CIL and Section 106 Obligations: Planning Levies in Development Finance

The Community Infrastructure Levy and Section 106 obligations are the two principal mechanisms through which local planning authorities require developers to contribute to the infrastructure and services needed to support new development. While they serve similar purposes, they operate in fundamentally different ways. CIL is a fixed charge calculated by reference to the type and size of development, set by the local authority in a published charging schedule. Section 106 obligations are negotiated on a site-specific basis between the developer and the planning authority as a condition of planning permission.

For development finance applications, both CIL and Section 106 obligations represent significant project costs that must be factored into the development appraisal. Failure to account for these costs accurately can result in a scheme that appears profitable on paper but is actually unviable once all planning obligations are included. In our experience, planning levies are one of the most frequently underestimated costs in development appraisals, particularly for developers who are new to a specific local authority area and are unfamiliar with the local charging schedule and Section 106 policy.

The combined cost of CIL and Section 106 obligations varies enormously by location and scheme type. In outer London boroughs, CIL charges for residential development can range from £50 to £250 per square metre, while in central London some boroughs charge over £400 per square metre. Section 106 contributions for affordable housing, transport, education, and health can add a further £10,000 to £100,000 or more per unit. For a twenty-unit residential scheme in a borough with high CIL rates and significant Section 106 requirements, the total planning levy cost can exceed £500,000, which is a material proportion of the total development cost.

CIL is calculated using a simple formula: the net additional floorspace created by the development, measured in square metres, multiplied by the CIL rate set in the local authority's charging schedule, indexed to account for construction cost inflation since the charging schedule was adopted. The net additional floorspace is the gross internal area of the new development minus any existing floorspace that has been in lawful use for at least six continuous months within the previous three years. This means that if you are demolishing an existing building with 500 square metres of lawful floorspace and replacing it with a building of 1,500 square metres, the CIL charge is calculated on the net additional 1,000 square metres.

The CIL liability becomes due when development commences, which is typically defined as the date on which any material operation is carried out on the site. This can include demolition, site clearance, or the digging of foundations. The developer must submit a CIL commencement notice to the local authority before starting work, confirming who will be liable for the CIL payment and when development will commence. Failure to submit a commencement notice can result in surcharges and the loss of any instalment payment arrangements.

CIL payment terms vary by local authority. Some authorities require full payment within sixty days of commencement. Others offer instalment policies that allow the CIL to be paid in stages over the construction period. A typical instalment policy might require 25% within sixty days of commencement, a further 25% at six months, and the balance at twelve months. For a CIL liability of £200,000 on a development with a twelve-month build programme, an instalment policy can significantly ease the cash flow burden. Development finance lenders will factor the CIL payment schedule into the facility drawdown programme, and in some cases, CIL can be funded from the development finance facility. We always check the local authority's instalment policy when preparing a finance application and model the CIL payments into the cash flow accordingly.

Several exemptions and reliefs are available that can reduce or eliminate the CIL liability. The most significant for residential developers are social housing relief, which exempts affordable housing from CIL, and self-build exemption, which exempts dwellings built by individuals for their own occupation. Social housing relief applies to units that meet the definition of social housing in the CIL regulations, including affordable rent, social rent, shared ownership, and other qualifying tenures. For a scheme that includes 30% affordable housing under a Section 106 agreement, the CIL relief on the affordable units can save tens of thousands of pounds.

Self-build exemption is available for individual plots within a development where the end user will build and occupy the dwelling themselves. The exemption must be claimed before commencement, and the applicant must demonstrate that they intend to occupy the dwelling as their principal residence for at least three years. This exemption is most relevant for small developers selling serviced plots rather than completed houses. The developer's own units, built for sale to the open market, do not qualify for self-build exemption.

There is also a vacancy exemption that applies where the development involves the conversion or demolition of a building that has been vacant and unused for at least six continuous months at the date the planning application was submitted. The floorspace of the vacant building is deducted from the CIL calculation, potentially reducing the liability to zero if the new development is no larger than the existing building. This exemption is particularly valuable for developers converting large commercial buildings to residential use. On a conversion of a 2,000 square metre vacant office building to residential flats with no increase in floorspace, the vacancy exemption can eliminate the entire CIL liability, a saving that could exceed £300,000 in a high-CIL area. We always investigate whether exemptions or reliefs apply when structuring a development finance application, as the financial impact can be transformative.

