S106 Viability: A Developer Perspective

Introduction

Section 106 agreements (S106), often seen as a pivotal component in the planning and development process, are designed to mitigate the impact of development and ensure that the necessary infrastructure, amenities, and affordable housing obligations are provided. However, from a developer’s perspective, the demands of S106 can significantly affect the financial viability of a project. At Bartons Planning & Development Consultancy, our mission is to add value to the development process by strategically managing S106 viability, ensuring that only appropriate and achievable levels of affordable housing and commuted payments are made, thereby optimising the commercial potential of every development.

Understanding S106 Obligations

Section 106 agreements, also referred to as planning obligations, are legal commitments entered into by developers to offset the local impact of a development. Typical obligations include affordable housing provision, infrastructure contributions, and payments toward community facilities or public services. While these obligations are critical to sustaining community welfare, they can create substantial financial pressures on developers, especially in the current economic climate with rising land costs and construction expenses.

Viability is a core concept that weighs the developer’s expected returns against development costs, including S106 contributions. The key to successful negotiation with planning authorities is establishing what constitutes a viable level of contributions while ensuring the project can still proceed and deliver community benefits.

Value-Adding Areas for Developers

Bartons specialise in unlocking value for our clients in several key areas related to S106 viability. We do this by working collaboratively with local authorities, engaging effectively with stakeholders, and employing in-depth financial modelling to justify the extent of contributions. Below are the value-adding areas in which Bartons excels:

1. Financial Viability Assessments (FVA)

The cornerstone of S106 negotiations is the Financial Viability Assessment (FVA), which provides a transparent analysis of development costs and projected returns. At Bartons, our consultants prepare robust FVAs to demonstrate whether the level of contributions requested by the local planning authority threatens the project’s financial viability.

Our assessments focus on key cost components, including land value, construction costs, professional fees, sales revenue projections, developer profit margin, and the requested S106 obligations. By carefully analysing each of these elements, we can provide a defensible position, ensuring that contributions align with the viability constraints of the project. Importantly, we aim to demonstrate how the level of affordable housing or financial contribution, if set too high, can threaten the delivery of much-needed development.

2. Negotiating Affordable Housing Requirements

Affordable housing is often the most significant element of an S106 agreement, and achieving a balance between local policy requirements and development feasibility is crucial. Bartons acts as a trusted partner for developers, leveraging our experience to negotiate with planning authorities, ensuring that the agreed affordable housing provision does not undermine the viability of the project.

We understand that the planning authority’s goal is to secure as much affordable housing as possible, but we also know that providing affordable units directly impacts profit margins and sales revenues. We work with our clients to propose alternative solutions, such as off-site contributions, commuted sums, or alternative tenure mixes, which can create a more feasible balance between the needs of the community and the financial goals of the developer. Our approach ensures that the final affordable housing provision reflects the economic reality of the project while delivering community benefits.

3. Commuted Payments and Infrastructure Contributions

Commuted payments for infrastructure, such as highways, education, or healthcare facilities, often become complex and substantial cost burdens for developers. Bartons’ role is to ensure that these payments are proportionate, justified, and reflective of the financial realities of each development.

We employ evidence-based approaches to contest excessive infrastructure requirements and ensure that any commuted payments are fair. We engage independent specialists when needed to assess traffic, educational needs, or open space requirements, thereby providing credible evidence to support our position. By ensuring that contributions are realistic, we help our clients keep a tight control over cash flow and project costs.

4. Maximising Land Value and Developer Return

One of our primary aims is to maximise the land value for developers, as this directly influences project feasibility and profitability. Bartons takes an innovative approach to site appraisal, including options for staged or deferred S106 payments. Deferring contributions until sales are completed or when cash flow is more robust allows a more viable and profitable development process, reducing upfront cost burdens.

In our assessments, we factor in strategic land planning, phased development schedules, and creative ways to mitigate abnormal costs. For example, when a site has remediation costs due to contamination, we work to ensure that the reduced site value is acknowledged and reflected in the S106 obligations.

5. Engagement with Key Stakeholders

The planning process involves multiple stakeholders, including local authorities, community groups, housing associations, and statutory consultees. Bartons actively facilitates engagement and dialogue between all parties to ensure smooth negotiations and minimise delays.

We adopt a proactive approach to stakeholder engagement, demonstrating the merits of a proposed development and clearly outlining how it benefits the local area. By building a positive relationship with stakeholders, Bartons ensures that all involved parties are realistic in their expectations regarding S106 contributions, and understand the constraints faced by developers. By creating this collaborative atmosphere, we can often achieve a consensus that allows the development to proceed smoothly and profitably.

6. Risk Management in S106 Negotiations

Viability discussions can be fraught with risk, particularly where disagreements arise with local planning authorities over the extent of contributions. Bartons manage this risk through rigorous preparation and planning, ensuring that our clients are equipped with well-reasoned evidence to support their case.

