MD2123 Mayoral Community Infrastructure Levy 2 (MCIL2)

Type of decision: 
Mayoral decision
Code: 
MD2123
Date signed: 
12 June 2017
Decision by: 
Sadiq Khan, Mayor of London

Executive summary

This MD sets out the findings and conclusion of viability evidence to support a second round of the Mayor’s Community Infrastructure Levy proposed to commence in April 2019 (MCIL2) to contribute towards the funding of Crossrail 2, and puts forward a Preliminary Draft Charging Schedule and associated documentation for agreement for public consultation in June-July  2017.  There are no direct costs to the Mayor arising from these recommended actions – TfL will recover the cost of MCIL2 preparation from the administrative charge which it is allowed to withhold from MCIL monies collected by the boroughs on the Mayor’s behalf.

Decision

That the Mayor:

1. Notes the findings and conclusions of the Mayoral Community Infrastructure Levy 2 Viability Evidence Base for Preliminary Draft Charging Schedule prepared by Jones Lang LaSalle (Annex A)

2. Approves the MCIL2 Preliminary Draft Charging Schedule (Annex B)

3. Approves the MCIL2 Preliminary Draft Charging Schedule Supporting Information (Annex C)

4. Agrees to publish for public consultation the MCIL2 PDCS (Annex B), the MCIL2 PDCS Supporting Information (Annex C) and the MCIL2 PDCS Viability Evidence Base (Annex A)

5. Delegates authority to the Deputy Mayor for Planning, Regeneration and Skills to agree the timing of public consultation on the MCIL2 PDCS and associated documents

Part 1: Non-confidential facts and advice

Introduction and background

Funding Crossrail 1 through the planning system

1.1 Almost a decade has passed since the concept of developer contributions to Crossrail funding was first developed.  This was finalised in the November 2007 funding agreement between the Mayor/TfL and the Government, which identified a total of £600m to be sought through the planning system via contributions from ‘developer contributions’ and from a ‘London Planning Charge’ (the latter subsequently became the Mayor’s Community Infrastructure Levy).

1.2 The ‘developer contributions’ component of Crossrail funding was introduced into the London Plan via alterations published in 2009.  London Plan Policy 6.5 permits the seeking of S.106 contributions from office, retail and hotel developments in defined areas of Central London, the northern part of the Isle of Dogs and around proposed station locations along the Crossrail route. 

1.3 The London Plan Crossrail Funding Supplementary Planning Guidance  sets the following indicative S.106 charge levels within these areas:

• Central London – offices £140/sqm; retail £90/sqm; hotels £61/sqm
• Isle of Dogs – offices £190/sqm; retail £121/sqm; hotels £84/sqm
• Rest of London around Crossrail stations – offices £31/sqm; retail £16/sqm; hotels £0/sqm

1.4 The Community Infrastructure Levy (CIL) came into force nationally on 6 April 2010.  CIL is a charge which local authorities (including the Mayor of London) can levy on most types of development to help fund infrastructure needed to support the development of an area in line with local development plans.  In London, the CIL Regulations restrict spending by the Mayor  to funding roads or other transport facilities, including Crossrail, to ensure a balance between the spending priorities of the boroughs and the Mayor .

1.5 The Mayor’s CIL – which for the purposes of this decision form will be referred to as MCIL1 – has been in operation since 2012.   Work on MCIL1 commenced in 2010 with consultation on a preliminary draft charging schedule and subsequently a draft charging schedule.  In making these proposals the previous Mayor had regard to the potential effect on the economic viability of development across Greater London, and the potential effect on the area’s overall development.  A public examination was held in late 2011.  The previous Mayor formally approved his charging schedule on 2 February 2012 and charging began on 1 April 2012.

1.6 Whereas the S.106 scheme is limited to offices, retails and hotels and sought only in defined areas, MCIL1 applies across all of London and to most land uses.  Education and health were exempted by the previous Mayor, and certain other uses are exempted by statute, affordable housing being the most notable.

