure 5 adapted from Fraser 19937

represents the supply and demand curve ineconomic terms for development land and theprices at which it will transact, assumingchanges in demand. As can be seen, there issignificant downside inflexibility in terms of SiteValues. Owners neither have to sell, nor indeed,wish to sell, at lower prices and therefore willtend to hold on to their land holdings. It followsthat the supply curve for development sites issignificantly more elastic below the currentprice than it is above. Changes in demand,having regard to planning policy such as levelsof affordable housing, can see relatively sharprises in values on the upside but relatively smallmovements on the downside. This would implythat prices in the market cycle are more volatileat the peak of the market than when themarket is in recession. Property development,which will influence the price to be paid for aparticular site, is, of course, subject to manyuncertainties and risk. Developers will havedifferent views (and interpretations on theapplication and inter-relationship between

planning policies) as to how any site will bebuilt out and this will affect the level of pricingand the range which may be bid for individualsites on a competitive basis to a willing seller.Real options analysis also underpins theeconomic position outlined above in terms ofthe supply of land to the market.8

E.2 Types of developerE.2.1 This guidance has differentiated betweenthe land owner (delivering land to the market)and the developer (implementing development)in respect of defining viability (see 2.1). Inpractice, the developer may also be the landowner, and vice versa. Developers also take onmany forms, of which the most common arehighlighted below.

+ Property company/developer: A companythat selects projects, assesses risk,promotes concepts, secures land, attractsoccupiers and achieves a final developmentfor onward sale. This occurs across most


development sectors, including residential,commercial and mixed use.

+ Land and estate businesses: Companiesthat manage large estates of land, forexample historic estates, national utilitiesand power companies. While acting as adeveloper they may have a primary focuson other mainstream activities such as thelong term management and improvement ofthe estate or, for example, the utilityfunction.

+ Public sector: Central government, localgovernment, agencies and other quasi-public sector parties are all developers ofproperty, often within the objective of someform of owner occupation, but maybe asjoint venture partners (see below) as a landowner.

+ Joint ventures: Companies can be createdto pursue development; for example, jointventures, special purpose vehicles andlocal asset backed vehicles. Some of thesehave a direct link to the functions of centralor local government to promote beneficialredevelopment and regeneration, and couldinclude Private Finance Initiative or PublicPrivate Partnership schemes.

+ Investment company: A business thatholds long term or strategic investments inland and property; for example, pensionfunds and insurance companies, wheredevelopment is a longer term objective.

+ Institutional/Strategic Investor: long termholders of property with future developmentpotential.

E.3 Constituent parts of theresidual appraisalE.3.1 Viability appraisals will vary according tothe project in question. Appendix C providesan indicative outline of what to include in aviability assessment. This section considerssome of the general key elements in a littlemore detail.

E.3.2 Most viability appraisals comprise asummary page as well as a cash flow. Thesummary page will provide an outline of theGross Development Value (sales value) and

show the various costs which have beendeducted to arrive at the residual land value ora profit return. The cash flow sets out thedetailed cash movements, including timing ofcost outlays (expenditure) and revenue receipts(income). It is an important tool in preparing adevelopment appraisal and in reality willprovide the primary focus for the developer.

E.3.2.1 Gross Development Value orsales proceeds

E.3.2.1.1 This is widely referred to as theGross Development Value (GDV). Differenttypes of development may use differentapproaches, for example:

+ for residential sales, the aggregated valuesof the individual properties

+ for an office block, there may be anadditional assumption that the completeddevelopment is let and income producingrather than being vacant and available forsale or letting; and

+ for commercial property, a slightly morecomplex investment valuation (rentmultiplied by yield) approach to establishingthe value may be used.

E.3.2.2 Land/property value (SiteValue)

E.3.2.2.1 See section E.1 of this Appendix andsection 3 of the guidance.

E.3.2.3 Development costs

E.3.2.3.1 For any development, a criticalinfluence on its viability will be the cost ofpreparing the surface of the site fordevelopment and the contract cost of finalconstruction. A reasonably accurate estimationof the building costs at the valuation date is amajor component in a residual valuation.

E.3.2.3.2 Development appraisals are verysensitive to variations in the estimated costs;however, the accuracy with which costs can beassessed may vary greatly according to thespecific site characteristics, for example, theintention to retain specific structures.

E.3.2.3.3 The choice of procurement routeimposes differing responsibilities. Fixed price


contracts are only fixed to the extent of theworks outlined in the contract. It allows forinflation and amendments can be made ifvariations to the specification are made. Itshould be noted that even ‘current day’ buildcosts (as tendered) allows for some degree ofprice inflation during the contract. Fordevelopments of long duration, additional buildcost inflation will need to be allowed for and agrowth/projection approach may be moreappropriate.

E.3.2.3.4 In all costs, the inclusion of acontingency allowance to cater for theunexpected is essential. The amount is usuallyreflected as a percentage of the buildingcontract sum and is dependent upon thenature of the development, the procurementmethod and the perceived accuracy of theinformation obtained.

