Commuted Sum Viability Statement

MARINA HOTEL - 24/00786/C Commuted Sum Evaluation and Viability Statement

Purpose:

• I. To note that DOI’s 20/4/25 commuted sum of $11,600 per Addendum 1, does not have their standard fixture/furnishing credit of £5,200/unit x 2.25 units, as omitted in (a) below, and thus include it in (b) below. Applicant requests that (b) be allowed/approved.

• II. Notwithstanding I. above, to demonstrate why Housing Policy 5 should not be applied in this instance, where there are other material considerations which would justify not requiring the payment of a commuted sum (as shown in (c) below).

Sales Values:

One 3-bedroom lower unit (112.2m2) @ £295,000 = £295,000 Four 1-bedroom units (41.8 - 47.6m2) @ £195,000 = £780,000 Three 2-bedroom units (54.9 - 57.7m2) @ £250,000 = £750,000 One 2-bedroom penthouse (110.0m2) @ £475,000 = £475,000

Total: £2,300,000

Purchase Price: Marina Hotel is currently under contract for £325,000

Construction Costs PSM: Overall speculative cost of works of £1,871,585 (see Addendum 3) For 9 units totalling 565.5m2, as of 14th April 2025) = £3,310/m2

Gross Development Costs:

£11,600 Commuted £11,600 Commuted £0 Commuted Sum Sum with NO fixture/ w/ £5,200/unit fixture/ if waived per Applicant’s furnishing credit (a) furnishing credit (b) Viability Statement (c)

Building Expenses £ 1,871,585 £ 1,871,585 £ 1,871,585 Purchase Cost £ 325,000 £ 325,000 £ 325,000 Commuted Sum £ 11,602 £ 11,602 £ 0 £5,200/Unit Credit £ 0 £ 11,700 £ 0 Total Costs £ 2,208,187 £ 2,196,585 £ 2,196,585 Less Sales Value £ 2,300,000 £ 2,300,000 £ 2,300,000 Total Profit £ 91,813 £ 103,415 £ 103,415 Profit/Unit £ 10,201 £ 11,490 £ 11,490 Margins 4.1% 4.7% 4.7%

I. Further Discussion regarding Commuted Sum Figures:

• 1) Commuted Sum calculations have been quite a challenge. DOI has proposed figures between approximately £11,600 and £85,000, both in person and in writing over the course of a full year (since April 2024). Clearly, based upon IOM Housing 5 rules, a developer can be required to make an “affordable housing” contribution. Whilst the Applicant believes that the substantial costs and minimal margins presented here for such an extensive undertaking should without a doubt qualify one for an exemption, it has been shown that Planning has refused approval based upon viability studies in the past. And further, it should be stated that any denial by Planning, resulting in a loss of development, fails to create necessary and much sought after housing in the Isle of Man.

Therefore, although the comps selected/rejected/altered by DOI continue to be questioned by Applicant, if Planning deems that commuted sums are absolutely necessary and chooses to disregard or disagree with the viability issues presented herein, it is proposed that the most recent figure presented by DOI on 20th April 2025 of £11,600 be used with a standard furnishing and fixture credit of £5,200/unit – see (b) on page 1. This, however, would also result in £0 in commuted sums. Specifically, £11,600 minus credit of £5,200 x 2.25 units (ie 25% of 9 units proposed) is still £0.

• 2) Furnishing and Fixture Credits should clearly be applicable and permitted, primarily for six important and highly relevant reasons:

• i) This £5,200/unit credit has been defined by Brett Woods at DOI himself as follows:

“Carpets and underlay fitted - 50m2 x 35/m2 = £1750

Karndean or ceramic tiling on plywood sub-flooring 13m2 x £70/m2 = £910

Kitchen appliances excluding extractor hood which fitted to affordable units:

• • Washer/dryer fitted to existing plumbing in place; built in £700
• • Electric Oven and Hob to prepared positions and power; built-in £750
• • Fridge/Freezer- built under £400

Venetian blinds to five window positions - £700

Total for these items is £5,210 per apartment”

• ii) This £5,200/unit figure is the exact amount that DOI has provided for numerous other housing projects and should therefore be deemed standard and totally acceptable. In fact, Brett Woods at DOI previously validated this by remarking that: “this price allowance has been used in the past for other residential developments”.