Our consultants conduct thorough research into local planning policies and precedent cases to anticipate the likely positions that authorities may adopt. We prepare contingency strategies to counter any overreaching demands while demonstrating a willingness to negotiate and accommodate reasonable requests. This proactive approach ensures our clients avoid protracted disputes, reducing potential delays and unforeseen costs.

7. Using Market Conditions to Inform Viability

Bartons takes into account local and regional market conditions to ensure that viability assessments are as accurate as possible. This is critical in demonstrating whether proposed S106 obligations are feasible. Market conditions, such as fluctuating house prices or rising construction costs, have a significant impact on development viability.

By utilising comprehensive market intelligence, including trends in house prices, buyer demand, and construction cost indices, Bartons builds robust viability assessments that reflect current market conditions. We ensure that planning authorities understand that viability must remain adaptable, with flexibility to reflect both positive and negative market changes.

Ensuring Only Viable Levels of Affordable Housing and Contributions

Our goal at Bartons is to support developers in achieving only viable levels of affordable housing and commuted payments. We understand the delicate balance between contributing to community infrastructure and retaining sufficient returns for the risk developers undertake.

We use detailed development appraisals to present an accurate financial position of the project, backed by comprehensive data. By clearly setting out the costs, revenues, and risks associated with each development, we can demonstrate to planning authorities the necessity of scaling back contributions when viability is in jeopardy. Importantly, our role is to find mutually acceptable solutions that enable projects to proceed.

Where local planning policies demand more than is viable, we engage with authorities to educate them on the financial aspects of development. By presenting a transparent breakdown of how excessive S106 demands could stall development, we advocate for proportionate contributions that allow both the development and community benefits to come to fruition.

Utilising Appeal Processes if Necessary

If local planning authorities are unwilling to compromise, Bartons has significant experience in taking S106 viability issues to appeal. Our consultants work to prepare the strongest possible case, leveraging financial analysis, planning policy, and third-party evidence to substantiate the client’s position.

While our aim is always to reach an amicable resolution, we are prepared to represent our clients throughout the appeal process. By relying on our extensive track record of success, we ensure that the financial viability of developments is protected, allowing our clients to proceed confidently.

Managing Clawback Mechanisms and Ensuring Robust Benchmark Land Values

Clawback mechanisms are often included in S106 agreements to ensure that if market conditions improve, additional contributions can be secured from the developer. However, poorly managed clawback mechanisms can have significant impacts on development viability, particularly at the review stage. At Bartons, we specialise in managing clawback mechanisms to minimise their impact, ensuring that contributions remain viable throughout the development process.

We approach clawback negotiations by ensuring that any review mechanisms are fair, transparent, and based on clearly defined criteria. By using up-to-date market data and viability assessments, we provide evidence to limit the potential increases in contributions during the review process. This proactive approach ensures that developers have a clear understanding of their obligations, reducing uncertainty and risk.

In addition, ensuring high and robust benchmark land values is crucial to managing viability. Benchmark land value (BLV) is used as a key reference point in viability assessments, and establishing an appropriate BLV is fundamental to ensuring that contributions are realistic. Bartons works diligently to establish strong BLVs that reflect the true market value of the land, including the complexities and costs associated with bringing it forward for development.

We also consider landowner incentives, which are a key factor in determining BLVs. According to RICS best practice, the level of landowner incentive can vary depending on the current state and use of the land. For example, for a run-down or underutilised property, a limited landowner incentive may be appropriate, as the motivation to sell is often driven by the costs and challenges associated with maintaining the land. Conversely, for land with fully active existing uses that generate income, a significant landowner incentive may be required to bring the land forward for development.

Bartons ensures that landowner incentives are set at a level that is sufficient to motivate the release of land without undermining development viability. Our approach is grounded in RICS guidelines, and we provide detailed justifications for the level of incentive applied, ensuring that both the landowner and planning authority understand the rationale behind the BLV. By doing so, we help facilitate the delivery of land for development while maintaining a viable financial position for the developer.

Conclusion

At Bartons Planning & Development Consultancy, we pride ourselves on adding value for our clients throughout the S106 negotiation process. We understand that while Section 106 agreements are necessary to mitigate the impact of new development, they must also be fair, proportionate, and viable.

By utilising detailed financial viability assessments, negotiating affordable housing requirements, managing commuted payments, maximising land value, engaging stakeholders effectively, and employing thorough risk management strategies, we ensure that our clients achieve the best possible outcome for their projects. Bartons’ role is to ensure that S106 obligations do not hinder development but rather support it in a way that is sustainable for both developers and the community.

In an increasingly challenging market, our expertise and strategic approach to S106 viability ensure that our clients can deliver successful developments while meeting only the most viable levels of affordable housing and commuted payments. We strive to strike the right balance, ensuring the long-term sustainability of the development industry and the local communities that benefit from it.

Contact Us

If you are facing challenges with S106 obligations and need a consultancy that truly understands how to optimise viability, Bartons Planning & Development Consultancy is here to assist. We invite you to contact us to discuss your project needs, and discover how we can add value through strategic and effective S106 negotiations. Let us help you deliver viable, profitable developments while navigating the complexities of planning obligations.