How section 106 agreements, the Community Infrastructure Levy and viability shape land value and your finance

A section 106 agreement, named after the relevant section of the Town and Country Planning Act, is a legal obligation entered into between a developer and the local planning authority. It makes a development acceptable in planning terms by requiring the developer to deliver or fund things that offset the scheme's impact on the local area. It is sometimes called a planning obligation or a planning gain agreement.

Typical section 106 contributions include:

• Affordable housing, a proportion of homes provided at below market value or transferred to a housing provider
• Financial contributions towards schools, healthcare, transport or open space
• On-site infrastructure such as roads, junctions or public realm
• Ongoing obligations, for example the future management of shared spaces

A section 106 agreement runs with the land, so it binds whoever owns the site. Because it can carry a significant cost, it directly reduces the net value the planning uplift creates, and any lender assessing the land will want to understand the obligation in full before deciding what to advance.

The Community Infrastructure Levy, usually shortened to CIL, is a charge that some local authorities levy on new development to help fund the infrastructure an area needs. Where a council has adopted a CIL charging schedule, the levy is calculated on the net additional floorspace a development creates, usually as a rate per square metre, and it is index linked over time.

Unlike a section 106 agreement, which is negotiated case by case, CIL is generally a fixed formula set out in the authority's published schedule, so it is more predictable. Certain developments and uses can qualify for relief or exemption, but where CIL applies it becomes payable in line with the authority's rules, often triggered when the development commences.

Not every authority charges CIL, and where it does apply it sits alongside, rather than instead of, any section 106 obligations. For a developer, CIL is another real cost that eats into the value released by consent. For a lender, it is another deduction to factor in when working out the net position of the site and how much can safely be advanced against it.

Viability is the test of whether a development can carry its planning obligations and still leave a reasonable land value and a competitive return for the developer. In simple terms, it asks whether the numbers stack up once section 106, CIL and build costs are all taken into account.

A viability assessment weighs the gross development value of a scheme against the costs of delivering it, including construction, professional fees, finance, developer profit and the planning obligations. If the obligations demanded would push the scheme into a loss or an unviable land value, there is a basis to negotiate them down. This is often where the affordable housing proportion or the level of financial contributions is settled.

Viability matters to finance because it is the bridge between the planning ask and the deliverable value. A scheme that looks generous on gross value but is loaded with heavy obligations may release far less planning gain than the headline suggests. We look at the viability position, not just the consent, because that is what tells us the real net value a facility is secured against.

The planning uplift is the jump in land value that consent creates, but that jump is a net figure, not a gross one. Section 106 and CIL are direct deductions from it. A consent that permits a valuable scheme can still deliver a modest uplift once heavy affordable housing, infrastructure contributions and levy payments are stripped out.

The same is true of net development value. Gross development value is what the finished scheme is worth on completion, but the net position is what is left after the obligations and costs of delivering it. A high gross figure with a large section 106 and CIL bill behind it can translate into a much slimmer margin than the top line implies.

For anyone valuing land, the sequence matters: take the value the consent creates, then deduct the obligations that come attached, and you arrive at the figure that actually supports lending. This is why we treat the obligations as central to the deal rather than as a footnote, and why an early, honest read of them protects everyone in the transaction.

A lender sizing a land facility is lending against value, and section 106 and CIL reduce the value that value is measured on. So the obligations feed straight into the loan to value calculation. Before consent, advances usually sit around 50% to 65% of current value, and after a strong consent they can move to around 65% to 75% of value, but that after-consent figure is applied to a value that already reflects the obligations, not one that ignores them.

Pricing responds too. A clean consent with modest, well understood obligations supports keener terms, with land bridging around 0.75% to 1.1% per month and stronger cases moving towards senior debt from around 6% to 8% a year. Heavier or uncertain obligations tend to push pricing towards the higher end and the advance towards the lower end. These are indicative bands, and facilities typically run from £100k to £25m over 1 to 36 months with interest rolled up. Every case is judged on its own numbers.

The obligations are manageable when they are understood early and priced honestly. The worst outcome is discovering the true weight of a section 106 or CIL bill after a facility has been sized on optimistic assumptions. A little discipline at the outset protects the whole transaction.

Practical steps we encourage:

• Read the agreement in full, including any financial contributions, triggers and timing of payments
• Check the CIL position with the charging authority and confirm any relief or exemption before relying on it
• Test viability with a properly costed appraisal, so the net uplift is realistic
• Plan the cash flow, since some obligations fall due on commencement and can coincide with a refinance

Planning gain and land finance for companies, developers, promoters and investors is unregulated commercial lending outside the FCA's regulated-mortgage perimeter. Nothing here is financial, legal, planning or tax advice, and you should confirm planning and tax matters with the right professionals. We arrange the finance around the real numbers, so bring us the obligations early and we will build the facility around them.