Furthermore, in the attached spreadsheet that he created for PA 23.00958.B (see Addendum 2), please note his credit and adjusted commuted sum figure at the bottom (highlighted in yellow). And this allowance supports his statement that: ”we informed you about the acceptance of reasonable finishes costs, as affordable apartments do not have those items”and also “with regard to furnishings, we cannot use any figure other than our standard which other applicants have accepted, as that would cause confusion in future applications”

• iii) £5,200/unit is a minimal amount considering that true costs for these upgrades are significantly higher, and this allowance has never been increased since first approved by DOI. In fact, according to Brett Woods, this sum was originally based upon actual developer costs and not this (lower) fixed amount, subsequently determined by DOI. Regardless, policy should be applied consistently and equally.
• iv) As recently as 7th April 2025, Brett Woods at DOI, with reference to PA 23.00958.B (essentially only differing in the number of apartments proposed), specifically recommended and approved this £5,200 credit per unit, stating that “the apartments will have floor coverings, curtains and blinds and kitchen appliances as agreed” and that “the commuted sum has been adjusted to reflect this inclusion” And since our initial Marina Hotel commuted sums discussions began over a year ago now, there should be no good reason that the same consideration or credits should not be applied.
• v) Changing or ignoring this policy for this specific planning application, after close to 50 emails back and forth, seems both unreasonable and inconsistent. Certainly, no notice was ever given to change this well-established policy nor to exclude any credit(s) for any such upgrades altogether. Brett Woods unfortunately failed to reference this standard DOI credit in his Memorandum as requested, despite this having been of such significant concern.
• vi) DOI has had ample opportunity since April 2024, when Applicant first emailed about commuted sums, to challenge any rightful claim for their £5,200/unit credit, as has been available to others since then. All the Applicant essentially ever received from Brett Woods regarding this issue were excuses or comments such as “Happy to discuss” and “We can meet and talk about it” and “I’ll check the comparables” and “I’ll revert in due course” and even “If/when approved by Planning, exact commuted figures and protocol can be confirmed then.” And these are exact quotes.

II. Further Discussion regarding Inadequate Viability with Commuted Sums

• 3) Margins are shown at only 4.1% or 4.7% (depending upon which commuted sum figure is used). They do not include any allowances for contingencies or company overhead (nor any financing costs). Developers generally follow the 10-10 rule, whereby an allowance for contingencies is standard at 10% and likewise, an allowance for company overhead is standard at 10%. If such 10% figures are used, this project would result in considerable losses. In fact, even with a contingency allowance or cost overruns of only 5%, this development would still not see any profit and result in a loss. And it should be noted that the IOM Operational Policy also states that general returns for a developer are 6% to 20%.

• 4) Sales Values have been derived using newer luxury apartment conversions in Douglas and beyond. They may be skewed slightly high, but it has been anticipated that build-out would not be for at least another 18 months, and development costs and market conditions will likely change. Reputable residential and commercial estate agents have been consulted, and this property’s various features and benefits (such as views and location) and realistic drawbacks (such as traffic and no parking) have all been carefully and professionally considered.
• 5) Contingency Fees (ie allowances for cost overruns) have not been included in the minimal 4.1% or 4.7% margins submitted, and yet, risks of going over budget remain very real. Although the industry standard is 10% (for rising costs of labour and materials, unforeseen work with demolition and reconstruction and project delays etc), margins will likely be reduced even further. In addition, no allowances have been given for legal fees in relation to property conveyance nor the formation of a management company.
• 6) Building Expenses have been derived from reliable sources and are deemed to be accurate at this time. However, more precise figures can only realistically be calculated once full specs have been evaluated and confirmed by Building Control and plans are sent out for bids.
• 7) Professional Consultants have provided valuable input including KTS Building Group (see Addendum 3 for speculative cost of works) and Fistard Project Services (David Norman). Both are experienced, well-qualified practitioners and assessments have been made using their significant knowledge and expertise. Fistard Project Services are local chartered building engineers and construction managers and have carefully evaluated the viability of this development. As dilapidation/condition surveyors and construction cost consultants as well, their market knowledge and experience specialising in historic renovations and conversions have been key.

• 8) Company Overhead Costs, generally set at 10%, have not been applied in assessing margins, although low overhead is anticipated with this development, without the need for customary in-house staff and facilities. However, even a 5% margin would result in a loss on this project.
• 9) Rental Options are also being considered as leasing may offer a greater return on investment than selling. Market conditions (including supply and demand) will need to be evaluated closer to completion, along with re-financing costs. And there could be a mix for selling some units and leasing others.
• 10) Opportunity Costs are important. If development costs become too steep, then other less desirable options must be considered, such as leaving a dilapidated building to deteriorate further, and instead, simply investing in bonds or banks (now offering interest rates up to 7%). With significant renovation risks, including structural concerns, demolition costs, fluctuations in property market values, labour and overhead, inflation, construction financing and affordable mortgages or rents for residents, not all projects can be deemed cost-effective or even viable, as has been presented here with the additional burden of commuted sums.
• 11) Other Material Considerations will hopefully be given too. Planning’s Operational Policy states that “the Development Plan is not the only material consideration in the determination of planning applications. There may be cases where a proposal does not comply with the development plan but can demonstrate ‘other material considerations’ which may include that there is an overriding and immediate need for the development, and it is rendered unviable by the policy requirements.”And this must be deemed an “unviable development”, based upon its anticipated miniscule financial returns, whilst an overriding and immediate need for renovation exists.

