By Aaron Gadiel, Partner 

The NSW Government has now changed the state’s planning controls to provide a new development assessment stream for ‘build-to-rent housing’.  The government has also released new guidelines that shed light on the associated new 50 per cent land tax concession.

The changes took effect last Friday (12 February 2021) as amendments to the State Environmental Planning Policy (Affordable Rental Housing) 2009 (the Affordable Housing SEPP) and the State Environmental Planning Policy (State and Regional Development) 2011 (the State and Regional Development SEPP).

In a very broad sense the key points are as follows:

• Some ‘build-to-rent’ development will now be permissible under planning law, where previously it was prohibited.
• Build-to-rent housing comes with some potentially onerous (and unusually inflexible) requirements.
• There are also some new ‘build-to-rent’ development standards of a more normal kind.
• The new ‘build-to-rent’ provisions include ‘cannot refuse’ standards (which are typically welcomed by developers).
• The cultural reluctance of some local councils to be flexible in applying the Apartment Design Guide (the ADG) has been addressed (but only for build-to-rent housing). A mandatory legal duty is imposed on the consent authority to be flexible in applying the design criteria set out in the ADG.
• A $100 million plus ‘build-to-rent’ development (outside of the City of Sydney) will be state significant development if it meets certain criteria.
• The NSW Government has recently legislated a 50 per cent land tax concession for build-to-rent housing. The Revenue NSW guidelines that will be used to apply this concession have now been released. The new guidelines do not precisely align with the planning requirements. There is some considerable ‘grey area’ in these guidelines.

The balance of this article addresses these key points in more detail.

Background

A state environmental planning policy (SEPP) is a legal document that has the capacity to override or replace local environmental plans (LEPs).

This means that SEPPs can:

• establish that certain types of development are permissible; and
• set development standards,

even when these measures are not supported by local councils.

In July 2020 the NSW Government released wide-ranging proposals for a new ‘Housing Diversity SEPP’ — this would be an entirely new SEPP.

Mills Oakley published an article in August 2020 on those proposed changes —  we concluded that  the overall tenor of the then proposed changes would have a negative impact on housing supply.

In December 2020 the government finalised some limited aspects of its ‘Housing Diversity’ policy proposals.  Mills Oakley published an article explaining those changes at that time.

More changes were made on 12 February 2021.  These are a further step in implementing some of the ‘Housing Diversity’ policy proposals.  The Government has updated its website to say that more steps will be taken to implement other aspects of the ‘Housing Diversity’ package ‘after March 2021’.

Limited winding back of prohibitions

New provisions have been introduced into the Affordable Housing SEPP ‘to enable certain residential accommodation to be used as build-to-rent housing’.

The new provisions apply to development for the purposes of multi dwelling housing, residential flat buildings or shop top housing:

• in any zone where residential flat buildings are permissible; and
• in any ‘Zone B3 Commercial Core’ and any ‘Zone B4 Mixed Use’ (irrespective of whether residential flat buildings are permissible).

Examples of zones where residential flat buildings are permissible include:

• ‘R4 High Density Residential zones’ (where the permissibility of residential flat buildings is mandated by the ‘Standard Instrument’);
• some ‘R3 Medium Density Residential’ zones (such as the one in Botany Bay Local Environmental Plan 2013);
• some ‘B1 Neighbourhood Centre’ zones (such as the one in Hornsby Local Environmental Plan 2013);
• some ‘B2 Local Centre’ zones (such as the one in Liverpool Local Environmental Plan 2008); and
• the ‘B8 Metropolitan Centre’ zones (in the City of Sydney).

The most noticeable change in permissibility is in the ‘B3 Commercial Core’ zone.  At present, the ability to develop residential flats or shop top housing in a B3 zone depends purely on the controls in the particular LEP.  Such buildings are often prohibited by LEPs.  The new provisions make ‘build-to-rent’ residential flat buildings and shop top housing permissible in all B3 zones, so long as they are ‘build-to-rent’.

