Section 106 and CIL: Planning Costs That Affect Your Development Finance

Section 106 agreements, named after Section 106 of the Town and Country Planning Act 1990, are legally binding obligations negotiated between the developer and the local planning authority as a condition of planning permission. They are used to make developments acceptable in planning terms by requiring the developer to provide community benefits that mitigate the impact of the development. Common Section 106 obligations include affordable housing provision, contributions to local education, healthcare, highways, open space, and other infrastructure.

The financial impact of Section 106 obligations can be substantial. An affordable housing obligation requiring 30% of a 20-unit scheme to be delivered as affordable units effectively transfers six units from the private sales programme to a registered provider at a significant discount. If the private sale value of each unit is £350,000 and the affordable sale value is £200,000, the Section 106 obligation reduces the GDV by £900,000 (six units multiplied by the £150,000 discount). This directly affects the viability of the scheme and the amount of development finance that can be supported.

Financial contributions under Section 106 agreements are typically calculated by the local authority based on adopted supplementary planning documents. Education contributions might be £5,000 to £15,000 per dwelling depending on the local authority and the size of the units. Healthcare contributions range from £500 to £3,000 per dwelling. Highways contributions can be significantly higher if the development requires specific infrastructure improvements such as new access roads, traffic signals, or pedestrian crossings. We have seen total Section 106 financial contributions exceeding £100,000 on schemes of 15 to 20 units in areas such as Surrey, Buckinghamshire, and Oxfordshire where local planning policies are particularly demanding.

The Community Infrastructure Levy is a fixed charge levied by the local planning authority on new development to fund infrastructure that supports growth in the area. Unlike Section 106 contributions, which are negotiated on a case-by-case basis, CIL is calculated using a published rate applied to the net additional floor area created by the development. Not all local authorities have adopted CIL, but those that have typically charge between £100 and £400 per square metre of new residential floor area.

The CIL calculation can produce significant charges on residential developments. A scheme creating 1,500 square metres of new residential floor area in a council area with a CIL rate of £200 per square metre would generate a CIL liability of £300,000. This is a substantial cost that must be factored into the development appraisal from the outset. CIL is payable regardless of whether the development is economically viable; unlike Section 106 obligations, CIL cannot be negotiated down on viability grounds except in exceptional circumstances.

CIL payment triggers vary by local authority but typically fall between 60 days and 12 months after commencement of development. Some councils offer instalment policies that allow the CIL to be paid in stages, which can help with cash flow management. However, if you fail to submit a commencement notice before starting work, you may lose the right to pay by instalments and the full CIL amount becomes payable immediately. This is a common trap that catches developers who are focused on the construction programme and overlook the administrative requirements of the CIL regulations. The penalty for non-compliance can be severe, including surcharges and enforcement action.

Section 106 and CIL obligations have a direct impact on the amount and terms of development finance available to your scheme. Lenders assess facility applications based on the net GDV after accounting for all planning obligations. If affordable housing requirements reduce the GDV by £500,000, the maximum loan available is reduced proportionally. A scheme that would support a £3,000,000 facility without affordable housing obligations might only support £2,500,000 once the Section 106 impact is factored in.

CIL is treated as a development cost by lenders, similar to build costs and professional fees. It is included in the total cost base when the lender calculates the loan-to-cost ratio. If CIL adds £150,000 to the total development cost, the lender may require additional equity from the developer to maintain the required loan-to-cost ratio. On a scheme where the loan-to-cost ratio is capped at 70%, a £150,000 CIL liability means the developer must provide an additional £45,000 of equity to maintain the ratio.

Some lenders will include CIL payments within the construction facility, allowing the CIL to be funded from the loan rather than from the developer's equity. This is helpful for cash flow but means you are paying interest on the CIL amount for the duration of the loan. On a £150,000 CIL payment funded through the facility at 9% interest over 12 months, the interest cost is £13,500. Whether this is preferable to paying the CIL from equity depends on your overall cash position and the opportunity cost of the capital. We model these scenarios for every client as part of our funding assessment. Submit your project through our deal room to receive a detailed analysis.

