REVIEW OF LIVE-WORK POLICY IN HACKNEY David Chippendale Geoff Marsh Matthew Giddings April 2005 Review of Live Work Policy in Hackney Final Report REVIEW OF LIVE-WORK POLICY IN HACKNEY EXECUTIVE SUMMARY ...........................................................................1 1.0 INTRODUCTION ......................................................................................14 1.1 Purpose of Review .............................................................................14 1.2 Methodology.......................................................................................16 1.3 Content of Review..............................................................................17 2.0 LIVE-WORK CHARACTERISTICS – THEORY AND PRACTICE .... 19 2.1 Definition of Live-Work .......................................................................19 2.2 The Treatment of Live-Work by the Valuation Office Agency (VOA)...21 2.2.1 Theory.......................................................................................21 2.2.2 Practice .....................................................................................23 2.3 The Treatment of Live-Work Units by the Inland Revenue..................26 2.3.1 Theory.......................................................................................26 2.3.2 Practice .....................................................................................28 2.4 The Liability of Live-Work Units to VAT ..............................................29 2.4.1 Theory.......................................................................................29 2.4.2 Practice .....................................................................................31 2.5 The Treatment of Live-Work by Lending Institutions - Theory & Practice ..............................................................................................32 2.6 “Home-Working” in Class C3 Residential Units...................................34 2.7 Compliance – Is Live-Work in Hackney Really “Back-Door” Residential? .......................................................................................36 2.8 Compliance and the “Four Year Rule” for Lawful Development Certificates .........................................................................................39 2.9 Live-Work Use as an Affordable Housing Avoidance Strategy by Developers ....................................................................................40 2.9.1 Affordable Housing Policy..........................................................40 2.9.2 Affordable Live-Work Units ........................................................40 2.9.3 Affordable Housing Avoidance ..................................................42 2.9.4 Live-Work and Affordable Housing – Preliminary Recommendations ....................................................................46 2.10 Live-Work - A Failed Policy? ..............................................................47 3.0 THE DEVELOPMENT OF THE LIVE-WORK MARKET AND PLANNING POLICY IN HACKNEY........................................................ 50 3.1 Introduction ........................................................................................50 3.2 The Big Picture – Live-Work and Residential Development in Hackney 1995-2004 ...........................................................................51 3.3 The “Unregulated Era” – Up to 1994 ..................................................54 3.3.1 The Origins of Live-Work in Hackney ........................................54 3.3.2 Live-Work Values in the Unregulated Era ..................................56 3.3.3 The Establishment of Planning Policy .......................................42 London Residential Research i April 2005 Review of Live Work Policy in Hackney Final Report 3.4 The “Kick-start to Regeneration Era” - 1995-1999 ............................60 3.4.1 A Brief Analysis of the Live-Work Development Market 1995-1999.................................................................................60 3.4.2 Pricing Analysis of the Kick-Start Era ........................................61 3.4.3 The Planning Policy Response – 1999 IPG ..............................65 3.5 The “Exploitation of the Planning Loophole Era” – 2000 to Present....67 3.5.1 A Brief Analysis of the Live-Work Market 2000-2004.................67 3.5.2 Pricing Analysis in the Exploitation Era......................................69 3.6 Current Development .........................................................................76 3.6.1 The Revocation of the Live-Work SPG, September 2003 ..........76 3.6.2 A Summary of Current Live-Work Construction .........................78 3.6.3 Pricing Analysis of Live-Work Units Under Construction at End 2004...................................................................................81 3.7 The Planning Pipeline – Permissions, Applications & Appeals ...........83 3.7.1 Planning Pipeline Summary.......................................................83 3.7.2 A Commentary on the Live-Work Planning Pipeline in Hackney 85 3.7.3 Recent Appeals.........................................................................92 3.8 “Best Practice” – Central Government and GLA Policy Advice and Live-Work in Other Boroughs .............................................................93 3.8.1 Central Government and GLA Policy Advice .............................93 3.8.2 Live-Work in Other Inner London Boroughs...............................85 4.0 POLICY OPTIONS AND RECOMMENDATIONS ........................... 