Infrastructure Levy - IL conceived

Now that the initial dust has settled after the Queen’s speech, I thought it was time to dig down in to what the future of the Infrastructure Levy might mean in reality and is it really viable (no pun intended)??

In a previous post I noted that my highly rewarding (slightly nuts) viability career was hanging by a thread.?Ready to be cast back in to the shadowy world of secured lending and valuation disputes I was going to hang up my Argus viability toolkit and return to the ranks…or maybe not.

So what is Infrastructure Levy (IL) – I’m sure most of you still reading this far are probably well aware of the IL which effectively will replace CIL and large parts of Section 106 – I won’t go in to detail as people like Iain Gilbey at Pinsent Masons will be far better at describing the various legal frameworks and how this will work in practice from a legal sense.?However, IL is a simple levy (￡/m2) based upon the final GDV of the completed development.?Job done.?Argus Toolkit licence revoked.?Back to the secured lending for me…or maybe not so fast!?There are a couple of small clouds on the horizon already…

The new Levy is set locally – not nationally, which means a lot more flexibility for the Levy to be moulded to the local market.?Great news.?But… also plenty of complexity in terms of agreeing what that rate should be (exacerbated by the fact that different rates can be set across a single authority as I understand).?If CIL is anything to go by – it will take a while to really get to the bottom of what a reasonable rate will be locally. ?I see a lot of arguments over the inputs in to the IL calculations on the horizon!

My colleague Anthony Lee from our London Viability team summed up the new Levy, and the reality of it, beautifully yesterday at the BNP / S&P Planning and Development Day.?We will now have a simple system which everyone can understand compared to the complex current system.?Great.?The problem is that the current system is complex because that’s the reality of development delivery.?Dumbing down the subject effectively removes the experts from the system and with it, their input (and expertise) and the ability to make sure that the "correct" level of planning obligations are provided.

The main issue however with a Levy (nationally or locally set) is that it has to cater for the lowest common denominator.?Many sites across the UK are coming forward with fully policy compliant levels of Affordable Housing or at least close to it.?However some don’t.?For the Levy to work – it has to apply across all schemes in a set area, thus those sites that previously could afford policy levels of affordable may only have to provide a small % of that.?It seems a bit odd that this is deemed a step forward to me.?

My personal take is that I see it as giving away your 21 speed mountain bike and buying a single geared bike.?Yes it will probably still get you where you want to go if the road is flat, but as soon as there is a hill, the complexity of the gears makes life a lot easier.?In extreme circumstances, only the mountain bike will get you to the top of the hill, whilst the nice and simple bike is left floundering about at the bottom!?The bike rider (developer / local authority) doesn’t have to understand the inner workings of a derailleur system – that is for the the engineers of the bike (viability experts and legal teams) to understand.?Gears are more expensive / complex than a single cog but they help get the rider to the top of that hill (development delivered as close to policy as possible). The relatively low initial cost/complexity of the gears is far outweighed by the outcome they provide. ?A slightly awkward metaphor, but you get the point.

Right to require – Council’s can require fixed levels of Affordable Housing within a scheme.?How will this work in terms of tenure mix??Will registered providers of affordable housing be keen on taking X% of a larger block of flats with all of the management issues etc that will go with it? Currently some do, but often they don't.

Off-site contribution may work better…the Council may build the affordable housing out in separate areas.?Will the Council have to pay full price for that land??I also thought we were trying to mix tenures up so that there weren’t "ghettos" created?

I understand a significant chunk of CIL is currently sat in various Council bank accounts, unused. How will IL be any different? Council's will need to adjust quickly and be able to identify infrastructure requirements and manage the process. Will the additional personnel required be funded by the IL? At present developers often have to cover the infrastructure (sometimes at a cost to the level of affordable housing provided). However, the infrastructure is often required prior to putting a spade in the ground for the proposed development. Will the Council be able to act that quickly? It is understood that the developer may be able to borrow the money from the Council to do the infrastructure works (in lieu of the IL payment upon completion). Council’s will be able to borrow from a central fund (in lieu of receiving the IL) for said infrastructure.?What happens if house prices drop and the Levy received doesn’t cover the LPA’s borrowing??Who will cover that shortfall??

The law of unintended consequences could rear its ugly head here too – development finance initially – my lending clients do not like uncertainty.?Will the GDV calculation be index linked (it is unlikely a large scheme will sell out on day one thus there will be movement up and down in the market during the sales period) and valuations required.???In the same way Late Stage Reviews tend to be frowned upon by lenders, the IL payment is a known unknown. There is no doubt that there is extra uncertainty in this new scenario.

Linked to the above point – profit – again the uncertainty word rears up – my developer clients do not like uncertainty.?Having large (relatively) unknown sums that need to be paid out late in a development is not an ideal situation at the beginning of a project.? We would expect higher profit levels (by banks and developers) to be required to counter this uncertainty.

I could (but won’t) go on for pages about this.?My conclusion is that the IL is probably not the golden goose that it is being sold as. ?At best, it is an experiment dreamt up by accountants which looks perfect on paper.?At worst, it is a cynical vote winner which makes a great headline but in reality is unworkable on all but the greenest of greenfield sites and therefore the existing S106 (or similar) system will still be required to ensure delivery in most urban sites.?That creates a two tier system and potentially more complexity than we currently have. The current system is not perfect but it gets results most of the time. If IL was going to provide the same levels of infrastructure / affordable as the current system in a simpler way then that would be great. Unfortunately, I think there are too many uncertainties / areas that add complexity by the proposals and therefore it doesn't really do what it is meant to.?