1.7 MCIL1 sets charge levels in three bands comprised of London boroughs: 

• Band 1 – £50/sqm: Camden, City of London, City of Westminster, Hammersmith & Fulham, Islington, Kensington & Chelsea, Richmond upon Thames and Wandsworth
• Band 2 – £35/sqm: Barnet, Brent, Bromley, Ealing, Greenwich, Hackney, Haringey, Harrow, Hillingdon, Hounslow, Kingston upon Thames, Lambeth, Lewisham, Merton, Redbridge, Southwark and Tower Hamlets
• Band 3 – £20/sqm: Barking & Dagenham, Bexley, Croydon, Enfield, Havering, Newham, Sutton and Waltham Forest

1.8 As of 31 March 2017, a total of £483m had been collected towards the combined target of £600m for Crossrail 1.  This is made up of £382m from MCIL1 levies and £101m from S.106 contributions.  This funding package is on track to reach its target by April 2019.
 
1.9 The existing London Plan Crossrail S.106 policy and the approach to MCIL1 are effectively tied to the delivery of Crossrail 1, which will be completed by 2019.  The March 2016 update to the Crossrail Funding SPG flags up this issue and outlines a proposal to bring the Crossrail S.106 contributions scheme to an end in March 2019, in line with a transition from MCIL1 to a possible MCIL2.

Funding Crossrail 2 through the planning system

1.10 In February 2016, the previous Mayor submitted a proposal for Crossrail 2 to the National Infrastructure Commission.  This submission:

• included a new MCIL (MCIL2) as a funding component of Crossrail 2
• to achieve around 19% of total project cost, MCIL2 to be levied at double existing (MCIL1) rates
• MCIL2 to incorporate S.106 rates into CIL levies charged on offices, retail and hotels in Central London and the
Isle of Dogs

1.11 The contribution of MCIL to Crossrail 2 funding has been reviewed under this administration.  To address concerns that a doubled MCIL rate might constrain affordable housing delivery – through reducing viability headroom for developer S.106 funding – GLA and TfL officers (together with consultants Jones Lang LaSalle), have revisited MCIL2. 

1.12 Following discussions with Deputy Mayors a revised MCIL2 has been developed.  This is put forward for Mayoral approval and agreement for its first stage of public consultation – the preliminary draft charging schedule (PDCS)
– in section 2 of this MD below.  The headlines are:

• MCIL2 rates up from MCIL1 levels, but not doubled
• MCIL2 to incorporate S.106 rates into CIL levies charged on offices, retail and hotels in Central London and the
Isle of Dogs

• MCIL2, with further changes in the 2020s (a possible MCIL3) to contribute around 15% of Crossrail 2 project cost

1.13 It is intended that MCIL2 will be levied from April 2019.  This gives early warning to the development industry to enable the proposed rates to be factored into investment decisions.  Publishing the PDCS now also signals to Government that the Mayor is committed to delivering Crossrail 2 by showing how he intends to deliver a significant part of the overall funding package.

1.14 The MCIL2 rates proposed for agreement in this MD are consistent with the MCIL2 income assumptions made in the Crossrail 2 Strategic Outline Business Case (SOBC).   The SOBC was submitted to Government on 6 March 2017.

Objectives and expected outcomes

The process for setting a CIL

2.1 The process for setting a CIL is set out in the Community Infrastructure Levy Regulations 2010 (as amended), and involves two rounds of consultation and a public examination before the charging schedule – the legal document setting a CIL for an area – can be approved.  The details are:

• a preliminary draft charging schedule (PDCS) – consultation period at the discretion of the charging authority, but usually six weeks
• a draft charging schedule (DCS) – minimum 4 weeks consultation
• an Examination in Public (EiP) in front of an independent Inspector

2.2 Under the CIL Regulations, the Mayor is required to satisfy himself that his proposed CIL rates will not unduly impact on development viability across London as a whole.  As set out in national guidance:

“Charging authorities should set a rate which does not threaten the ability to develop viably the sites and scale of development identified in the relevant Plan (the London Plan in London). They will need to draw on the infrastructure planning evidence that underpins the development strategy for their area.  Charging authorities should use that evidence to strike an appropriate balance between the desirability of funding infrastructure from the levy and the potential impact upon the economic viability of development across their area.”