In some other zones, the new provisions turn-off existing prohibitions on ‘multi dwelling housing’ (eg terraces on a single lot of land) — so long as the housing is build-to-rent.   However, as residential flat buildings/shop top housing would already be permitted (in some form) in those zones, it is (in our experience) rare that ‘multi dwelling housing’ is preferred by developers over apartments.  (If residential flat buildings are permitted, but can only be two storeys, we do see some developers choosing to build attached housing or multi-dwelling housing.)

However, for many zones, these new build-to-rent provisions do not make any difference to what is permissible.  That is, multi dwelling housing, residential flat buildings or shop top housing are already permitted.

New mandatory requirements

Build-to-rent housing comes with some potentially onerous (and unusually inflexible) requirements.

The changes to the Affordable Housing SEPP have been accompanied by a change to the Environmental Planning and Assessment Regulation 2000 (the Regulation).

As a result of these changes to the Regulation, any development consent for build-to-rent housing is subject to the following mandatory conditions:

• the development must contain at least 50 dwellings occupied, or intended to be occupied, by individuals under residential tenancy agreements;
• for B3 Commercial Core zoned land —any building to which the development relates must not be subdivided into separate lots;
• in other zones — there must be no subdivision of the build-to-rent dwellings and the common spaces and shared facilities for the residents;
• the build-to-rent dwellings — and the common spaces and shared facilities for the residents — must be owned and controlled by a single person;
• those dwellings and common spaces/shared facilities must also be operated by a single managing agent (who must provide on-site management).

These mandatory conditions are in force from the issue of the occupation certificate covering the whole building (or buildings):

• ‘in perpetuity’ on B3 Commercial Core zoned land; and
• for 15 years on other land.

Among other things, these mandatory consent conditions will:

• in the B3 Commercial Core zone — prevent stratum or strata subdivision of a building to which a ‘build-to-rent’ development relates (until now stratum subdivision of mixed use buildings has been a routine and a generally uncontroversial practice);
• in other zones — prevent any build-to-rent dwellings, as well as the common spaces and shared facilities for the residents, being on separate lots (easements cannot be used to escape this requirement);
• prevent ownership of the build-to-rent dwellings (and the common spaces and shared facilities for the residents) by any more than one person (ie no ‘joint tenants’ or ‘tenants-in-common’, although a single corporation could own the land);
• prevent management of the build-to-rent dwellings (and the common spaces and shared facilities for the residents) by the landowner itself and instead require the landowner to appoint an agent to manage the premises (although the managing agent could be a related company to the landowner).

The ‘clause 4.6’ process cannot be used to vary these requirements.  ‘Clause 4.6’ is a mechanism that sometimes allows the variation of planning requirements when their application is unreasonable or unnecessary in a particular case.  However, ‘clause 4.6’ can only be used to vary development standards imposed by ‘environmental planning instruments’ (ie LEPs and SEPPs).  Unusually, these requirements are imposed via the Regulation as mandatory development consent conditions.

More conventional development standards

The new Affordable Housing SEPP does contain some ‘build-to-rent’ development standards of a more normal kind (which can potentially be varied under clause 4.6).

Firstly, there is a provision that says a development consent may only be granted in a B3 Commercial Core zone if the consent authority is satisfied that a ‘reasonable change of use’ can be carried out to change the building to commercial premises.

The vagueness of the provision is likely to be seized upon — at least initially — by some local councils who want to resist build-to-rent housing in their commercial core areas.

Secondly, there is a requirement that the ground floor of the building (by both the selection of land use and building design elements) encourages interaction between the inside of the building and the external public areas adjoining the building.

This last requirement does not apply to a part of a building that:

• faces a service lane that does not require active street frontages; or
• is used for a lobby, access for fire services or vehicular access.

Thirdly, development consent is not to be granted unless the ground floor of the building will not be used for the purpose of residential accommodation.

In most residential buildings, the ground floor is the site of an entrance, lift lobby and fire services access that are used for the purpose of residential accommodation.  Strangely, there is no express exclusion for these typical building features from this particular requirement (as there is for the previous requirement).