E.3.2.4 Abnormal site developmentcosts

E.3.2.4.1 A typical viability assessmentincludes provisions for exceptional costs. Thismight include an unusual sewerage connectionfacility, high levels of site contamination andthe need for extensive remedial works,flooding, site boundary and stabilisation works,particularly if there are substructure obstaclesto overcome.

E.3.2.4.1 These exceptional site costs, or‘abnormals’, inflate costs as well as adding tothe timeframe for the delivery of a scheme.Historic costs may also be reasonable andappropriate (see paragraph 3.6.2.3).

E.3.2.5 Planning obligations(including affordable housingprovision)

E.3.2.5.1 See Appendix A.

E.3.2.6 Professional fees andexpenses costs

E.3.2.6.1 Fees and expenses can varysignificantly according to the size andcomplexity of the development. Thedevelopment team normally includes:

+ a planning consultant

+ an environmental contractor

+ an architect

+ a quantity surveyor

+ a funding surveyor; and

+ a civil and/or structural engineer.

E.3.2.6.2 Specialist services may be suppliedas appropriate by mechanical and electricalengineers, landscape architects, trafficengineers, acoustic consultants, projectmanagers, health and safety and otherdisciplines, depending on the nature of thedevelopment.

E.3.2.7 Finance costs

E.3.2.7.1 Most development projects arefunded from interest-paying borrowings that arehighly sensitive to timescales and risks. Interestarises on land acquisition and developmentcosts. The rate of interest reflects levels in themarket for the type of scheme involved. It iseither paid when due or deferred (rolled up)throughout the projected programme.Conventionally, the interest is compoundedeither quarterly or annually, in line with thecurrent market practice. Delay, addedcomplications or shifts in the money marketscan all, therefore, have an important impact onfinance costs.

E.3.2.7.2 Viability appraisals generally assumethat projects are fully funded by borrowingmoney. This is often referred to as 100 per centgearing. Even where the funder has providedonly part of the finance debt and the developerhas used his own funds for the balance(equity), the appraisal should reflect the totalcost of the funding.

E.3.2.7.3 Normally, interest is treated as adevelopment cost up to the assumed lettingdate of the last unit, unless a forward saleagreement dictates otherwise. For residentialdevelopments, sales of individual units mayoccur at various stages during the developmentand appropriate assumptions have to be maderegarding cash flow, both inward and outward.The approximate timings for the pre-construction, principal construction and post-construction periods have to be determined.


E.3.2.7.4 It should be noted that interest costsare relevant when using, in particular, profit oncost and profit on value measures of return.When the internal rate of return (IRR) is used asa project IRR, it is usual to state this excludingfinance, in common with normal corporatepractice (see Appendix D).

E.3.2.8 Profit return

E.3.2.8.1 The nature of the development andprevailing practice in the market for the sectorinfluences the target profit margin, or rate ofreturn. This varies for each development.Commercial developers tend to seek a returnon cost, usually expressed as a percentage ofthe total development cost. The residentialsector seeks a return on the GDV, commonlyreferred to as the sales margin. Both return oncost and return on value have a directrelationship and are, therefore, interchangeable.Increasingly, and particularly in respect of largescale or lengthy developments, the internal rateof return is used. This is important when usingprojection (growth) models and furtherreference is made to this in Appendix D.


Appendix F: Glossary of terms

Affordable housing

All housing provided at below market value ormarket rental value. May include various formsof tenure, including: social rent, affordable rent,target rent, intermediate housing, shared equity,etc.

Acquisition/Disposal Costs

Cost associated with the acquisition ordisposal of property usually including legal,agent and stamp duty land tax (SDLT) costs.

Alternative use value (AUV)

Where an alternative use can be readilyidentified as generating a higher value for asite, the value for this alternative use would bethe market value with an assumption, asdefined for Site Value for financial viabilityassessments for scheme specific planningapplications (see also Appendix E).

Benchmark

A comparator for either the outputs or inputsinto the appraisal, i.e. Site Value or developer’sreturn, etc.

Building Cost Information Service (BCIS)

A subscriber service set up in 1962 under theaegis of RICS to facilitate the exchange ofdetailed building construction costs. Theservice is available from an independent bodyto those of any discipline who are willing andable to contribute and receive data on areciprocal basis.

Building costs indices

A series of indices published by BCIS relatingto the cost of building work. They are based oncost models of ‘average building’, whichmeasure the changes in costs of labour,materials and plant which collectively cover thebasic cost to a contractor.

Capital value

The value of a building or land as distinct fromits rental value.

Cash flow

The movement of money by way of income,expenditure and capital receipts and paymentsduring the course of the development.

CIL

Community Infrastructure Levy.

Clawback

See overage.

Comparable evidence

A property used in the valuation process asevidence to support the valuation of anotherproperty. It may be necessary to analyse andadjust in order to put it in a suitable form to beused as evidence for comparison purposes.

Competitive returns

A term used in paragraph 173 of the NPPF andapplied to ‘a willing land owner and willingdeveloper to enable development to bedeliverable’. A ‘Competitive Return’ in thecontext of land and/or premises equates to theSite Value as defined by this guidance, i.e. theMarket Value subject to the followingassumption: that the value has regard todevelopment plan policies and all othermaterial planning considerations and disregardsthat which is contrary to the development plan.A ‘Competitive Return’ in the context of adeveloper bringing forward development shouldbe in accordance with a ‘market risk adjustedreturn’ to the developer, as defined in thisguidance, in viably delivering a project.

