Defining Financial Viability in Planning

Financial viability at the planning stage, as opposed to during construction, is concerned with the effect of policy related costs on a development, such as plan-led land use allocations and the application of local planning policies, such as affordable housing policy, which are enforced through planning obligations and associated legislation.

Since 2019, the Government approach has been to encourage the front-loading of viability testing, whereby viability should be considered at the plan-making stage for each local authority. This process entails site typologies being assessed for their ability to deliver policy requirements. If the authority has undertaken this process, then when a site-specific planning application is brough forward, it is assumed that the scheme is viable.

The Assumption of Viability

For developers, the overall financial viability of a project is determined by the extent to which it can generate revenues which cover:

1. Construction costs – land acquisition, construction of buildings, siteworks, and professional fees.
2. Finance costs and profit – providing an acceptable return for capital providers and developer profit.
3. Policy costs – such as planning obligations.

Regarding the policy costs of site-specific proposals, the Government has defined national policy such that where local plans have up-to-date policies, the any proposed schemes brought forward for consideration are, by default, assumed to be viable.

This approach has been reached to try and ensure that the costs of meeting planning obligations are priced into all aspects of a project, including land values.

For developers and landowners, this places the burden of proof on them to demonstrate that a site-specific scheme is unviable given all costs, including policy costs. If the developer wishes to express viability concerns, Government guidance provides an explicit framework for assessment, which details the standard inputs and methods which must be used.

• A development is assumed to be viable if local policies are up-to-date.
• It’s up to a developer to demonstrate otherwise.

Assessing Financial Viability

The process of assessing financial viability in planning involves comparing two land values:

• Benchmark land value – the existing use value of the land, plus a premium, if applicable, which reflects any element of alternative use or development value.
• Residual land value – the value of the land based on the proposed development scheme, where it is assumed that the scheme is policy compliant and provides an acceptable financial return.

This comparison exercise shows the extent to which the value of the land as existing is higher or lower than that which would be generated if developed through a fully compliant, and profitable, scheme.

If the benchmark land value (existing value, plus a premium) is not reached by the land value generated by the proposed development – the residual value – there would be no incentive for the land to be released for development, and it is deemed unviable.

• Price paid cannot be used as a factor to justify the reduction of developer contributions.

Importantly, any assessment of benchmark land value should not consider price paid for the specific site, although it should allow for a developer return which would be deemed acceptable.

Benchmark Land Value

The concept of a benchmark land value (BLV) is defined in Government planning guidance relating to viability in planning. Typically, BLV is taken as existing use value, plus a premium (EUV+). although it may also be appropriate to use an alternative use value (AUV).

For the existing use element of EUV+, the value is taken as the current use and ignores any alternative or hope value which could be attributed to a future, except where permitted development rights are applicable, but only if this does not require construction works. The premium element of EUV+ should represent an incentive for the landowner to develop their land in a policy compliant manner, and it should represent the minimum figure they would accept.

Residual Land Value

In defining the residual land value, a Development Appraisal is used to assess the financial performance of a proposal, on the basis that it is policy compliant. For example, if policy requires a site provide 20% of the units on a residential development to be affordable homes, this should be reflected in the appraisal. In addition, the specifics relating to abnormal costs should be included. The revenue and costs elements should be taken on a market basis, using data from sources which are transparent and justifiable given the site.

Viability Outcome

If the assessment process shows that the residual value of a development is less than the benchmark land value, and that this has been shown using acceptable sources of data and applied correctly to the specifics of a site, then this can form the basis of adjustments to planning obligations. This process entails negotiations with the local planning authorities on what levels of obligations and conditions are viable, how they will be delivered, and the timings of that delivery.

• If a site is demonstrably unviable, it is possible to adjust levels of planning obligations.
• However, the process should be transparent and collaborative.
• Price paid cannot be relied upon to justify not being able to meet planning obligations.