This appears to be a drafting error which (hopefully) the Planning Department will quickly recognise and correct.

Finally, development consent cannot be granted unless the ground floor of the building will not be used for a car park (or to provide ancillary car parking spaces). There is no express exclusion for vehicular access to a car park (as there is with the second requirement listed above).  Again (hopefully) the Planning Department will quickly recognise and correct this apparent drafting error.

There is a twist to these four development standards.  There is a very unusual qualification. These standards say that an LEP — or even a development control plan —will override these provisions when there is an inconsistency.

This qualification may have multiple consequences, depending on what a given LEP or development control plan actually says.  In general terms, if it is not possible to comply with:

• one (or more) of these development standards; and
• the requirements of an LEP or development control plan,

compliance with the LEP or development control plan will take priority.

This provision in the SEPP gives unusual precedence to a development control plan.  A development control plan is typically a document prepared by a local council alone.  Normally it does not have the status of a ‘statutory requirement’.  Direct reference in the SEPP in this way now gives some provisions of development control plans a special legal status.

‘Cannot refuse’ development standards

The new ‘build-to-rent’ provisions include development standards of a kind that are typically welcomed by developers.

These are formally described (misleadingly) as ‘non-discretionary development standards’.

However, the purpose of such development standards is to set out standards for build-to-rent housing that — if complied with — prevent the consent authority from requiring more onerous standards for those matters.

Non-compliance with these particular development standards does prevent development consent being granted.  In short, these development standards limit the discretion of the consent authority, but do not limit the freedom of the developer.

The standards can be briefly summarised as follows:

• If the building height of all proposed buildings is not more than the maximum building height permitted under a SEPP or LEP for a building on the land — a more onerous height requirement cannot be imposed.
• If the density and scale of the proposed buildings, expressed as a floor space ratio, are not more than an existing maximum under the SEPP or LEP — a more onerous density and scale requirement cannot be imposed.
• Outside of Greater Sydney — if the number of parking spaces complies with the number required under the relevant development control plan or LEP for a residential flat building — a more onerous parking requirement cannot be imposed.
• In Greater Sydney — if the number of parking spaces complies with either the number required under the relevant development control plan/LEP for a residential flat building or 5 parking spaces for each dwelling (whichever is lower) — then a more onerous parking requirement cannot be imposed.

The above regime is similar to the system of ‘cannot … refuse’ standards for boarding houses that is already in the Affordable Housing SEPP. (Boarding houses are an existing form of build-to-rent housing and their planning provisions have not yet been changed.)

The improvement (when compared to boarding houses) is that it is not necessary to satisfy any ‘character’ test before these ‘cannot … refuse’ standards can be invoked by a developer.

A relative disadvantage is that the floor space ratio bonus (of 20 per cent of the maximum) for boarding houses is not available when a developer is relying on the new build-to-rent provisions.

Apartment Design Guide

The State Environmental Planning Policy No 65—Design Quality of Residential Apartment Development (SEPP 65) will still apply to ‘build-to-rent’ residential flat buildings and shop top housing (as before).

SEPP 65 already says that — for any development application or modification application covered by SEPP 65 — a consent authority is to take into consideration the ADG.

Despite a common misperception (by local councils), the ADG does not lay down any binding rules for such development (whether it is build-to-rent housing or not).   A consent authority has never been required to refuse a development application merely because the design criteria specified in the ADG had not been observed.  In brief terms, the law can be summarised in this way:

• A decision-maker may need to consider why it may be appropriate to not apply a standard in the ADG, or whether, in the particular application under consideration, the non-compliance with an ADG standard might be ameliorated by the imposition of conditions.
• Merit reasons may be advanced by an applicant as to why the ADG standard ought not to apply at all.

Of course, as a practical matter, some local councils choose to apply provisions in the ADG in a rigid, inflexible way.  (The Land and Environment Court, in merit appeals, does recognise that the ADG is not a set of binding rules and, where the circumstances allow it, applies the ADG flexibly.)