Contingent liabilities

See Re-appraisal.


Counter factual scenario

A scheme that is not that which is beingproposed by a developer, but reflectsalternative interpretation of planning policy,which can then be financially appraised andcompared with the proposed scheme.

Current use value

Market value for the continuing existing use ofthe site or property assuming all hope value isexcluded, including value arising from anyplanning permission or alternative use. Thisalso differs from the Existing Use Value. It ishypothetical in a market context as propertygenerally does not transact on a CUV basis,See Appendix E.

Current use value (Plus a premium)

Used by some practitioners for establishingSite Value. The basis is as with CUV but thenadds a premium (usually 10% to 40%) as anincentive for the landowner to sell. However, itdoes not reflect the market and is botharbitrary and inconsistent in practicalapplication.

Deferred payments

See overage.

Depreciation

The rate of decline in rental/capital value of anasset over time relative to the asset valued asnew with a contemporary specification. Seealso obsolescence.

Discounted cash flow (DCF)

Discounted cash flow. See internal rate ofreturn or net present value.

Development appraisal

A financial appraisal of a development tocalculate either:

+ the residual Site Value (deducting alldevelopment costs, including an allowancefor the developer’s profit/return from thescheme’s total capital value); or

+ the residual development profit/return(deducting all development costs, includingthe Site Value/cost from the scheme’s totalcapital value).

Developer’s profit

The amount by which, on completion or partialcompletion of a development, the estimatedvalue or the price realised on sale of adeveloper’s interest exceeds (or is less than)the total outlay, including such figure for theland as is considered appropriate in thecircumstances (including accrued interest).

Developer’s return for risk and profit

This return is commonly expressed as profit oncost; profit on value; development yield; andinternal rate of return (see individualdefinitions). There are other, less used, proxieswhich may be referred to in certaincircumstances. Each is appropriate as amethod of interpreting viability.

Development risk

The risk associated with the implementationand completion of a development includingpost-construction letting and sales.

Development yield

Rental income divided by actual cost incurredin realising the development.

Discount rate

The rate, or rates, of interest selected whencalculating the present value of some futurecost or benefit.

Estimated rental value (ERV)

An estimate of the likely rental income to begenerated from the scheme when fully let.

Existing use value

The estimated amount for which an asset orliability should exchange on the valuation datebetween a willing buyer and a willing seller inan arm’s-length transaction after properlymarketing and where the parties had eachacted knowledgeably, prudently and withoutcompulsion, assuming that the buyer is grantedvacant possession of all parts of the propertyrequired by the business and disregardingpotential alternative uses and any othercharacteristics of the property that wouldcause market value to differ from that neededto replace the remaining service potential atleast cost.


It is an accounting definition of value forbusiness use and as such, hypothetical in amarket context, as property generally does nottransact on an EUV basis (see also AppendixE).

Existing use value (plus a premium)

Used by some practitioners for establishingSite Value. The basis is as with EUV but thenadds a premium (usually 10% to 40%) as anincentive for the landowner to sell. However, itdoes not reflect the market and is botharbitrary and inconsistent in practicalapplication.

Gross development value (GDV)

The aggregate market value of the proposeddevelopment, assessed on the specialassumption that the development is completeas at the date of valuation in the marketconditions prevailing at that date.

Gross development cost (GDC)

The cost of undertaking a development, whichnormally includes the following:

+ acquisition costs

+ site-specific related costs

+ build costs

+ fees and expenses

+ interest or financing costs; and

+ holding costs during the developmentperiod.

A full list of typical costs is contained in VIP 12.See also Appendices C and E.

Gross external area (GEA)

The aggregate superficial area of a building,taking each floor into account. As per the RICSCode of Measuring Practice this includes:external walls and projections, columns, piers,chimney breasts, stairwells and lift wells, tankand plant rooms, fuel stores whether or notabove main roof level (except for Scotland,where for rating purposes these are excluded),and open-side covered areas and enclosed carparking areas, but excludes: open balconies;open fire escapes, open covered ways or minorcanopies; open vehicle parking areas, terraces,etc.; domestic outside WCs and coalhouses. In

calculating GEA, party walls are measured totheir centre line, while areas with a headroomof less than 1.5m are excluded and quotedseparately.

Gross internal area (GIA)

Measurement of a building on the same basisas gross external area, but excluding externalwall thicknesses.

Holding cost

The cost involved in owning a site or property,which may include such items as interest onfinance used to acquire the asset, maintenancecosts, empty rates, etc.

Hope value

Any element of open market value of aproperty in excess of the current use value,reflecting the prospect of some more valuablefuture use or development. It takes account ofthe uncertain nature or extent of suchprospects, including the time which wouldelapse before one could expect planningpermission to be obtained or any relevantconstraints overcome, so as to enable themore valuable use to be implemented.

Inflation

As measured by the consumer or retail pricesindex or property related index, including theBCIS index.

