Viability assessment & development appraisal

Our interpretation of the contract details relating to the necessity or otherwise of conducting a viability assessment/development appraisal

Note: A viability assessment meeting the criteria below was carried out in May 2014. It seems to confirm little more than that the developer’s sums of the costs of the development add up.

Silk Street viability assessment May 2014

  • In May 2011 the cabinet was told the the Assessment then being carried out for it by consultancy firm CBRE was “to assess whether the scheme appears financially viable at the current time…”. The report raised questions and advised the CEC to “expect a formal test” of viability to be undertaken up to 6 months after the granting of planning permission. CBRE expressed the view that at that stage “it is probable given the time period to the run-in to start on site date it is highly likely that they will not have completed the letting of the development and therefore a future appraisal will still be required to ascertain a full and final position.”
  • In the 2011 contract the term “viable” means there is to be “a reasonable expectation” that the developer will achieve a return of 13% or more from the development. In the context of this agreement therefore, “viability” seems only to relate to whether the developer will make a particular profit. It has no relation to whether the scheme itself will succeed in bringing benefit to the town.
  • The contract also includes provision for the production of a “Development Appraisal”, meaning an appraisal which is to be in accordance with an undisclosed format. Usually, a Development Appraisal is an assessment of the residual value (if any) of a completed development after deducting the actual costs of construction, together with all the other costs incurred by the developer, including finance costs.
  • The contract requires the developer to confirm, no later than 6 months following the date of planning permission (i.e. by March 2014), that they are “satisfied that the development is viable”. It is up to the developer to “notify the Council in writing whether or not in its opinion acting reasonably the development is viable”.
  • “If the developer fails to provide a notification….the viability precondition shall be deemed to be satisfied..” In other words, at this point, CEC will take it that the scheme will make the expected profit for the developer, even if the developer does not notify this to be the case. If the developer does choose to give a notification on viability to CEC 6 months after the date of planning permission, then at the same time the developer must also disclose its “Development Appraisal”. Thus, if the developer does not give a viability notification at this stage, it seems there is no obligation for the developer to serve a “Development Appraisal” at this point, nor any requirement for CEC to obtain one.
  • The contract does oblige the developer to produce a “Development Appraisal”, “within one month of the funding condition being satisfied”. It seems possible that by this stage the construction may have started. Only if the developer fails to produce this appraisal, or if CEC is not satisfied that the developer’s “estimates..are reasonable”, does the contract provide for CEC to seek its own expert Development Appraisal. However, it seems to be open to CEC to accept the developer’s “estimates” without obtaining an expert assessment of them.
  • Any Development Appraisal ought to provide the developer and CEC with an assessment of the development’s commercial viability.

 

Timescales

Pre-conditions

Financial arrangements

Incentives

 

 

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