Viability

2.3 A viability study for a prospective MCIL2 which seeks to meet the ‘appropriate balance’ test set by the CIL Regulations (see above), and the necessity to contribute to Crossrail 2’s funding, has been commissioned by TfL from Jones Lang LaSalle.  The ‘Mayoral Community Infrastructure Levy 2 Viability Evidence Base for Preliminary Draft Charging Schedule’ prepared by JLL is attached as Annex A. 

2.4 This employs the viability methodology endorsed by the MCIL1 EiP Inspector in 2012 – that in the unique circumstances of a Londonwide CIL it is appropriate to use residential house prices as a proxy for development viability – and:

• considers London property markets and concludes that – continued cyclicality notwithstanding – the underlying pressure of predicted population growth in London and limited land supply should lead to further value growth, provided the underlying economy is healthy
• looks at house price growth and suggests minor changes to the composition of MCIL bands 2 and 3 (Waltham Forest and Enfield up from band 3 to band 2, Greenwich down from band 2 to band 3)
• as Mayoral Development Corporations (MDCs) are CIL charging/collecting authorities, recommends placing both LLDC and OPDC in band 2
• conducts a sensitivity check on the relationships between office rents, retail rents, disposable income and house prices and concludes that residential values remain a good proxy for assessing viability characteristics
• taking into account borough CIL rates set since MCIL1, looks at the extent to which a rise in CIL rates could be accommodated
• considers various options for MCIL2 and recommends the charging regime reflected in the PDCS to be levied from April 2019 – flat rates in the bands and higher rates for offices, retail and hotels in Central London and the Isle of Dogs to incorporate the to-be-demised Crossrail S.106 policy
• assesses the impact of the proposed MCIL2 rates on economic viability
• suggests adjustments to the Central London and the Isle of Dogs charging area boundaries
• considers the impact of MCIL2 on affordable housing delivery
• flags the possibility of an MCIL3 to be levied from April 2024

2.5 The Viability Evidence base concludes that the MCIL2 rates proposed should not have an undue impact on the viability of development across Greater London as a whole.

2.6 The Mayor is recommended to agree recommendation 1, that he:

1. Notes the findings and conclusions of the Mayoral Community Infrastructure Levy 2 Viability Evidence Base for Preliminary Draft Charging Schedule prepared by Jones Lang LaSalle (Annex A)


MCIL2 PDCS and PDCS Supporting Information

2.6 Officers have prepared the MCIL2 PDCS (attached as Annex B) and the MCIL2 PDCS Supporting Information document (Annex C) for Mayoral approval for public consultation in June 2017.  The PDCS is the formal statement of the Mayor’s proposed CIL rates, prepared under the provisions of the CIL Regulations.  The Supporting Information document, together with the Viability Evidence Base (Annex A), explains how the proposed rates have been arrived at.

2.7 The proposed MCIL2 rates are set out in the PDCS, and comprise:

• Flat rates in three borough bands for all developments in London, with the exception of office, retail and hotel use in Central London and the northern part of the Isle of Dogs, and health and education in all London – as set out numerically in Table 1 and shown geographically in Figure 1 of Annex B.  This CIL scheme follows that set in MCIL1, and the levy rates show modest increases – basically those of MCIL1 adjusted for viability.
• Higher rates for office, retail and hotel use in Central London and the northern part of the Isle of Dogs, as set out in Table 2 and Figures 2 and 3 of Annex B.  This reflects the higher rates for these uses in these areas sustained under the London Plan’s Crossrail S.106 policy (the Mayor will cease to apply this policy on commencement of MCIL2).
• Nil rates for health and education uses, as set out in Table 3 of Annex B.

2.8 In setting the CIL rates set out in the Mayoral CIL PDCS, the CIL Regulations require the Mayor to strike an appropriate balance between:

• the desirability of using the CIL to fund the cost of infrastructure to support the development of his area taking into account of other actual and expected sources of funding, and
• the potential effects (taken as a whole) of the imposition of the CIL on the economic viability of development across London.