Interest rate

The rate of finance applied in a developmentappraisal. As most appraisals assume 100 percent financing, it is usual for the interest rate toreflect the total cost of finance and funding of aproject, i.e. the combination of both equity anddebt in applying a single rate.

Internal rate of return (IRR)

The rate of interest (expressed as apercentage) at which all future cash flows(positive and negative) must be discounted inorder that the net present value of those cashflows, including the initial investment, shouldbe equal to zero. It is found by trial and errorby applying present values at different rates ofinterest in turn to the net cash flow. It issometimes called the discounted cash flow rateof return. In development financial viability


appraisals the IRR is commonly, although notalways, calculated on a without-finance basisas a total project IRR.

Local planning authority (LPA)

The determining authority of a givendevelopment project.

Market risk

The uncertainty resulting from the movement ofthe property market, irrespective of theproperty being developed.

Market risk adjusted return

The discount rate as varied so as to reflect theperceived risk of the development in themarket.

Market value (MV)

The estimated amount for which an assetshould exchange on the date of valuationbetween a willing buyer and a willing seller inan arm’s length transaction after propermarketing wherein the parties had each actedknowledgeably, prudently and withoutcompulsion.

Market value growth

The forecast growth of the capital value of thescheme.

NPPF

National Planning Policy Framework producedby the Department of Communities and LocalGovernment in March 2012.

Net development value (NDV)

The GDV less acquisition costs.

Net cash flows

The free cash flows of the scheme after costsand taxes.

Net internal area (NIA)

The usable space within a building measuredto the internal finish of structural, external orparty walls, but excluding toilets, lift and plantrooms, stairs and lift wells, common entrancehalls, lobbies and corridors, internal structuralwalls and columns and car parking areas.

Net present value (NPV)

The sum of the discounted values of aprospective cash flow, where each receipt/payment is discounted to its present value at adiscount rate equal to a target rate of return orcost of capital. In the case of an investment,the formal definition of NPV is net of the initialinvestment, but the term is more commonlyused colloquially to describe the NPV of thefuture cash flows (net income) and terminalvalue, which figure is compared with thepurchase price in order to reach an invest-or-not decision. In the case of a development theterm is more commonly used colloquially todescribe the NPV of the future cash flows(costs less income, i.e. net income) andterminal (i.e. sale) value, which figure iscompared with the purchase price of the site inorder to reach an invest-or-not decision.

Net present value method

A method used in discounted cash flowanalysis to find the sum of money representingthe difference between the present value of allinflows and all outflows of cash associated withthe project by discounting each at the criterionrate, e.g. the cost of capital.

Opportunity cost

The return or benefit of the next best choiceforegone by pursuing an alternative action.

Outturn (growth) model

A development appraisal that has beenadapted to forecast various inputs, usually bothin respect of values and costs.

Overage (clawback)

A practice referred to as overage, clawback ordeferred payments, and employed as a postdevelopment appraisal of the scheme inquestion. The practice is not consideredappropriate as it cannot take account of risk,uncertainty and funding at the point ofimplementation. If re-appraisals are to takeplace, the guidance recommends this isundertaken prior to implementation (see Re-appraisal)


Oversailing licences

Where a crane, for example, is required to useair space over neighbouring properties.

Party wall costs

All costs and professional fees associated withappointment of the building owner andadjoining owner’s surveyors, service andreceipt of notices, selection of the thirdsurveyor, negotiation and agreement of theparty wall award, taking and recording anyschedules of condition, additional consultant’sfees (i.e. structural engineer, etc), fees arising inthe event of damage occurring as a result ofthe work described within the award andconcluding the award and checking off anyschedules of condition.

Planning obligation

Provided for under section 106 of the Townand Country Planning Act 1990, usually inconnection with the grant of planningpermission for a private development project. Abenefit to the community, either generally or ina particular locality, to offset the impact ofdevelopment, e.g. the provision of open space,a transport improvement or affordable housing.The term is usually applied when a developeragrees to incur some expenditure, surrendersome right or grant some concession whichcould not be embodied in a valid planningcondition.

Pre-lets and pre-sales

Where a developer of a scheme, usually priorto implementation, has agreed lettings withoccupiers or sales of part of the whole of thedevelopment.

Profit on cost

The profit of the scheme expressed as apercentage of cost. This has a directrelationship to profit on value.

Profit on value

The profit of the scheme expressed as apercentage of the scheme’s value. This has adirect relationship to profit on cost.

Property specific risk

The uncertainty attached to the intrinsicdevelopment of a site or property in addition tothe general market risk.

Rateable value

The figure upon which the uniform businessrate is charged.

Rental value

The income that can be derived under a leaseor tenancy for use of land or a building.

Red Book

The RICS Valuation – Professional Standards2012 (Formerly RICS Valuation Standards).

Re-appraisals

Appraisals undertaken prior to implementationof a development in order to assess viabilitybefore actual development.

Residual appraisals

See development appraisals.

Residual Site Value or residual land value

The amount remaining once the GDC of ascheme is deducted from its GDV and anappropriate return has been deducted.

Residual valuation

A valuation/appraisal of land using adevelopment appraisal.