104 4.1 Introduction ......................................................................................104 4.2 A Suggested Approach for Regularising Live-Work..........................104 4.3 Negotiating with Developers and Investors.......................................107 4.4 Negotiating with Existing Owners and Occupiers .............................107 4.5 Policy Objectives and Recommendations.........................................109 APPENDICES 1 Residential and Live-Work Developments Completed 1995-1999........................................................................................112 2 Residential and Live-Work Developments Completed 2000-2004........................................................................................118 LIST OF TABLES 1 VOA Status of Live-Work Developments over 20 Units Completed in Hackney 1997-2004 ......................................................................25 2 Self-Declared Use of Live-Work Units by a Sample of Live-Work Occupiers in Hackney ........................................................................38 3 Threshold Abuse in Mixed Live-Work and Residential Developments in Hackney.................................................................43 4 Live-Work Developments Where the Number of Live-Work Units is in Excess of the Affordable Housing Threshold, Granted Since February 1998....................................................................................44 5 Residential and Live-Work Completions in Hackney of 5 units or More 1995-2004.............................................................................52 London Residential Research ii April 2005 Review of Live Work Policy in Hackney Final Report LIST OF TABLES (contined) 6 Residential and Live-Work Units Under Construction in Hackney of 5 units or More at End 2004 ...........................................................52 7 The Live-Work Development Pipeline in Hackney at December 2004..................................................................................................53 8 Pricing Analysis of Residential and Live-Work Developments Completed 1995-1999........................................................................62 9 Pricing Analysis of Residential and Live-Work Developments Completed 2000-2003........................................................................70 10 Pricing Analysis of Residential and Live-Work Developments Completed 2004.................................................................................75 11 Live-Work Developments Under Construction End 2004....................80 12 Pricing Analysis of Developments Under Construction Including Live-Work at End 2004.......................................................................82 13 Live-Work Developments with Planning Permissions and Applications End 2004........................................................................85 14 Live-Work In Other Boroughs.............................................................95 London Residential Research iii April 2005 Review of Live Work Policy in Hackney Final Report REVIEW OF LIVE-WORK POLICY IN HACKNEY EXECUTIVE SUMMARY PREAMBLE Hackney has an equivocal image. During the 1990s, the Borough played the rôle of incubator for the likes of Tracy Emin and Alexander McQueen, icons of “Cool Britannia”. Jamie Oliver’s new restaurant, “Fifteen”, is now doing its bit to keep Hoxton and Shoreditch in the public eye. The other, more traditional Hackney is less attractive, with indices of deprivation and a reputation for poor governance seemingly ever-present features of Hackney life. On its own admission, the London Borough of Hackney Planning Department had all but ceased to function a couple of years ago. That’s changing. This report on the live-work property market, is part of the London Borough of Hackney’s (LBH) new found determination to tackle problems and opportunities head on, rather than hiding behind the statistics of poverty, excuses and indifference. In the mid 1990s, live-work emerged in Hackney as an innovative, pragmatic planning policy to encourage private investment into run down buildings in run down parts of a run down borough. It worked. Other boroughs followed suit. In fact it worked so well, that developers then highjacked the whole process. Instead of live-work facilitating the conversion of redundant factories and warehouse to provide highly flexible space, live-work offered a formula for developers to build space conditioned as live-work, but in reality occupied more often than not as pure residential. Live-work enabled developers to side-step the employment promotion and affordable housing policy requirements that would otherwise have to be met. By about 2000, Hackney had a pretty shrewd idea that live-work had become a “planning scam”, but