2.9 The evidence for the first requirement is set out in Section 2 of the Supporting Information document.  It shows the vital strategic importance of Crossrail 2 to the development of Greater London.  It also shows that the sum to be raised through MCIL2 will contribute towards funding the project but it will not close the entire funding gap.

2.10 The evidence for the second requirement is set out in the Viability Evidence Base.  This explains the basis on which the proposed MCIL2 rates set out in the PDCS were arrived at, and at how the differential charge rates for each London borough and for specific land uses were derived.  It describes how a number of different options were considered in coming to this judgement on the charging levels, and concludes that the best approach is one that takes account of differing levels of viability in different parts of Greater London.  This will also ensure boroughs will be able to raise resources through their own CILs without undue effect on viability.  It then shows that these rates (together with an allowance for administrative costs) should not have an undue impact on the viability of development across Greater London as a whole.

2.11 As discussed in the Viability Evidence base:

• minor changes are proposed to the composition of MCIL2 bands 2 and 3 (compared to the bands in the MCIL1 scheme) – Waltham Forest and Enfield move from band 3 to band 2, and Greenwich moves from band 2 to band 3 – justified by house price data
• the boundary of the Central London charging area has been rationalised (compared to the equivalent S.106 contribution area) to include the full component of the CAZ (the London Plan’s Central Activity Zone) south of the Thames – ie to include Vauxhall/Nine Elms, Waterloo and Elephant & castle – justified by a viability considerations; and to align the boundaries around Crossrail (1) stations along major roads
• the Isle of Dogs boundary has been simplified by using roads and the river as the natural boundaries, rather than the 1km circle around the Canary Wharf station employed in the S.106 contribution area

2.12 The Supporting Information document also:

• discusses the  impact of MCIL2 on development delivery in the London Plan’s Opportunity Areas and concludes that delivery of homes and jobs will not be impeded (Table 1, Annex C)
• looks at the impact on housing delivery across London as a whole and reaches a similar conclusion (Table 2 Annex C)
• reports that professional advice suggests the impact of the proposed rates on delivery of affordable housing is likely to be minor – Mayoral CIL remains a very small element of overall development costs, and rates of affordable housing are much more likely to be affected by other factors such as housing policy, the grant regime and cost of construction
• taking indexation into account, quantifies the scale of change between MCIL1 levy rates /S.106 charges and MCIL2levy rates at 2019

2.13 The Supporting Information document also makes clear the current position on Crossrail 2.  Annex 2, para 2.12 states:

“Negotiations on the Crossrail 2 scheme are still underway and there is no agreed funding package at present.  However, MCIL2 does need to be brought forward now to avoid a charging gap at the end of Crossrail 1 construction and to allow for early funding of the Crossrail 2 scheme.  Should no funding deal be achievable, the Mayor will apply the MCIL2 proceeds to fund other strategic transport projects for which there is a significant funding gap.”

2.14 Officers suggest that it is right for the Mayor to conclude  that the approach to MCIL2 outlined in the Viability Evidence Base is appropriate given the availability of data and the nature of the judgement he has to make – the effects on viability across Greater London as a whole – and that the MCIL rates proposed in the PDCS and discussed in the Supporting Information document are reasonable, justified and can be published for preliminary consultation.

2.15 The Mayor is recommended to agree recommendations 2 and 3, that he:

2. Approves the MCIL2 Preliminary Draft Charging Schedule (Annex B)

3. Approves the MCIL2 Preliminary Draft Charging Schedule Supporting Information (Annex C)


Public consultation

2.16 Under the provisions of the CIL Regulations, as outlined in paragraph 2.1 above, the Mayor must carry out two rounds of public consultation on his proposed MCIL2 Charging Schedule:

• First, he must consult on a preliminary draft.  The Regulations do not specify a time period, but PDCS’s are normally consulted on for a period of six weeks.
• Having considered the comments made on the preliminary draft, he must then consult again on a Draft Charging Schedule for a period of at least four weeks.  Any person or organisation that makes comments at this stage will have the right to be heard at the CIL examination in public (EiP).  The Mayor then has a further opportunity to make changes to the Draft Schedule and, if he does so, he has to allow a further four weeks for public consultation on these changes.