Return (on capital)

The ratio of annual net income to capitalderived from analysis of a transaction andexpressed as a percentage.

Review mechanisms

See Re-appraisals.

Rights to light

An easement which entitles the owner of thedominant tenement to adequate natural light toa window from the adjoining land. It isappropriate to include as a development cost,compensation for loss of rights of light toneighbouring properties in respect of theparticular scheme being appraised.


RSL/RP

Registered social landlord/registered provider.

Sensitivity analysis

A series of calculations resulting from theresidual appraisal involving one or morevariables, i.e. rent, sales values, build costs,which are varied in turn to show the differingresults.

Sensitivity simulation

A simulation analysis considers the probabilityof outcomes given certain variances applied tokey inputs within the financial appraisal througha stochastic process. It can quantify therobustness of a development in terms ofvarious outputs including risk and return.

Site Value (for financial viability assessmentsfor scheme specific planning applications)

Market value subject to the followingassumption: that the value has regard todevelopment plan policies and all othermaterial planning considerations and disregardsthat which is contrary to the development plan.

Site Value (for area wide financial viabilityassessments)

Site Value (as defined above) may need to befurther adjusted to reflect the emerging policy/CIL charging level. The level of the adjustmentassumes that site delivery would not beprejudiced. Where an adjustment is made, thepractitioner should set out their professionalopinion underlying the assumptions adopted.These include, as a minimum, comments onthe state of the market and delivery targets asat the date of assessment.

(For first assumption of Site Value for financialviability assessments for scheme specificplanning applications – see also paragraph3.3.3.)

Social and intermediate housing

As defined by government guidance or instatute.

Speculative developments

Developments which are commenced prior toany agreed sales or lettings.

Standing investments

Properties which are income producing, usuallywith a tenant in occupation.

Synergistic value

See Appendix E.

Target profit

The level of return considered to be theminimum acceptable.

Tender price indices

A series of indices, published by BCIS, relatingto the level of prices likely to be quoted at agiven time by contractors tendering for buildingwork, i.e. it reflects the impact of marketconditions on the tenderer’s decision whetherto bid at a high, low or average level relative tobuilding costs.

Threshold land value

A term developed by the Homes andCommunities Agency (HCA) being essentially aland value at or above that which it is assumeda landowner would be prepared to sell. It is nota recognised valuation definition or approach.

‘Toolkit’ appraisal

A generic term often used when undertakingfinancial viability testing in planning. Sometimesapplied to financial models that have beendeveloped to try and standardise the exercisewhen presenting to local authorities, e.g. theHCA Economic Assessment Toolkit (EAT).

Vacant possession

The attribute of an empty property, which canlegally be exclusively occupied and used bythe owner or, on a sale or letting, by the newowner or tenant.

Viability assessments/financial viability

A report including a financial appraisal toestablish the profit or loss arising from aproposed development. It will usually providean analysis of both the figures inputted andoutput results, together with other matters ofrelevance. An assessment will normally providea judgment as to the profitability (or loss) of adevelopment.


Weighted average cost of capital (WACC)

The minimum return a company should earn inrespect of an asset by reference to relativeweight of equity and debt within its capitalstructure.

Yield

As applied to different commercial elements ofa scheme, i.e. office, retail, etc. Yield is usuallycalculated as a year’s rental income as apercentage of the value of the property.


Appendix G: FAQs for users of viabilityassessments

G1 What should a financial viability assessment (FVA) look like and what should beexpected?A FVA will vary from planning application to planning application. It should, however, contain alevel of information that is reasonable and appropriate in the circumstances. The FVA will contain anumber of sections and should, in the first instance, clearly set out what is being tested, themethodology and approach, and link it back to the underlying planning policy framework. Allinputs should be justified in the financial model with agents and professional reports appended asnecessary. The outputs from the appraisal should be analysed and tested in order to reach a fullyjustified conclusion. (Reference: 2.5.1, 4.2, Appendix C)G2 Does an FVA need to be undertaken by a chartered surveyor?No. A suitably qualified chartered surveyor or professional practitioner can undertake FVAs. Whereconsidering the underlying Site Value, a chartered surveyor is likely to be beneficial to the process,given the core skill sets required. (Reference: 3, 4.2)G3 Does the FVA need to include a ‘toolkit’ model such as the HCA Development AppraisalTool or similar?The guidance does not advocate a particular financial model. It is up to the practitioner in the firstinstance to use what they consider to be the most appropriate model for the application schemebeing financially assessed. (Reference: 2.5.3)G4 Is it necessary to employ a viability consultant to undertake a review of the applicant’sFVA?Given the complexities of development appraisals, it is recommended in most cases that anapplicant and/or local authority seek advice from a suitably qualified practitioner. (Reference: 2,4.2)G5 How much influence can be exerted over the consultant in terms of the council’s/applicant’s aspiration for negotiation purposes?The guidance recommends that practitioners are reasonable, transparent and fair in objectivelyundertaking or reviewing FVAs. Where possible, differences of opinion should be resolved betweenconsultants acting for the applicant and the council. Once the financial position has beenestablished and agreed between consultants, this does not preclude further negotiation betweenthe council and the applicant having regard to all material planning considerations. (Reference: 4.5)G6 The FVA has used an EUV plus approach to land value. Is this wrong?The guidance recommends the FVAs should be undertaken having regard to market value with anassumption. While the practice of using EUV plus is flawed, it is possible that both approachescould end up with the same answer as to the Site Value for the purposes of the FVA. (Reference:3.4, Appendix E)


