Will ATLAS prop up the commercial market on his shoulders?
Before the recession, city centres up and down the country saw a boom of urban regeneration schemes. New up and coming areas burst on the scene complete with residential flat blocks, flagship developments and the odd trendy wine bar or two. Fast forward a couple of years however, and most of these schemes have been stopped in their tracks by a lack of funding. In some cases, developments have stalled for the foreseeable future and are in danger of being scrapped if the market doesn’t pick up again soon. The Advisory Team for Large Applications (ATLAS) has recently published a series of guidance notes to help local authorities and their private and public sector partners deal with large scale development schemes that have been mothballed because of the recession.
The ATLAS guidance notes encourage local authorities to review stalled schemes; working out which ones are key in terms of delivering key local housing and regeneration objectives and then where possible, moving forwards with the developers and other stakeholders to collaborate on a strategy that outlines how these schemes will get delivered.
The guidance notes have been designed to offer solutions to unblock a stalled scheme at any point in the planning process and ATLAS state that the suggestions in the guidance notes can apply irrespective of how far along a scheme has got before it stalled. Nevertheless, there may be more flexibility for these potential solutions to work better when they are applied to schemes that stalled early in the process or where planning policy has changed in the interim.
Whilst this guidance is very useful, it remains to be seen just how viable these suggestions are in practice and more importantly, will its advice be enough to help turn stalled developments around and boost the property market once more?
Unblocking - step oneFinancial issues – viability
The starting point to the unblocking process suggested by the ATLAS guidance is for local authorities to discuss the options available with the developers. The majority of schemes will have been mothballed for financial reasons and so a key part of the process with the local authority will involve looking at the reasons why the scheme doesn’t stack financially. Local authorities should conduct a financial appraisal to work out why the scheme is not viable. They will also look at the bottom line profit costs going back to the developer.
The rationale behind this would appear to be that if the local authority is attempting to unlock a scheme via the planning system then it is not viable for it to do so if the end result produces over-inflated financial returns for the developers or the scheme financiers.
The financial appraisal process looks at what the viability gap is and what is causing it for each project, before laying out the options available to narrow or close the gap and get the scheme unlocked. The guidance notes state that the financial appraisal used to identify the viability gap must be agreed with the developer and any other parties or stakeholders involved.
The financial appraisal would also look to identify the factors that are contributing towards the gap eg infrastructure and other costs, phasing requirements, the type of development proposed and the type and mix of affordable housing requirements.
Of course, there will probably be a number of aspects that can make a scheme unsteady financially so the appraisal will need to take these into account as well. These include issues such as land values particularly where the land was purchased pre-rescission. One question to be looked at here though is whether or not this decrease in value has been written off by the banks or any other parties that are funding the project.
The appraisal should also consider whether the build costs quoted are actually correct and whether they have been reviewed recently.
The financial appraisal should lastly cover points such as whether the phasing of the project can be used to alleviate difficulties, the rate of sales or lettings that has been assumed and the returns those will yield as well as considering all possible sources for grants and further funding. In this last respect, the guidance notes offer a useful list of possible sources of funding which may not have been explored.
If the local authority is able to help get the scheme unlocked using some of the tools suggested in the guidance notes, it must consider that a mechanism for a re-appraisal would be necessary eg if economic circumstances were to change or where future surplus occurs.
Unblocking – step twoResponsive planning practices for changing economic times or what’s in the planning tool kit?
Once the financial appraisal is complete, the guidance notes have set out range of planning tools that could be used to unlock stalled schemes. These include reviewing section 106 agreements, discounted or deferred tariffs and affordable housing cascades, amongst others. Reviewing section 106 Agreements
According to ATLAS, reviewing completed section 106 agreements is becoming common practice since the recession with some local authorities setting out the circumstances in which they would review them eg where the scheme is of strategic importance, delivers other economic, social or environmental benefits or delivers other key policy objectives. Other local authorities may have not set out their criteria in this way but are looking into reviewing these agreements on a more ad hoc basis.
The review process looks at whether or not the conditions in the section 106 Agreement meet the test set out in circular 05/05 ie being relevant to planning; necessary to make the proposed development acceptable; relate to the proposed development itself; fairly and reasonably related in scale and kind to the proposed development; and reasonable in all other respects. The guidance also points out that in some cases it may not be possible for the proposed development to tick all the right boxes in terms of local regional and national planning policies and still be viable economically. In such cases it may be possible for the local authority to provide the necessary infrastructure itself in order for the development to be acceptable in planning terms.
The review process focuses on what conditions within a section 106 are critical and can’t be altered and which ones can. For conditions which can’t be altered, the guidance advocates the local authority looks into whether or not alternative funding or delivery mechanisms can be found. Where conditions can be altered, the modified section 106 agreement would need to go back to the planning committee for a formal re-approval. Discounted/deferred tariffs
The guidance also suggests that where local authorities operate a tariff system, some have introduced either a discount to the standard charge or have allowed deferred payments linked in to changes in values over time as a response to the downturn. Again where discounts or deferred payments are agreed in principle by the local authority committee, approval would have to be obtained before moving forward. Affordable housing cascades
A cascade is a mechanism within a planning obligation which enables the form and/or the number of affordable housing units to be varied so that it is either reduced (cascade downwards) or increased (staircased upwards) if certain triggers occur e.g. a higher grant is obtained at a pre-set level or there are increased development costs. A ‘baseline’ level of affordable housing is agreed with the local authority but these specified triggers would operate to increase the provision over the baseline, again an option that the ATLAS guidance encourages local authorities to look into.
Whilst these guidance notes are undoubtedly very helpful for local authorities and developers trying to get regeneration schemes moving again, from my reading of the guidance notes they will mainly apply to schemes which are deemed to be of strategic importance such as flagship sites or those which deliver other social, economic and environmental benefits eg housing growth that could be lost if the development didn’t go ahead. However there are going to be many other schemes that won’t make the grade under the guidance. However, if the ATLAS guidance goes some way to instilling confidence in both local authorities and developers and offers up solutions to the financial problems that are stalling regeneration schemes, then it will have achieved a great deal.
This article appeared in the Estates Review on 1 June 2010. Useful links