Infrastructure levy for Scotland: discussion paper

3 Development viability

It will be important to ensure that any charge made on development considers its impact on viability, taking local factors into account, otherwise it may discourage rather than support development. It should also be predictable, so that a prospective developer can take it into account in their early calculations of whether a site is viable.

A site is viable if the value generated by a development is more than the cost of developing it, including land value, landowner premium, and developer return^[1].

The value of a development is the income generated from sales and lettings. For housing built for sale, which constitutes most development, there is little flexibility in the value: people pay what they can afford (usually, what they can afford to borrow as a mortgage) and prices are set by the local market. Values of commercial and industrial premises are calculated differently, usually on the basis of long-term letting returns, or on the value of the facility to the operator’s business.

Costs include build costs, professional fees etc and planning obligations. They also include the developer’s profit. Profit represents the return on risk, therefore a more difficult site is likely to require a greater level of profit to persuade the developer to take it on, and anything that increases risk, such as uncertainty over the costs to be paid, may also increase the profit required. Landowner premium is the amount required to persuade a landowner to sell the land, over and above the value of the land in its current use.

Viability assessment is typically carried out in the form of residual valuation, either for land or for profit. This sets the costs against the value to derive the residual amount available to pay for the land, or if the cost of the land is already known (or already paid), the amount available as profit. Early assessments will normally set the amount of profit that is considered acceptable, in order to calculate the amount that can be paid for the land. Where possible, this will include the anticipated costs of developer contributions including s.75 planning obligations and any other charges such as an infrastructure levy. This means that, if charges are predictable at an early stage, they are reflected in lower land prices realised by the landowner, allowing the development itself to remain viable.