G7 As an authority, the core housing strategy is based on an EUV plus basis rather than MV(with assumptions), which is used in the site specific appraisal. How are the two reconciled?The core strategy is an area-wide document, which should be tested accordingly including marketvalue (with assumptions). It should also accord with the NPPF. Site-specific appraisals are, again,appraised, having regard to the intrinsic nature of the development and market value (withassumption). Even where a site-specific appraisal has adopted EUV plus in accordance with acore strategy, values may or may not be reconciled. Professional advice is recommended shouldthis become an issue. (Reference: Appendix E)G8 The regional authority has intimated they wish to see FVAs based on an EUV plus basis.How does this fit with this guidance note?The regional authority is entitled to produce guidance or otherwise advocating how they wish tosee the basis of FVAs undertaken. This should be in accordance with the NPPF. As the RICS GNis consistent with the NPPF where regional guidance differs from the RICS GN, for example, inrespect of Site Value, it is recommended that the authority sets out their reasons and rationale forjustifying a departure in order to assist applicants and inspectors at inquiries. (Reference:Appendix E)G9 Is the RICS GN consistent with the NPPF?The guidance is in accordance with the NPPF and a number of references are made to this policyand how it relates to FVAs. (Reference: 1, Appendix A)G10 Can the applicant insist on parts, or the entirety, of the FVA remaining confidential?FVAs often contain confidential information which, if discussed in the public forum, would beprejudicial to an applicant. It has become standard practice, backed up by recent case law, forcommercially sensitive information to be classified as confidential. This may result in parts of theFVA being redacted for the purposes of the public inquiry. It would be unusual for the entirecontents of the FVA to be classified as confidential. Confidential information may be passed to theCouncil’s consultant to review and advise upon accordingly. (Reference: 4.3)G11 How should local authority decision takers be reported to on matters that an applicantconsiders are confidential?These may be outlined by the Council’s consultant in any report without disclosing the confidentialnature of the information. It can be mentioned that advice has been sought on this information, inthe context of the FVA, from the Council’s consultant. Sometimes information can be reported inaggregate form, thereby avoiding individual figures becoming public. (Reference: 4.3)G12 The applicant and the council’s consultants have not been able to agree on the FVA.How can this be resolved?The guidance recommends that the participants should seek to resolve differences of opinion.Where disputes are unable to be resolved, the applicant and council may seek the opinion of athird party. (Reference: paragraphs 4.4)G13 How should the council’s consultant be briefed on undertaking a due diligence exerciseon the applicant’s FVA in the first instance?During pre-application meetings between the applicant and the council, it is usual for the scope ofthe FVA exercise to be identified. This will form both the basis of the FVA and the consultant’sbrief for undertaking the due diligence exercise. (Reference: 2)G14 Should council officers be attending meetings between the council’s consultant and theapplicant and their consultant?This is entirely open to be agreed between the parties as to how to progress matters in the mostsensible and appropriate way. It is usual for both parties’ professional consultants to meet, withoutprincipals in attendance, to discuss technical matters. (Reference: 4)


G15 Is a local authority obliged to let the applicant see a copy of the council’s consultant’sreport before (or after) the committee to consider the application? Is it sensible for this to bein draft form in the first instance?It is recommended that applicants are allowed to review the contents of a due diligence report.This allows for errors and matters of fact to be corrected. It may also assist in certain instances inreconciling differences of opinion. If the report is kept in draft, this assists in this process.(Reference: 4.5.2)G16 Is sensitivity checking of the results from an FVA important in my considerations inviability planning terms?For many, if not most, development proposals that are the subject of planning applications, thereremains uncertainty and future risk. It is therefore appropriate to test sensitivities within thefinancial model in order to form an appropriate judgment as to the robustness of the outcome andlikely variance. (Reference: 2, 3.6.6, Appendix D)G17 Where a ‘pot’ has been identified as to what the scheme can reasonably deliver andremain viable, should the consultant be expected to divide this up (say between affordablehousing and other planning obligations) or is that a matter for the council in negotiation withthe applicant?It is usual for both the applicant’s and council’s consultant to identify the magnitude of the ‘pot’. Incertain instances, the consultants may also be able to offer advice on division. In other instances,this may be more appropriate for subsequent negotiation between the council and the applicant(and their advisers). (Reference: 2, 4)G18 Are FVAs only required for affordable housing applications?No. There are a number of instances where FVAs may be required to assist the planning process.(Reference: 1.5.2)G19 When should applicants be providing FVAs based on growth expectations?This may occur where there are schemes of long duration or could be in instances where adevelopment may have a regenerative impact which will impact on values that cannot beevidenced on a current day basis. (Reference: 3.6.5)G20 Are there situations where re-appraisals of viability are appropriate?As with growth appraisals. In addition, where growth models cannot be used, it may be moreappropriate to review the viability of the application scheme prior to implementation ofdevelopment. (Reference: 3.6.4)G21 Can the council suggest ‘overage’ clauses in Section 106 Agreements?No. The guidance sets out why this practice is inappropriate and why re-appraisals prior toimplementation are the appropriate way of reviewing the scheme viability in a planning context.(Reference: 3.6.4)G22 Can the EUV plus or AUV of the land/property input be equivalent to MV (withassumption)?Yes. In arriving at the market value with assumption, the practitioner will have regard to the currentuse of the site (and alternative uses). In certain circumstances, market value with the assumptionmay equate to the EUV plus or the AUV of the site. It should be noted, however, that EUV cannotbe evidenced in the market and the mark up (‘plus’) is arbitrary. (Reference: 3, 3.4, Appendix E).G23 Is there any empirical evidence to support the appropriate return/profit?There is very little evidence. It is often an assumed market benchmark based on common practice.The Investment Property Databank (IPD) have recently produced the first and only study ondevelopment returns from 1983 to date. There are alternative approaches to seeking to justify anappropriate return based on the specific risk of a particular scheme. Target rates of return shouldbe contra-cyclical. (Reference: Appendix D, Appendix E)G24 Should the output from the appraisal be a profit/return or residual land value?It can be either. Both are measures of viability. (Reference: 2, 3)


