Part V- The true cost to Home Buyers

Throughout the years, through the various entities we have been involved in numerous part V agreements, both for our own projects as developer and on behalf of various clients. Through our Quantity Surveyors within OCF Project & Commercial Management (Trading as OCFPM) we have built up significant expertise and have the benefit of involvement in part V negotiations throughout all provinces.

The Housing Agency website defines the purpose of Part V as “The purpose of Part V is for the State to capture a portion of the increase in land value resulting from the granting of planning permission for residential development. The current Part V legislation provides for local authorities to acquire 20% of this land at existing use value and to utilise this land to deliver homes to those households who qualify for social and affordable housing support”

From experience we would feel that with the current part V agreement processes, such costs for the developer are often much more significant than costs associated with land increases. These naturally end up having to be borne by the purchasers of the remaining units within the scheme. Therefore, it in effect has the risk of becoming a tax on the first time buyer or home purchasers. There can be a significant variance of methodologies and “accepted costs” in negotiating Part V prices with the various local authorities.

The below sets out some costs, that is often not recouped via the part V process in situations where the developer is completing units for Part V purposes. The result of this is that such costs need to be passed to homebuyers in the remaining units of the development to ensure a scheme is viable

Legal Costs associated with purchase of land & onward sale to the LA/AHB:

For purchase related, this will occur where a developer purchases the land with planning. This typically is in terms of due diligence reporting, legal costs and Stamp Duty Costs. While there is significant variance across the country in the approach to such costs, it can be very difficult in many local authorities to get these costs included. The part V guidance focuses on the EUV values for the land and sets out the Nett Monetary Value based on differences on land values. Some local authorities therefore feel the sole and value that should be assessed is the EUV and any other costs like Legal costs associated with purchase

For sales related legal costs, this should be obvious. The developer has to retain a solicitor, procure mapping/registration and various other aspects to facilitate the sale to the AHBs. Guidance issued by the department focuses on “the costs, including normal construction and development costs and profit on those costs, calculated at open market rates that would have been incurred by the planning authority had it retained an independent builder to undertake the works, including the appropriate share of any common development works, as agreed between the authority and the developer.” The view of some local authorities can be that this doesn’t include sales costs on the completed units.

Finance Costs

Some Local Authorities we have found take very literal the term “market rates that would have been incurred by the planning authority” while other will look at the actual finance costs to be incurred. More progressive local authorities engage specialist accountant firms and this can be very effective. These will usually take specific project funding agreements on board and have a good understanding of funding provisions in the market. Others do not engage specialists and often leave it to the QS that may not be as familiar with the market finance offerings for new build development. Taking the direct meaning of “market rates that would have been incurred by the planning authority” one can find themselves paying market rates for finance (including having to cover %in, % Out, bank due diligence costs, interest rate and bank monitor cost) but with the local authority only covering what they feel the council would be paying had they got a loan to build the units direct. There isn’t generally any evidence provided to back up the local authority figure but as you can imagine the differences are stark, and can be a fraction of the actual cost.

Planning Application Fees

Some local authorities take the approach that this is a land cost and are therefore linked to the EUV, where the Local Authority will only pay EUV value. We have had situations where the local authority will cover the local authority fee (as there is published guidance that says it should include the planning fees) for the planning application, but not the consultants/architects etc that prepared and lodged the application which can be a significant cost. Therefore, any costs incurred in these aspects would invariably end up being passed to the purchasers of the non part V units if the scheme is to be viable.

Developer Prelims

There can tend to be very little discussion on this but this cost is real and unavoidable. In the day to day operations of a development company with an SPV on a project there is costs to be incurred. In effect the developer is managing and ensuring the development of these part V units on behalf of the local authority in conjunction with the rest of the development. This includes procurement, arranging of finance, filing accounts, bookkeeping etc. While contractor/construction prelims will be factored in by all local authorities, developer costs are very often omitted and not accepted. From a review of various projects, such costs generally seem to come in between 2% to 4% of the construction contract amount which can be significant.

The costs of the items above invariably results in costs to the developer that far exceed the intended aim of capturing increase in land costs as set out in the Housing Agency website. Furthermore when Vat is provided for, these costs in the shortfall between Part V units prices and actual costs can become even more pronounced. Given the timelines involved in any form of appeal processes, the developer is often left with no option but to accept. Especially in apartment schemes, given these are by enlarge being sold into social, affordable and cost rental schemes, these cannot often progress often until the Part V is agreed.

Given the significant and well publicised issues with non viability of housing schemes, one has to wonder to what extent the provisions of Part V is still achieving in the current environment what it was set up to achieve or instead n some situations resulting in additional costs to the 1st time buyer.

Donal Fitzgerald