its early efforts to tackle the scam were ineffectual. In September 2003, in response to the perceived abuse of live-work policy, LBH revoked its Supplementary Planning Guidance (SPG) for live-work use. This revocation has not been entirely successful. LBH lost subsequent Appeals and continued to grant some live-work consents through its own planning committee, in part due to confusion as to the meaning of the Revocation. Existing permissions have been built out, and with the market now dominated by investors rather than owner occupiers, the actual occupation of live-work units for their intended dual use purpose has almost certainly declined even more, in favour of pure residential use. In 2004, however, LBH took preliminary enforcement action against significant numbers of occupiers of live-work units, for being in breach of the work element of the unit. This had an immediate effect of disrupting the market, making (owner- occupier) buyers, mortgage providers and solicitors much more nervous about live- work. Nervous buyers make for grumpy developers. That market uncertainty remains very much apparent at the time of writing (April 2005). London Residential Research 1 April 2005 Review of Live Work Policy in Hackney Final Report For those readers who do not wish to read the whole report, or even this executive summary, we should state at the outset that our main policy recommendation is to allow the “regularisation” of live-work, by which we mean: “to allow the change of use from live-work to pure residential, for a fee, or ‘commuted payment’. In principle, all applicants, be they owner-occupiers or investors/developers must be able to avail of the opportunity to ‘regularise’ existing and planned units. The calculation of the fee will be based on a flexible formula which seeks to split the uplift in value resulting from ‘regularisation’ between the applicant and LBH”. The monies raised by LBH from this process should be strictly ring-fenced, to be spent on employment initiatives aimed at local residents and/or affordable housing provision. CHAPTER 1 INTRODUCTION Purpose of the Study In response to the situation described above, LBH asked the consultants in December 2004 to review live-work policy. The current uncertainty surrounding live- work is not just unsatisfactory for LBH in pursuit of its legitimate planning policies, but also to private buyers and sellers wishing to transact, and developers and investors seeking to remove market uncertainties. In making its original proposal to Hackney, London Residential Research (LRR) stressed that it wished to explore market-based solutions alongside the planning policy review and recommendations. The original LBH Brief to consultants bidding for the contract, presupposed that the research would lead to a revised Live-Work SPG. LRR suggested in its proposal that a new SPG should only be considered as one policy option, and that reinforcing the Revocation of the Live-Work SPG (“scrap it”) might be a more effective way of resolving current policy abuse relating to live-work. This would partly depend on making a satisfactory case to show that “conventional” policies for employment, housing and mixed-use could deliver the same if not better results than live-work, without the “scams”. Thus, the main purpose of this report is to balance the competing merits and disadvantages of a refined policy for live-work, against a conventional package of policies, and make recommendations accordingly. Methodology LRR has sought to provide an “evidence based” approach. A great deal has been written about the theory of live-work, and its attractions in terms of sustainable urban living and local job creation. These benefits are, however, illusory if live-work is in reality residential in (a not very clever) disguise. Our data gathering efforts were London Residential Research 2 April 2005 Review of Live Work Policy in Hackney Final Report heavily focused on getting hard evidence about how live-work units are being occupied in practice, including: ƒ The LRR database, cross-checked with LBH internal records, to identify all Hackney permissions for pure residential (private and affordable), live-work and commercial space since 1995. This was followed by site visits and collection of marketing brochures to check implementation of permissions, and provide qualitative inputs to the database and analyses. ƒ Data gathered by LBH’s enforcement officers in 2004 in an on-going enforcement exercise, added to publicly available data from the Valuation Office Agency (VOA) on the liability for Business Rates and Council Tax for occupiers of live- work units. This exercise has produced some extraordinary results. ƒ Extensive discussions with developers, agents, and other stakeholders involved in live-work, to ascertain where the main market pressures are which might support a change in policy to better meet LBH’s objectives for residential and employment growth, without deterring the momentum for development led regeneration. The report devotes a lot of time to pricing analysis, comparing pure residential pricing with live-work pricing. Pricing data has two possible important applications. First, it