G25 How important are previous appeal decisions and case law in reviewing FVAs?The guidance has not sought to reference any appeal decisions or case law. It is recognised thatthere was a lack of previous guidance in this area for decision makers to rely upon. (Reference:Chair of Working Group Statement)

G26 Are RICS members bound by the RICS GN in producing a FVA? What about otherpractitioners?Members of RICS are not bound to follow the guidance note. It is up to individual members todecide on the appropriateness in the circumstances. Where a member does depart from theguidance, they should do so only for good reason. Other practitioners are not bound by theguidance, but in the absence of relevant alternative guidance, again reasons for departure fromthis guidance should be set out. (Reference: RICS guidance notes).

G27 How does the RICS GN deal with area-wide studies such as producing CIL chargingschedules and Local Plan testing?This is set out in 2.4. Practitioners are also directed to the Local Housing Delivery Group guidance(facilitated by the HCA and produced by the Local Government Association and the HomeBuilders Federation)

G28 Does the RICS GN prescribe a particular financial model for use with FVAs?No. This is up to the individual practitioner to adopt as appropriate. In some instances, it may benecessary to set out why a particular financial model is to be used with reasoned justification.(Reference: 2.5.3)

G29 How important is the analysis around the inputs into the model and outputs in FVAs?This guidance note considers this to be fundamental to justifying both the level and variance ofinputs but also the sensitivity around the output in formulating a reasoned judgment on viability.(Reference: 2.4)

G30 Should all inputs be evidenced or backed up with supporting information?Yes, (Reference: 4.2, Appendix C) but professional opinion and support from suitable qualifiedpractitioners is considered appropriate where there is limited quantitative evidence.

G31 How do viability consultants benchmark the outputs of the financial model in the FVA?This will often have regard to the risk of a particular scheme, and therefore appropriate return,and/or comparable information such as land values. The professional expertise and knowledge ofthe practitioner, together with their suitability to deal with a particular application scheme areconsidered important. Benchmarks need to be fully justified and appropriate to the particularcircumstances. (Reference: 4)

G32 How important is comparable evidence in arriving at the land/property value?It is an essential consideration in formulating an appropriate professional judgment of Site Valuefor the application scheme. Often, it is necessary to analyse and adjust comparable evidence inorder to put it in a suitable form to be used for comparison purposes. (Reference: 3.4)

G33 How much does a due diligence report on a FVA cost and who should be paying?This depends on the complexity of the exercise. In some cases, the applicant reimburses thecouncil for costs incurred in obtaining a due diligence report on a FVA submitted. (Reference: 4)

G34 Are rights of light payments a legitimate cost?Yes. It is appropriate to include, as a development cost, compensation for loss of rights of light toneighbouring properties in respect of the particular scheme being appraised. (Reference: AppendixF)

G35 Are vacant possession costs (i.e. to compensate tenants, etc.) a legitimate cost?Yes. It is a cost incurred by a developer in order to be able to implement a development byagreeing terms to vacate by existing tenants. (Reference: Appendix F)

G36 Should the FVA take account of who the applicant is in terms, for example, of theirability to secure finance, other preferential terms or specific skill attributes?

