So, you have found the right property, you’ve checked the developers track record and the price of the property, you’ve checked that there is planning in place for the development and that the developer is funding the whole project. Rental income looks good, not too much to be risky, not too small that you’re not making any money, capital growth in the area looks like it should be superb over the next 5 years.
Congratulations! You are nearly there but there is one thing you should check with your broker before you get that reservation paid and take on the project. The Section 106 agreement.
But what is a section 106?
A section 106 agreement at its most basic level is an agreement between the local council where a planning application has been made and the developer. It is effectively a caveat to the planning application where a council may request that affordable housing is included in the development or local infrastructure is completed due to the developments impact on the local area.
In some circumstances the section 106 agreement can be in the form of a fee paid to the council where by the local council can use this money how they see fit in the local community.
Why is this important?
There are a few reasons as an investor you want to be comfortable with the section 106 agreement being in place and agreed.
Primarily, even if a developer shows you a planning agreement this may have that it has been granted based on a section 106. Knowing what this is can help understanding whether affordable housing or council tenants will be in the development.
In the vast majority of cases the planning will be granted with affordable housing or council tenants included, this section 106, like the planning will be contested by the developer, after which they will agree a fee rather than having the council or affordable housing within the development.
Delays while contesting.
While contesting the section 106 is relatively simple process it can take time. Although in theory the planning permission has been granted, until the section 106 is correct most developers won’t start on site.
As an investor we don’t like any uncertainty, and this is especially important when talking about planning permission.
At Baron & Cabot we will not look at developments until the section 106 has been finalised. We do this not because we believe that an investors money will be at risk, but because it makes the expected completion date impossible to gauge (without a start date how can we know completion).
While a section 106 agreement may seem insignificant at first it is becoming increasingly more important in understanding the investment and we would suggest you check with your broker or developer that this is agreed. Get a copy of it, even if you are unsure exactly what you are looking at, if the developer/ broker refuses it, it may be questionable how much research they have conducted.
When working with Baron & Cabot we will ensure this is in place and a copy will be accessible for you at all times.
For more questions on Section 106 agreements, or an investment in general, click our live chat or call us on 0203 287 8282.