shows whether live-work does actually offer occupiers “cheap” workspace to run a home based business. (It does not). Second, it provides a possible basis for defining a procedure to “regularise” existing and planned live-work units, by which we mean allow the change of use from live-work to conventional residential use. CHAPTER 2 LIVE-WORK CHARACTERISTICS - THEORY AND PRACTICE Section 2.1 of the report tracks the evolution of the definition of live-work, from Hackney’s admirably crisp definition in 1996: “Live/work development is the provision of integrated living and working accommodation within a single self contained unit”, to a high profile court case in September 2004, when the judge in “Bishopsgate Foundation v Curtis” concluded that live/work meant “live and/or work” [where there was no planning condition defining the extent of the workspace]. In other words, when it comes to definitions, the devil is in the detail, and no one agrees on the detail. (Incidentally, there is no universally accepted way of spelling “live-work”. We prefer live-work to live/work or any of the various permutations). Unclear definitions of live-work are not just a problem for the planning authority and any parties caught out by current market uncertainty. Section 2.2 examines the treatment of live-work units by the Valuation Office Agency, from the standpoint of London Residential Research 3 April 2005 Review of Live Work Policy in Hackney Final Report determining the local taxes which a live-work unit should attract, in terms of Council Tax on the domestic element, and Business Rates on the workspace. One thing is clear. When the (VOA) tax “man” cometh to do his or her inspection of a property, he or she is concerned with the actuality of how the unit being used, not with the planning conditions and defined uses. In practice, the research discovered that: “the VOA database revealed that in most of the largest live-work schemes in Hackney, the vast majority of live-work units have never been designated as liable to business rates”. LRR analysed 20 developments with over 20 live-work units completed in Hackney between 1995-2004, comprising 777 units. According to the VOA, 96% of these units were either “wholly domestic”, or the work use was “de minimus” to the domestic use. Given that the live-work planning permission insists that the defined workspace should be for work and not for living, this would suggest that 96% of the live-work units in the sample were not at the time of the VOA site visit compliant with the live-work permission. Section 2.3 reviews the Inland Revenue’s treatment of live-work. In theory, and with the help of the planners, live-work could be a “nice little earner” for The Revenue. Under the definitions used by the Inland Revenue, the capital gain on the work element of a live-work unit ought to be potentially liable to Capital Gains Tax. Thus, for example, in Shoreditch where live-work prices doubled from around £100 per sq ft in the mid-1990s to £200 per sq ft in the late 1990s, and then doubled again to around £400 per sq ft by 2003/4, many live-work owner-occupiers could technically face hefty chargeable gains on selling their units. In practice, it appears that, like his counterpart at the VOA, the taxman is not interested in planning, only in actual usage. Nonetheless, the (admittedly remote) risk of The Revenue paying more attention to planning conditions in future does exist, and the owner might well see this as an added reason to “regularise” the use of his or her unit as pure residential in planning terms. Section 2.4 deals with the issue of the liability of sales or leases of live-work units to VAT at the standard rate of 17.5%. The guidance on VAT from HM Customs and Excise (HMCE) on construction, land and property is by no means straightforward. Helpfully, HMCE documents contain explicit reference to live-work as a property use, and its definition of live-work is driven by planning conditions defining the respective live and work elements of the unit – in other words it is the same as LBH’s. The detailed guidance clearly states that in sales where the building is less than three years old, the value of the live element is zero rated, but the work element should be standard rated. In practice, we are unaware of any sales in Hackney where VAT has been charged in such circumstances. If VAT has inadvertently not been charged, it is our understanding that developers could be liable to reimburse HMCE. London Residential Research 4 April 2005 Review of Live Work Policy in Hackney Final Report Section 2.5 explores the role of mortgage providers in the live-work market. In the early days, mortgage providers were suspicious, and loan terms were onerous in comparison with conventional residential mortgages. Things clearly became easier for both lenders and borrowers as live-work became more common in the late 1990s and early “noughties”, but the nervousness of the mortgage providers has returned in the wake of Hackney’s 2004 enforcement initiative. This situation provides a major incentive for investors, developers and owner occupiers wishing to sell live-work units to support a regularisation procedure, even