2.17 Following this consultation, the Mayor has to appoint an independent examiner to conduct the EiP into the Draft Charging Schedule.  This public hearing will ensure that:

• The Mayor has complied with the procedures for setting the CIL as set out in legislation and the CIL Regulations
• The Schedule is supported by background documents containing appropriate available evidence.

2.18 It is proposed that the PDCS is consulted on for a period of six weeks, commencing in June 2017, and that the Mayor delegates authority to the Deputy Mayor for Planning, Regeneration and Skills to agree the exact timing of the period of public consultation.

2.19 The Mayor is recommended to agree recommendations 4 and 5, that he:

4. Agrees to publish for public consultation the MCIL2 PDCS (Annex B), the MCIL2 PDCS Supporting Information (Annex C) and the MCIL2 PDCS Viability Evidence Base (Annex A)

5. Delegates authority to the Deputy Mayor for Planning, Regeneration and Skills to agree the timing of public consultation on the MCIL2 PDCS and associated documents

Equality comments

3.1 In the exercising of his functions, the Mayor has legal duties to consider equality of opportunity, elimination of discrimination and the promotion of good community relations (GLA Act 1999, as amended, Equality Act 2010).  This includes the public sector equality duty, as set out in Section 149 of the Equality Act 2010.

3.2 The 2010 Act includes a single public sector equality duty covering race, disability, gender, age, sexual orientation, religion or belief, pregnancy and maternity, and gender reassignment.  These are the grounds upon which discrimination is unlawful and are referred to as ‘protected characteristics.’  The public sector duty requires the Mayor when exercising his functions to have due regard to the need to eliminate discrimination, harassment, victimisation and any other conduct prohibited by the Act, advance equality of opportunity between persons who share a relevant protected characteristic and persons who do not share it and foster good relations between persons who share a relevant protected characteristic and persons who do not share it.  This duty applies to the MCIL2 preliminary draft charging schedule. 

3.3 MCIL2 will be used to contribute towards the funding of Crossrail 2.  Lower income groups are more likely to be users of public transport.  People who are disabled, older, from ethnic minority groups are more likely to be in these lower income groups. Improving the public transport network – which Crossrail 2 will do – is likely to improve these groups’ access to services and employment opportunities in central London. The delivery of Crossrail 2 will also unlock significant additional housing provision, a proportion of which will be affordable and thus give increased housing opportunities to lower income Londoners.

3.4 The CIL is analogous to a tax on development.  The proceeds from CIL are put towards infrastructure necessary to support the development of an area.  The CIL does not fall on all households, like the annual council tax for example.  CIL is only paid by landowners when a CIL-liable development is implemented.

3.5 Consideration has been given to whether the banding of boroughs for MCIL2 purposes would result in undue impacts (in terms of CIL liability) on parts of London with particularly large Black, Asian and Minority Ethnic (BAME) populations. This shows that 87% of London’s BAME population live in boroughs in the lower two charging bands, with 21% in the seven boroughs in the lowest band.  Other social groups mentioned in legislation have a more dispersed pattern of settlement.  Given this, it is considered that the proposals will not have any significant adverse impact on any particular social group or community in terms of the Mayoral equalities duties.

Other considerations

Links to Mayoral strategies and priorities

4.1 Ensuring the delivery of Crossrail 2 was a Mayoral manifesto pledge:

• “I will … plan for the long term, securing Crossrail 2” 
• “I will … Get Crossrail 2 off the ground, using my experience as a Minister responsible for the original Crossrail to secure the funding package, and ensure the route enables the building of thousands of new homes”

4.2 Delivering Crossrail 2 is key commitment in A City for All Londoners:

• “I am determined to secure … Crossrail 2 by 2033, which will promote house building and create jobs, as well as alleviating overcrowding”
• “..first among the many projects critical to London’s future growth will be Crossrail 2, which I am determined to keep on track for delivery by 2033”

4.3 Both the emerging Mayor’s Transport Strategy and the new London Plan will prioritise the implementation of Crossrail 2 to help deliver a large part of the capacity increases the transport network needs to both accommodate and facilitate London’s anticipated growth. 

