To understand alternative use value, it helps to understand ‘existing use value’.
One of the costs fundamental to a viability appraisal is the existing use value of the land (sometimes referred to as the ‘benchmark’). Thisis either included as a cost or compared with the outcome of the appraisal to determine if there is any ‘land value uplift’, ‘surplus’ or ‘supra profit’ available for contributions towards affordable housing and other council requests.
Existing use value is not necessarily the market value of the land. Government guidance suggests this should be the value of the land in its existing use without any ‘hope value’ added, and notes that market transactions can result in a buyer under or overpaying for property.
However, the guidance does note that a premium should be applied to the existing value to incentivise release of the land for development – i.e. if you weren’t paid more than you currently make from the site, why would you develop it? The difference between this premium and ‘hope value’ is an ambiguity which has yet to be resolved by RICS or government guidance.
If there is an existing building on the land which is currently in use, then its value should be a reasonably straightforward calculation. For example a rented office building is largely a straightforward case of capitalising the rent specified in the lease to produce its value. A theoretical ‘premium’ would then be added to this ‘existing use value’ to incentivise the land being offered for development by the landowner.
So ultimately the value of the office would be:
- +30% premium
However, is this the highest possible value of the land, and what happens when the building is vacant, demolished, obsolete or in need of refurbishment to return to market?
Ultimately, AUV considers other options for a property to ascertain the highest value and best use for the land. There’s usually more than one thing that can be done to release value in a site, and it’s logical that the landowner should consider all avenues before bringing a scheme forward.
Government guidance allows viability assessors to consider the alternative use value of a building as a benchmark, provided this relates to a lawful use which complies with the adopted development plan. This alternative use can therefore be:
- a legal permitted change of use or development(which does not require planning permission)
- an existing planning permission (for example a smaller scheme)
- or a proposal which fully complies with all development plan policies.
Taking the example of the office building above, if say the building was knocked down as part of implementing an existing consent for demolition and erection of 9 flats, but before the building was substantially completed a new permission was sought for an increased 18 flats which requireda viability appraisal – the land is effectively empty and therefore in its existing use would have a low ‘existing’ value as it can no longer be valued as an office as this does not exist.
However, because there is an existing planning permission,the value of that permission can be calculated minus the costs of implementing it to return the alternative use value of the land. This is then used as an input in the viability appraisal for the new proposal as the baseline value which needs to be achieved.
Alternatively, while the office building might be obsolete, it may benefit from Class O Permitted Development rights for conversion into residential without the requirement for planning permission. 20 residential units will generally be higher value than office accommodation even after the costs of conversion.
However, a key point to note is that, unlike with Existing Use Value, you cannot then apply a premium to an AUV calculation as a profit assumption is included within this already.
But why is this important to you?
Because ultimately the value of a bare site will almost always be less than the value of an implementable permission, particularly where that permission relates to a smaller scheme which does not reach the affordable housing threshold.
And from a viability perspective, you want to ensure that your benchmark land value accurately reflects the highest and best value ofyour land, rather than a sub-standard value.
Otherwise the resulting surplus may be, and often is, over-estimated, resulting in higher contributions and placing marginal developments in jeopardy.
We often encounter arguments that a site is worth £1 or a notional existing value, whether because they are bare, low value, or have no immediately obvious use.
These arguments often miss alternative use options provided by existing permissions and permitted development in particular. While ultimately a complicated calculation, an alternative use value can make the difference between a profitable and unprofitable development, and whether or not s106 contributions are required of a development.
However, for developers, there are two key points:
- Never demolish the existing buildings onsite if intending to reconsider its viability during a new planning application.
- Always tell your viability assessor if there is an existing consent on site, or if you think permitted development rights may apply, as this can help them quickly ascertain the highest and best use value of the land.