if it costs them a significant sum to do so. In section 2.6 we return to a planning perspective on live-work. A crucial question is whether the advent of “screen-based” working at home in recent years, using “domestic” office equipment, means that live-work is no longer necessary to facilitate working at home for all or part of the working day. A classic stereotype of the genuine live-worker in the mid-1990s was a photographer poring over trays of chemicals with tweezers in a dark room. Now he’s digital and he does it in daylight. Our conclusion on whether screen based “home-working” has largely displaced the need for defined live-work accommodation for those who do wish to work at home is that it has. That conclusion does not, however, create a case for a general “amnesty”, since the policy damage done through widespread breaches of live-work conditions also relates to loss of pure employment space for small and medium sized firms that could not operate out of a C3 dwelling, and the avoidance of affordable housing obligations. Sections 2.7 and 2.8 focus on enforcement issues. Section 2.7 reinforces the message from the VOA analysis, that LBH is justified in initiating enforcement procedures on the basis of non-compliance with live-work conditions. Although this report is first and foremost about evidence, policy and procedures, there is an ethical dimension to the whole issue. Enforcing against owner occupiers who have “done their bit” to promote Hackney by choosing to live in the borough is likely to be difficult to support in political terms. Enforcing against investors who have in effect stuck two fingers in the air at Hackney is quite another thing. Owner-occupiers should be aware of the “Four Year Rule” for Lawful Development Certificates, an issue that we explore in Section 2.8. LBH enforcement officers have suggested to us that if the occupier can prove continuous residential use for four years through such evidence as payment of Council Tax, non-payment of Business Rates, payment of other household bills, and lack of any enforcement action on the part of LBH, then a Lawful Development Certificate for residential use could be granted. We estimate that around 750 live-work units were completed in Hackney by end 2001. Whilst long-standing owner occupiers do therefore seem to have a straightforward way of regularising the planning use of their home (as long as they want to and have the evidence to back up continuous residential use), investors who typically see a high turnover of tenants will find the Four Year Rule far less helpful. London Residential Research 5 April 2005 Review of Live Work Policy in Hackney Final Report Section 2.9 examines live-work as an “Affordable Housing Avoidance Strategy” by developers. Without any question, live-work has been used in this way by developers. Hitherto, live-work units have not attracted affordable housing planning obligations. Given that live-work values have traditionally been around 10% lower than pure residential values (albeit subject to much wider ranges within individual schemes), compared with a discount of 50% or more between social rented housing and private housing, the attractions of live-work for developers are obvious. In theory, around 350 affordable homes have been lost as a consequence of live-work policy, although in practice the number is likely to be less but still significant. The live-work affordable housing “loophole” is likely to be plugged by the forthcoming revised SPG “Interim Planning Guidance: Affordable Housing”, a draft version of which was published for consultation in 2004, and which is likely to be adopted after revisions in July 2005. During the consultation period we submitted that live-work units should be brought within the net of the affordable housing threshold, based on our knowledge of Islington’s policy on the same issue. The likely outcome is that live-work will attract the same planning obligations in terms of affordable housing as pure private residential. Neighbouring Islington adopted this approach in 2003, and it works. In concluding Section 2 we ask whether live-work is now a failed policy. Our conclusion is: “If LBH has granted a certain type of planning consent in the context of its employment and other planning policies, it is reasonable in our view that it is able to guarantee that the approved use continues in the future. Live-work use is not transparent and is not, in a practical sense, permanently enforceable. In summary, live-work planning policy is not capable of implementation in a manner that is either transparent or enforceable, and policy that is incapable of implementation is ‘bad policy’.” Which leads to the inescapable conclusion that the best way to treat live-work policy in future is to “scrap it”. However, the process of scrapping it in a way that is fair and accountable, and promotes rather than detracts from Hackney’s wider employment and housing policies will need to be carefully designed and implemented. It should not take the form of a general amnesty, which would be unfair, and would almost certainly result in unwelcome unintended consequences. London Residential Research 6 April 2005