Impact assessment

4.4 The MCIL2 PDCS similarly does not require an SEA.  Equalities impacts are addressed in section 3 of this MD.

4.5 The viability evidence prepared by the Mayor and TfL’s consultants, Jones Lang LaSalle (Annex 1) demonstrates that the MCIL2 rates proposed in the PDCS will not unduly impact on development viability across London.


Public consultation

4.6 At PDCS stage – the subject of this MD – the CIL regulations require the Mayor to consult local planning authorities in and adjoining London, residents, businesses, relevant voluntary groups and groups representing businesses.

4.7 The programme for MCIL2 preparation is set out in section 7 below.  Sufficient time is programmed to allow officers to undertake further work/seek legal advice if necessary in response to consultation responses received.  Once a satisfactory report has been received from the Inspector, the charging schedule can be adopted.  This PDCS is the first stage in adopting a charging schedule.

Key risks

4.8 The principal areas of risk relate to the two areas that will be considered at the public examination of the draft MCIL2 charging schedule – compliance with the legal and procedural requirements and the sufficiency of the supporting evidence.  Possible delay is also a key risk.  In order to ensure that MCIL2 is in place by April 2019, the preliminary draft charging schedule – the first step in the process – should be issued for public consultation by June 2017.  There is also a further underlying risk that the national arrangements for CIL may change, as flagged by Government in the February 2017 Housing White Paper.

4.9 Officers are managing these risks by:

• employing professional property consultants to provide the Mayor and TfL with robust viability evidence to ensure that the rates proposed are reasonable and capable of defence at EiP
• taking appropriate legal advice throughout the preparation of MCIL2, including the opinion of leading counsel if necessary
• careful project management by the joint GLA/TfL steering group which from 2008 has overseen the development of Mayoral CIL

Financial comments

5.1 The estimated income that will be raised from MCIL2 to assist the financing of Crossrail 2 is some £8.6bn in nominal terms from 2019-20 to 2042-43.

5.2 There are no direct costs to the GLA arising from the recommendations. TfL will cover the cost of MCIL2 consultation, publicity, legal advice and public examination from the 1% administration charge allowed under the CIL regulations. The GLA’s costs will also be met from this admin charge.

Activity table

MCIL2 timeline

MCIL2 activity

May - June 2017

  • Mayor agrees MCIL2 preliminary draft charging schedule (PDCS) for consultation (decision in this MD)

June - July 2017

  • MCIL2 PDCS public consultation (six weeks) – exact dates to be agreed by the Deputy Mayor for Planning, Regeneration and Skills (see recommendation 5)

October 2017

  • Mayor agrees MCIL2 draft charging schedule (DCS) for consultation

November - December 2017

  • MCIL2 DCS public consultation (four weeks)

March 2018

  • Mayor agrees to appoint an Examination in Public (EiP) inspector and agrees to MCIL2 DCS for submission for EiP
  • submit MCIL2 DCS to EiP and appoint inspector

Autumn 2018

  • MCIL2 EiP (possibly part of London Plan EiP)

January 2019

  • Mayor receives MCIL2 inspector’s report

February - March 2019

  • Mayor agrees MCIL2 charging schedule for commencement April 2019 concurrent with demise of MCIL1/S.106 Crossrail 1 funding regime

1 April 2019

  • MCIL2 commences
  • MCIL1/Crossrail 1 S.106 ceases
Appendices and supporting papers

Annex 1

  • MCIL2 Viability Evidence Base for PDCS prepared by Jones Lang LaSalle for the Mayor and TfL

Annex 2

  • MCIL2 Preliminary Draft Charging Schedule

Annex 3

  • MCIL2 Preliminary Draft Charging Schedule Supporting Information

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