Section 106 obligations are negotiated between the developer and the local planning authority as part of the planning application process. Unlike CIL, which is a fixed charge, Section 106 obligations are site-specific and can cover a wide range of requirements including affordable housing provision, transport improvements, education contributions, healthcare contributions, public open space, ecological mitigation, and employment and training initiatives. The scope and value of Section 106 obligations are guided by the local authority's planning policies and supplementary planning documents.

Affordable housing is typically the most significant Section 106 obligation. Most local planning authorities require developments above a threshold, usually ten units or more, to provide a proportion of affordable housing, commonly 25-40% of the total units. The affordable housing can be provided on-site, which means building and transferring units to a registered provider at below-market values, or off-site through a commuted sum payment to the local authority. An on-site affordable housing obligation of 30% on a twenty-unit scheme means six units must be provided as affordable, at values that are typically 40-60% below open market value. The impact on the scheme's gross development value and profitability is substantial.

Section 106 obligations are legally binding and must be completed before the planning permission can be issued. The negotiation process can take weeks or months, particularly where the developer is seeking to reduce the affordable housing requirement on viability grounds. A viability assessment, prepared by a qualified surveyor to demonstrate that the proposed Section 106 obligations render the scheme unviable, can cost £5,000 to £20,000 and may result in a reduced obligation. In our experience, viability assessments are a legitimate and effective tool for managing Section 106 costs, particularly in areas where the standard affordable housing requirement is 35% or more and build costs are high. The development finance lender will expect the Section 106 obligations to be finalised and the agreement completed before the facility is offered, as the obligations directly affect the scheme's financial viability and the lender's assessment of the deal.

Accurate modelling of CIL and Section 106 costs in the development appraisal is essential for a successful development finance application. The CIL calculation should be based on the local authority's current charging schedule, indexed to the latest index figures published by RICS. The floorspace figures should be based on the measured gross internal area of the proposed development, less any deductions for existing lawful floorspace. The calculation should account for any available exemptions or reliefs, with supporting documentation to demonstrate eligibility.

Section 106 costs should be based on the agreed heads of terms or the completed Section 106 agreement. If the agreement has not yet been completed, the appraisal should include an estimate based on the local authority's standard policy requirements, with a note explaining that the final obligation is subject to negotiation. Affordable housing costs should be modelled by replacing the open market values of the affordable units with the transfer values agreed with the registered provider, typically 40-60% of open market value for shared ownership and 30-50% for affordable rent.

The timing of CIL and Section 106 payments should be modelled in the project cash flow to ensure that sufficient funds are available at each payment trigger. If the CIL is payable within sixty days of commencement, the initial drawdown must include sufficient funds to cover the payment. If Section 106 contributions are triggered at specific milestones, the drawdown schedule must align with these triggers. In our experience, the developers who achieve the best outcomes are those who present the lender with a comprehensive appraisal that fully accounts for all planning levy costs, demonstrates the scheme's viability after these costs, and includes a cash flow that shows exactly when each payment falls due. This level of detail gives the lender confidence in the borrower's professionalism and the scheme's deliverability.

The planning levy landscape continues to evolve, and developers need to stay informed about changes that could affect their schemes. The Levelling Up and Regeneration Act 2023 introduced provisions for a new Infrastructure Levy that is intended to replace both CIL and most Section 106 obligations with a single, mandatory levy charged on the value of development. While the Infrastructure Levy is still in the pilot stage and full implementation is not expected for several years, developers and lenders are monitoring its progress closely because it could fundamentally change the way planning contributions are calculated and collected.

In the meantime, several local authorities have revised their CIL charging schedules upwards, reflecting increased development values and construction cost inflation. Developers who rely on outdated CIL rates when preparing their development appraisals risk understating their costs. We always recommend checking the local authority's current charging schedule before submitting a finance application and, where possible, confirming the CIL liability directly with the authority's CIL team.

The interplay between CIL and Section 106 is also evolving. The CIL regulations prohibit the pooling of Section 106 contributions from more than five developments towards a single infrastructure project, directing infrastructure funding towards CIL instead. This has led some authorities to reduce their Section 106 requirements for infrastructure while increasing their CIL rates. For developers, the net effect depends on the specific authority and the type of development. We keep a close watch on these changes across all development finance markets and ensure that our clients' appraisals reflect the current regulatory position. If you are planning a development and need clarity on the planning levy costs for your site, submit your deal and we will provide a detailed assessment.