CIL and S106 agreements from a development managers perspective
CIL is a tariff-based payment used to pay for essential infrastructure within a particular area. In contrast, s.106 is a section of the Town and Country Planning Act (1990 and is a legal agreement (planning obligation) that gives planning obligations that developers must follow.
Section 106's are negotiable, but a CIL payment is not. Regulation 122 of the CIL regulations (2010) state that planning s.106 must be:
(a)necessary to make the development acceptable in planning terms;
(b)directly related to the development; and
(c)fairly and reasonably related in scale and kind to the development.
Property developers, whether or large or small, must understand the importance of these CIL and s.106 as they are enforceable and have the power to stop your development if not managed appropriately.
Community Infrastructure Levy
When I started my career in property development, CIL had barely come out, and it wasn’t something I fully understood. All I knew was that once planning permission is secured, you just crack on with the development. Little did I know that there was a method to calculating CIL and that as long as you understood the calculation and its inputs, it is straightforward to understand.
The workings of CIL can be found in the CIL regulations 2015, which set out how to calculate it. It is recommended that before a person decided to purchase a piece of land or increase the floor space of a building, they calculate the estimated CIL. On single-unit small schemes that I worked on, the CIL payment was on or around £49k based on a CIL rate in that area and multiplied by the floor area. In other more significant scheme examples, this cost can balloon to £1-5m just on CIL costs. Imagine miscalculating your CIL during the planning process only to be hit with with a large CIL bill once planning permission is secured; this can quickly erode your profits and make the scheme unviable.
For CIL to be chargeable, the local authority must adopt CIL following the CIL regulations 2010 (as amended). However, according to www.architecture.com, only 60% of local authorities have adopted CIL.
In London in particular, there are two charging regimes for CIL, the borough takes the first, and the Mayor of London takes the second. The Council CIL is used to fund safer roads, schools, hospitals, green infrastructure and much more infrastructure projects. The Mayoral CIL is used to cover the cost of major infrastructure projects like cross rail etc.
There are various rates attributable to the commercial, residential etc., so be sure to research the rates ahead of your calculation.
Finally, and in simplistic terms, CIL is calculated by multiplying the increased area or the area of a brand new build by the associated rate based on the use. Some people tend to forget that these rates are index linked, meaning a rate of £500 today with indexation at say 139 will be £536 if indexation rises to 149.
Calculating CIL is not a static calculation as the cost becomes fixed once planning permission is secured. CIL payments are linked to the BCIS All-in Tender Price Index, which means that you cannot just take the rate from the Council’s website and times it by the gross increase in floor area. Doing this will likely lead you to receive a rude awakening when the correct indexation is applied. For instance, if, say, the CIL rate for one new house-sized at 60sqm with a residential rate of £200 per sqm gives you a total CIL payment of £12,000. This amount does not mean this is the payment you will be making. You will need to factor in indexation from the year the CIL was adopted in that borough versus when planning permission was secured. In this simple example, £12k would increase to £13,972 if CIL was adopted in a Council in 2017 (All in TPI of 286) and you secured planning permission in 2021 (All in TPI of 333).
The example i represents a 16% increase which is not a small number if this was a much larger scheme. The lesson here is to make sure you factor in indexation. The All in TPI Index can be found on the BCIS website.
S106 of the Town and Country Planning Act 1990
I heard a funny quote that nobody plants more trees than property developers, and I am inclined to agree. S.106 agreements are used to secure contributions that make a proposal acceptable in planning terms. The types of costs captured in s.106 agreements are carbon offset payments, contributions towards local parks, cycle lanes, affordable housing payments, transport and childcare. This list is not exhaustive but gives you a flavour of the types of costs to consider.
Like CIL, mostly all s.106 agreement payments include indexation, so include this in your calculations. For example, £10k in 2021 may be more in 2023; again, a prudent property development professional will ensure that their assumptions include indexation because, in reality, the Council could ask for the uplift.
One key element of s.106 agreements is the non-financial obligations which give precise requirements that developers and landowners must follow. For example, S.106’s prescribes the use of the land by dictating affordable housing, travel plans, carbon offset payments and limiting the occupation of private homes until the affordable homes are completed. They also provide several pre-start on-site and pre-occupation conditions that must be discharged.
What happens if I do not pay CIL or discharge my S.106 obligations
In short, if you do not pay CIL, the charging authority could issue a stop notice or an injunction stopping you from developing your site. It could even get worst; your asset could be seized and sold to satisfy the payment, or even worst, and if all fails, you could end up going to prison. Therefore, if for any reason you can not make the CIL payment, it is much better to get in touch with the CIL officer and explain your circumstances. Late CIL payments will accrue late payment charges.
Failure to discharge planning obligations could mean you will not be able to sell your completed homes. Good solicitors acting for buyers of new build homes always ask for evidence that you have discharged your conditions. You heard it here, get your financial and non-financial obligations discharged in writing so that you can rent or sell your completed homes in peace.
Factor these costs into your development appraisals
To all land buyers and developers purchasing sites with planning permission, be sure to read the s.106 agreement in detail before putting in an offer to buy a site.
Outside of building costs and sales values, I always try to understand the fundamental assumptions relating to CIL and s.106.
The critical lesson relating to CIL is ensuring that your assumptions are correct and applying the proper indexation. In some cases where there were exiting buildings to demolished or providing social housing as part, you could be due a reduction in fees. Therefore, do not demolish your homes before getting your CIL forms in, as you may be due to pay the full charge.
On s.106 costs, some of the costs are negotiated, but many of these are set out in Council’s Supplementary Planning Documents. To estimate the likely s.106 costs, spend time researching planning policy within the borough or finding similar schemes to yours with the borough to see the level of payments made. S.106 payments are not arbitrary, so try not to rely too strongly on other schemes but use them only as a guide to establish your costs as each scheme is assessed on its own merits.
Make your CIL, s106 payments and discharge your obligations on time and everything will be ok.
Ensure that you submit your CIL forms before you commence demolition.
Always hire a solicitor and planning consultant to help you negotiate your s.106 agreement.
Finally, do not forget to add indexation to your calculations as it is better to be have over provision in your appraisal. It is better to be caught with indexation than without it.
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