These “material considerations” must surely include evaluating the downside of not purposing the scheme. For example, this dilapidated property, although temporarily boarded up, is an eyesore and has been for sale without any serious offers for many years now. Previous planning applications have not resulted in any improvements or development (mainly due to the high costs of selective demolition required in such a confined and potentially unsafe space). The property has been unoccupied (aside from pigeons) for decades, and it will at some point begin to collapse and thus cause danger and be beyond economic repair. Furthermore, the value to the character of the Conservation Area of having the building renovated and used, the architectural and visual benefit of removing the existing dormer/mansard, and the benefits to those in neighbouring properties from not having a derelict building alongside them, along with the creation of 9 new additional housing units, should all be self-evident.

Summary:

The Applicant is respectfully proposing that this Commuted Sum Evaluation and Viability Statement and accompanying documentation (Addendums 1-3) should result in Planning imposing no commuted sums.

I. Commuted Sums

It is important to emphasise that the comps submitted in support of an affordable housing contribution were all selected without any adjustments based upon their various differences in size, design and amenities etc to the apartments that have been proposed in this Application. And it is respectfully negligent not to make financial allowances/adjustments when comps selected have larger floorplans or superior finishes or additional features to the subject property(ies).

Indeed, “comps” that were mis-selected and subsequently deleted by Brett Woods at DOI were generally only replaced by other “comps” with even higher values or with extra features, without any allowances/adjustments for these upgrades. In other words, “comps” ultimately selected by DOI simply exceeded standards of those considered “affordable housing” by DOI, and the value of these differences should have been deducted from their pricier “comps”, so as to compare “apples with apples”.

If Planning still chooses to accept DOI’s comps and their commuted sum figure of £11,600, then it is respectfully suggested that DOI’s customary credit of £5,200 per unit (or £11,700 for 2.25 units) be given for furnishing and fixtures as detailed in paragraph 2 on pages 2 and 3. DOI regrettably chose not to address this important point in its Memorandum, despite numerous requests to do so, which would have fully offset any commuted sums requested. This is particularly important with such small margins, and in the interests of fairness and precedent, a £5,200 credit/unit should be duly applied.

The purpose of this credit has always been to ensure that a developer only pays commuted sums when applicable on like-for-like furnishings and fixtures (that DOI requires for affordable housing in the Isle of Man). Developers have consistently been allowed to exclude the cost(s) of improvements they provide that are in excess of such affordable housing standards, and to receive a deduction for their upgrades accordingly.

Summary (continued):

• II. Viability

As shown in column (a) on page 1, a projected margin of only £10,200 per unit (with commuted sums applied) may realistically make this project too risky regarding gaining access to adequate funding and fully completing build-out according to the current plans proposed. And thus, this development with commuted sums should be deemed financially unviable especially when financing costs and overheard and contingencies are factored in. Viability is everything, and the idea of increasing sales prices or increasing rents or cutting costs is primarily market driven and never easily implemented by a developer. Plus, unfortunately, efforts to acquire a grant through the Island Infrastructure Scheme since March 2024 have been unproductive so far.

Also, as shown on page 1 in column (c), by eliminating the requirement for £11,600 in commuted sums, margins would rise by 13% from a projected 4.1% to 4.7% or from ַ£10,201 per unit to £11,490 per unit. A small difference perhaps, but still noteworthy with the slightest of margins presented.

In addition, it is considered highly relevant that this property has been unoccupied and unused for decades and has been for sale for years with no potential purchasers. The property continues to sink further into disrepair to the point when, soon, it will be beyond economic repair and replacement might be the only realistic prospect for the site. The continued lack of use and maintenance is not beneficial to the Conservation Area in which the property sits, nor to those who own property alongside.

The Strategic Plan seeks to generally support proposals which seek to regenerate run-down urban and rural areas (General Policy 43) and whilst the property is not identified in any regeneration strategy, as it is an individual building, rather than an area, perhaps this is not surprising. The refusal of planning applications for the appropriate restoration of this building, or imposition of unrealistic requirements for financial contributions will not cease this continued decline of the building nor provide any incentive for anyone to undertake maintenance or reparatory work.

The fact that this site lies not only within an adopted Conservation Area but also within the primary sea front promenade on the Island and which the majority of visitors see as their first impression of the Island weigh significantly in favour of trying to make the regeneration of this building work and it is our position that if additional financial contributions to affordable housing are required here, this will make the project economically unfeasible, demonstrated by the information provided above, and the building will continue to deteriorate to the detriment of the area.

III. Conclusion

By Planning either allowing the requested standard £5,200/unit credit for furnishings and fixtures set by DOI or by Planning giving reasonable consideration regarding the risks inherent in this viability statement and the overriding and immediate benefits of renovation, and in turn waiving commuted sums, this grande dame may yet be salvageable and brought back to life.

Therefore, the Applicant requests that Planning agrees with one or both of these positions, having fully evaluated all facts presented, even if not contesting DOI’s calculations based upon their pre-credit figure of £11,600.

To recommend to the contrary or to recommend that this decision be referred to others or decided later (thus delaying the process and incurring further costs) will likely cause this endeavour, however worthy, to hemorrhage. And sadly, this may be our last opportunity to save this old Victorian from withering away, since even its beautiful but fragile facade can only contend with mother nature for so long.