No. The FVA should disregard who the applicant is, except in exceptional circumstances.(Reference: 2.5.2)


G37 Can the council engage in a pre-application FVA with an applicant and is the outcomethen binding?No. Financial viability is only one of the material considerations in determining a planningapplication. The council may disagree with their consultant and will need to state why this is thecase in any committee report in making a recommendation. (Reference: 4)G38 Can the council refuse to register an application because of an inadequate FVA or ifnone is provided?Yes. The guidance encourages this practice as informing the planning process and reducinguncertainty. The outcome cannot be binding as the council will determine the application in thenormal way. In most cases, the outcome of a FVA (following a due diligence report by the council’sconsultant) will be a material consideration in determining a planning application. (Reference: 4)G39 Assuming both the applicant’s and council’s consultants are in agreement, does thismean the applicant and council are bound by the outcome?This will depend upon the nature of the planning application and importance of the FVA as amaterial consideration in determining the application. (Reference: 1, 2, 3 & 4)G40 Does the RICS GN recognise that in order to grant planning permission, essentialplanning mitigation must be undertaken notwithstanding financial viability?Yes. This will usually be set out in a FVA as part of the planning application. (Reference: 2)G41 Will the RICS GN be subject to periodic updates?Yes. It is intended to be updated as required and necessary.G42 It has been argued that MV with the assumption is circular in arriving at a Site Value. Isthat correct?No. It is possible to formulate a judgment on Site Value using market value with the assumption.Chartered surveyors regularly provide such valuations in practice. The guidance sets out themethodology framework and considerations in order to arrive at a Site Value including reference tocomparable evidence. (Reference: 3, Appendix E)G43 How does the RICS GN fit with other policy and previous guidance on viabilityassessments?The RICS guidance is a standalone document, setting out best and recommended practice in thecontext of the planning system in England. It has reference to planning policy which forms theframework for the guidance note. (Reference: Chair of Working Group)G44 Can FVAs be updated during the planning process?Viability assessments may occasionally need to be updated due to market movements or changesin the scheme during the planning process. (Reference: 3.5)G45 In obtaining a fee quote for undertaking a financial viability assessment, can these beperformance related or conditional on the outcome?RICS in the context of this guidance note discourages the practice of performance related fees asthis would clearly impair objectivity and the ability to resolve differences of opinion to assist theplanning process. In addition, this would be contrary to GN20, Conditional Fees of SurveyorsActing as Expert Witnesses (2009), should a scheme specific planning application proceed toAppeal. The guidance note also suggests ways to resolve disagreements in respect of viabilityassessments through either mediation, arbitration or expert determination, which is also subject tothe above guidance on conditional fees. (Reference: 4.5.4)


References

1 The estimated amount for which an assetor liability should exchange on the valuationdate between a willing buyer and a willingseller in an arm’s-length transaction afterproperly marketing and where the partieshad each acted knowledgeably, prudentlyand without compulsion.

2 Where viability is being used to test andinform planning policy it will be necessaryto substitute ‘a development project’ and‘project’ into the wider context.

3 See note 1.

4 See note 1.

5 National Planning Policy Framework(paragraph 173).

6 See note 1.

7 Adapted from W.D. Fraser “Principles ofProperty Investment and Pricing (2ndEdition, 2003)

8 RICS Research ‘A review of the practicaluses of real property options’ (Volume 5No. 1 April 2005)



rics.org/standards

rics.org

RICS HQ

Parliament Square London SW1P 3ADUnited Kingdom

Worldwide mediaenquiries:

e pressoffi [email protected]

Contact Centre:

e [email protected] +44 (0)870 333 1600f +44 (0)20 7334 3811

Advancing standards in land, property and construction.

RICS is the world’s leading qualifi cation when it comes to professional standards in land, property and construction.

In a world where more and more people, governments, banks and commercial organisations demand greater certainty of professional standards and ethics, attaining RICS status is the recognised mark of property professionalism.

Over 100 000 property professionals working in the major established and emerging economies of the world have already recognised the importance of securing RICS status by becoming members.

RICS is an independent professional body originally established in the UK by Royal Charter. Since 1868, RICS has been committed to setting and upholding the highest standards of excellence and integrity – providing impartial, authoritative advice on key issues affecting businesses and society.

RICS is a regulator of both its individual members and fi rms enabling it to maintain the highest standards and providing the basis for unparalleled client confi dence in the sector.

RICS has a worldwide network. For further information simply contact the relevant RICS offi ce or our Contact Centre.

AsiaRoom 2203Hopewell Centre183 Queen’s Road EastWanchaiHong Kong

t +852 2537 7117f +852 2537 [email protected]

AmericasOne Grand Central Place60 East 42nd StreetSuite 2810New York 10165 – 2811USA


OceaniaSuite 2, Level 161 Castlereagh StreetSydney, NSW 2000Australia


Europe (excluding United Kingdom and Ireland)Rue Ducale 671000 BrusselsBelgium

t +32 2 733 10 19f +32 2 742 97 [email protected]

AfricaPO Box 3400Witkoppen 2068South Africa

t +27 11 467 2857 f +27 86 514 0655 [email protected]

Middle EastOffi ce G14, Block 3Knowledge VillageDubaiUnited Arab Emirates


India48 & 49 Centrum Plaza Sector RoadSector 53, Gurgaon – 122002India


United KingdomParliament SquareLondon SW1P 3ADUnited Kingdom

t +44 (0)870 333 1600f +44 (0)207 334 [email protected]

Ireland 38 Merrion SquareDublin 2Ireland


RICS Professional Guidance, UK

1st edition, guidance note

Financial viability in planning

GN 94/2012

Documents

RICS guidance on financial viability in planning · RICS guidance notes This is a guidance note. Where recommendations are made for specific professional tasks, these are intended