Unlike CIL, Section 106 obligations can be negotiated on viability grounds. If you can demonstrate that the planning obligations make the scheme financially unviable, the local planning authority may agree to reduce or modify them. This process, known as a viability assessment or viability review, involves submitting a detailed development appraisal that demonstrates the scheme cannot deliver the required profit margin after accounting for all Section 106 costs.

Viability assessments are typically prepared by specialist planning consultants or chartered surveyors and submitted to the local authority for review by their own appointed assessor. The cost of preparing a viability assessment ranges from £5,000 to £15,000, and the process can take three to six months. While this adds cost and time to the planning process, the potential savings can be substantial. We have seen developers reduce their affordable housing obligation from 30% to 15% on the basis of a successful viability review, saving hundreds of thousands of pounds in lost GDV.

The key to a successful viability assessment is accuracy and transparency. The local authority's assessor will scrutinise every element of your development appraisal, including land value, build costs, professional fees, finance costs, and profit margin. If any element appears unrealistic, the assessment will be challenged. Include your actual finance costs, including arrangement fees, monitoring surveyor fees, and all other charges detailed in these guides, because demonstrating the true cost of development finance strengthens your viability argument. A scheme that looks viable on a simplistic finance cost assumption may be shown to be marginal when the full cost of finance is properly accounted for.

Several exemptions and reliefs are available under the CIL regulations that can reduce or eliminate your liability. The most significant is the social housing relief, which exempts affordable housing units from CIL. If your Section 106 agreement requires 30% affordable housing on a 20-unit scheme, six units are exempt from CIL, reducing your liability by 30%. This relief must be claimed before commencement of development; if you fail to claim it, you lose the exemption.

Self-build exemption is available where the developer intends to occupy a dwelling as their principal residence for at least three years. This is relevant for individual self-builders rather than commercial developers, but it illustrates the importance of understanding the full range of exemptions. Charitable exemption is available where a charity owns the land and the development is to be used wholly or mainly for charitable purposes. Conversion exemptions may apply where the development involves the conversion of an existing building that has been in lawful use for a continuous period of at least six months in the three years preceding the planning application.

Vacant building credit is a particularly valuable relief for developers converting or redeveloping existing buildings. Where there is an existing building on the site that is to be demolished or converted, the gross internal floor area of the existing building can be deducted from the CIL calculation. On a site with a 500 square metre warehouse being replaced by a 1,500 square metre residential development, the CIL would be calculated on the net additional 1,000 square metres rather than the full 1,500 square metres. At a CIL rate of £200 per square metre, that saves £100,000. Understanding these reliefs is essential for schemes in CIL-charging areas, and we advise all our clients to take specialist planning advice before submitting their CIL forms. This is particularly important for developers active in high-CIL areas such as parts of Greater London, Cambridgeshire, and the South East.

The timing of Section 106 and CIL payments has a significant impact on your project cash flow and should be carefully modelled in your development appraisal. Section 106 financial contributions are typically triggered at specific milestones defined in the agreement, such as commencement of development, occupation of a specified number of units, or completion. Some contributions are payable before the development starts, while others are deferred until the sales phase. Review the trigger points in your Section 106 agreement carefully and map them onto your project programme.

CIL payments, where an instalment policy is available, are typically structured as follows: 25% payable within 60 days of commencement, 25% at six months, 25% at 12 months, and the final 25% at 18 months. This staging helps spread the cash flow impact but means you are making CIL payments throughout the construction phase, potentially from equity if the lender does not include CIL in the facility. If no instalment policy is in place, the full CIL amount is payable within 60 days of commencement, which creates a significant early cash outflow.

Late payment of CIL attracts surcharges and interest under the CIL regulations. If payment is overdue by more than 30 days, a surcharge of 5% of the outstanding amount or £2,500, whichever is greater, is applied. After further non-payment, the local authority can issue a CIL stop notice, which prevents any further construction work until the outstanding amount is paid. A CIL stop notice would halt your project, delay your construction programme, and potentially trigger default provisions under your development finance facility. The consequences are severe, so ensuring that CIL payments are made on time is essential. Speak to us through our deal room about structuring your facility to accommodate Section 106 and CIL payment timelines.