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MPs back developers’ funding pleas

Berkeley Homes seeks to renegotiate Section 106 commitment to build Crossrail Station

An influential group of MPs has added its weight to developers’ pleas for local authorities to shoulder more of the cost of urban developments.

Developers are increasingly frustrated by Section 106 requirements and have begun to renegotiate their obligations with local authorities. Now they have been joined by the All-Party Urban Development Group and think tank the Smith Institute in calling for an overhaul of funding structures.

“Urban regeneration projects are already marginal, and anything which makes them less viable is likely to scupper them,” said Jonathan Seager, planning director at the British Property Federation, which advised on the Group’s report. “Local authorities need to become more like partners.”

The report, Regeneration and the recession: unlocking the money, makes a series of recommendations on new models of finance. One, Accelerated Development Zones, would see local authorities share more of the up-front risks of development and more of the returns.

The model would involve one or more local authorities having the freedom to borrow against the expected increases in tax revenue associated with a new development, with the debts repaid over a period of 20-plus years

Jason Marcus, chairman of Thornfield Properties, which is due to complete the £350 million Rock urban regeneration development in Bury next July, said speculative finance had dried up and councils needed to move fast on these recommendations or risk forsaking years of development.

“There will be a blockage in the pipeline for many years,” he said. “And I don’t know exactly how ADZ would work, but the principal is very interesting.

“When you deliver a major regeneration project, local authorities see rates increase. The risk of that not happening is low. So they should be able to borrow against that.”

But house builders have warned that local authorities needed to be prepared to step in to make schemes viable, even when developers were well funded.

Taylor Wimpey group planning director Peter Andrew said the firm was renegotiating size and timescales of Section 106 obligations on about 300 pipeline projects – even though the firm’s refinancing in April has given it cash for investments.

“At the moment, we are working with local authorities to make them understand that the existing model is broken,” he said. “The finances of developments are under enormous pressure – whether it is for urban regeneration, greenfield or brownfield sites.

“The growth in the level of Section 106 over the last 10 years has been driven by the growth in house prices. That is not the case anymore.”

Berkeley Homes, whose Royal Arsenal development is helping to regenerate Woolwich in east London, is seeking a new deal with local authorities over its Section 106 planning commitment to build a Crossrail Station.

Berkeley Homes regeneration chairman John Anderson said the value of returns on developments was already perilously close to the build cost. The difference between a scheme that is viable and one that is not could be affordable housing obligations or Section 106 contributions, he added.

“Where we have 35 per cent affordable housing at a discount price, they are being delivered at less than cost,” he said. “And it is difficult to then make that up in the private sale.

“There is a lot of discussion going on with Crossrail and the local authority, and sensible compromises are being discussed, because I don’t think major schemes can fund major infrastructure any more.”

Potential new financing tools mooted by All-Party Urban Development Group

Business rate supplements and the community infrastructure levy

BRS will allow local authorities to levy up to an additional 2p per pound on the business rates of firms with a rateable value in excess of £50,000, for a set time period. The community infrastructure levy involves levying a set charge on different types of development to invest in the supporting infrastructure provision.

JESSICA

JESSICA has been set up for the 2007-13 programming period of the EU structural funds. It allows RDAs to use a proportion of their EU structural fund allocations to create an urban development fund for use as equity, loans or guarantees, rather than as grant money.

Regional infrastructure funds

Money could be top sliced from other budgets, such as regional funding allocations and used as a loan facility to help fund private sector contributions to development projects. In some cases, the loans made are only partly repayable so the fund value is set to erode over time. Another option would be to use a RIF as a way of guaranteeing other loans.

Tax increment financing / accelerated development zones

TIF, long part of the infrastructure financing toolkit in the US, works by allowing local councils to raise money by borrowing against the expected increases in tax revenue associated with a new development. There is much appetite for the adoption of TIFs in the UK, which are known here as ADZs. The report calls for pilot schemes.

By Mark Lewis

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