The review shares the upside of a scheme consented below the affordable housing target, and it never shares the downside.
A late-stage viability review payment is a share of the surplus the scheme earns over its consented viability appraisal: the rise in GDV, less the rise in build costs, less the developer's profit on the extra GDV, times the authority's share, capped at the cost of the affordable housing the scheme did not provide. On an illustrative 200-home scheme whose GDV beats the appraisal by £10.0m while costs rise £3.0m, the surplus is £5.25m and the payment at a 60 per cent share is £3.15m, 45.0 per cent of the net improvement.
Worked in full in The Real Estate Development Manager by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
When a scheme is consented below the affordable housing target because the viability appraisal said it could not afford more, the planning authority usually reserves the right to look again. A late-stage review takes place near the end of the build, once most homes are sold or let, and uses actual sales values and actual costs. In London the Mayor's 2017 Affordable Housing and Viability Supplementary Planning Guidance set a widely copied form: commonly a review at 75 per cent of sales, a 60:40 split of the surplus in the authority's favour, and a cap at the policy-compliant level. Elsewhere the trigger, share and cap are whatever the section 106 agreement says, so read it before modelling it.
| Input | Value |
|---|---|
| Homes | 200 |
| GDV in the consented viability appraisal | 120.0 |
| Build costs in the consented appraisal | 80.0 |
| GDV at review, actual sales plus valuation of unsold homes | 130.0 |
| Build costs at review, actual plus cost to complete | 83.0 |
| Developer's profit agreed in the appraisal, % of GDV | 17.5% |
| Authority's share of surplus | 60% |
| Affordable housing provided / policy target | 20% / 35% |
| Deficit per affordable home not provided (market value less transfer value) | 0.25 |
The land value is not reopened. It stays at the benchmark used in the original appraisal, which is why the formula only looks at changes in GDV and build costs.
Change in GDV = 130.0 − 120.0 = 10.0, or 8.33 per cent
Change in build costs = 83.0 − 80.0 = 3.0
P = 10.0 × 17.5% = 1.75
Surplus = ΔGDV − ΔCosts − P = 10.0 − 3.0 − 1.75 = 5.25
Payment = 60% × 5.25 = 3.15
Homes short of target = 200 × (35% − 20%) = 30; cap = 30 × 0.25 = 7.50. The payment of 3.15 is below it.
Excel: =MIN(MAX(0,(dGDV-dCost-dGDV*Profit))*Share, Units*(Target-Provided)*Deficit)
The scheme is 7.00 better than the appraisal assumed: 10.0 more revenue, 3.0 more cost. The authority takes 3.15, enough for about 12.6 affordable homes at the assumed deficit, usually paid as a contribution to off-site provision. The developer keeps 3.85, 55.0 per cent, made of its 1.75 of profit on the extra GDV and 40 per cent of the surplus, 2.10.
Measured against the rise in revenue alone, the review takes 31.5 per cent of the 10.0 rise in GDV. At the margin it takes more: once the cost increase and the profit deduction are covered, each extra pound of GDV pays 49.5 pence to the authority until the cap binds. That is the number to put in the developer's appraisal next to the sales risk: upside is shared, downside is not.
| GDV change | GDV at review | Surplus | 60% share | Payment after cap | Developer's change in profit |
|---|---|---|---|---|---|
| −5.00% | 114.00 | −7.95 | 0.00 | 0.00 | −9.00 |
| 0.00% | 120.00 | −3.00 | 0.00 | 0.00 | −3.00 |
| 5.00% | 126.00 | 1.95 | 1.17 | 1.17 | 1.83 |
| 8.33% | 130.00 | 5.25 | 3.15 | 3.15 | 3.85 |
| 15.00% | 138.00 | 11.85 | 7.11 | 7.11 | 7.89 |
| 25.00% | 150.00 | 21.75 | 13.05 | 7.50 | 19.50 |
Two thresholds frame the table. With costs up 3.0, a payment starts only once GDV rises more than 3.64, 3.03 per cent, because the cost overrun and the profit on the extra revenue are deducted first. The cap binds once the surplus reaches 12.50, which takes a GDV rise of 18.79, 15.7 per cent. Above that, the developer keeps every extra pound again.
Below the appraisal, nothing flows back. A scheme that sells 5 per cent under its appraisal loses 9.00 of profit and the review does not refund any of the affordable housing already provided. The review is a one-way option held by the authority, and a developer pricing land should value it as one: on a probability-weighted range of outcomes rather than at the base case, where it is often assumed to cost nothing.
Payment = min(share × max(0, ΔGDV − ΔCosts − profit × ΔGDV), homes short of target × deficit per home). Here 60% × 5.25 = 3.15, well under a 7.50 cap. The mechanism is close to an overage on a land sale, with the authority as the beneficiary, and its cap is the same per-home deficit that drives how affordable housing reduces residual land value. The residual appraisal and the quarterly cash flow behind both are in the free workbook for this case.
Typically near the end of the build, once a set share of homes has been sold or let; the London guidance uses 75 per cent. Actual sales values and evidenced costs then replace the appraisal figures. In the illustrative case a quarter of the 130.0m GDV is still a valuation of unsold homes at that point, which is where most review disputes start.
Usually, at the cost of providing the affordable housing the scheme fell short of the policy target. In the illustrative scheme 30 homes are short of a 35 per cent target at a deficit of 0.25m each, so the cap is 7.50m. It binds once GDV rises by 15.7 per cent over the appraisal with costs up 3.0m.
Whatever the section 106 agreement says. London's widely used form gives 60 per cent to the authority and 40 per cent to the developer. On a 5.25m surplus that is 3.15m and 2.10m; with its 1.75m profit on the extra GDV, the developer keeps 55.0 per cent of the 7.00m net improvement.
This article is one calculation from The Real Estate Development Manager. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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