There is a new provision in the Affordable Housing SEPP that is plainly directed to addressing the problematic approach taken by some local councils (but only for build-to-rent housing).  A mandatory legal duty is imposed on the consent to be flexible in applying the design criteria set out in the ADG, including, in particular, the design criteria for:

• private open space and balconies;
• storage; and
• apartment mix.

There is a related provision that requires a consent authority to give particular consideration to the following in its assessment of the design of build-to-rent premises:

• the amenities proposed to be provided to residential tenants through common spaces and shared facilities and services;
• whether the configuration and variety of dwellings in the development will provide adequate options to prospective tenants in relation to the size and layout of the dwellings; and
• whether tenants residing in the development will be able to relocate to other dwellings in the development that will better accommodate their housing requirements if their requirements change.

The implication of these two provisions, taken together seems to suggest that for ‘build-to-rent’ housing:

• it may be more feasible to argue for less (or no) private open space, balconies and storage if there are sufficient shared amenities, facilities and services; and
• apartment mix might not need to be as broad as in a conventional residential flat development, but some variety may still be desirable.

State significant development

The State and Regional Development SEPP has been amended to declare development that is permitted under the new ‘build-to-rent’ provisions to be state significant development, provided it satisfies the following:

• The proposed development must have a capital investment value of more than $100 million (in Greater Sydney) or more than $50 million (elsewhere).
• The build-to-rent dwellings — and the common spaces and shared facilities for the residents — must have a value of at least 60 per cent of the capital investment value of the overall proposed development.
• For B3 Commercial Core zoned land — the proposed development must not involve prohibited development, other than development for the purposes of multi dwelling housing, residential flat buildings or shop top housing.
• For development on land that is not B3 —the proposed development must not involve development that is prohibited at all.
• The development must be outside the City of Sydney.

The consequence is that a development application for any qualifying ‘build-to-rent’ housing must be made to the Department of Planning, Industry and Environment (not the local council).  The consent authority will then either be the Planning Minister (for less contentious development) or the Independent Planning Commission (for development that is likely to be more contentious).

There is a logical inconsistency that the government does not seem to have adequately explained.  That is, why a $100 million plus residential development that is ‘build-to-rent’ is state significant, but a development of the same scale — that provides for a mixture of owner occupiers and renters in the normal way — is generally excluded from the ‘state significant’ development stream.

50 per cent land tax concession

The NSW Government has recently legislated for a 50 per cent land tax concession for build-to-rent housing.   However, until 12 February 2021 it was not possible to work out exactly which projects might benefit from the concession.  This is because the government had not published the necessary ‘guidelines’ which must be used by Revenue NSW to apply the concession.  These guidelines have now been released.

Before we address the guidelines, it is worth briefly summarising what was already known (that is, what was already in the new legislation):

• The concession applies in respect of land owned at midnight on 31 December in any year (ending with midnight at the end of 31 December 2039).
• The land value of a parcel of land is to be reduced by 50 per cent (for land tax purposes) if a building is on the land, the construction of the building commenced on or after 1 July 2020 and Revenue NSW is satisfied that certain labour force goals have been achieved.
• If Revenue NSW is satisfied that only part of a parcel of land is being used and occupied for a build-to-rent property, the reduction in land value is to be proportionately decreased.
• The reduction is only available on application.
• If, within the period of 15 years after the land tax concession is first applied, the land is subdivided (or the ownership of the land is otherwise divided) liability for land tax in respect of the following years is to be reassessed and past land tax concession must be repaid with interest.

The new guidelines do not precisely align with the planning requirements.  This means that a developer who wants to ensure access to the land tax concession and the special ‘build-to-rent’ planning provisions will need to consider both very carefully.

In brief terms, the new guidelines include the following:

• All requirements of the relevant development consent must be complied with.
• The buildings on a parcel of land must contain at least 50 self-contained dwellings used specifically for the purpose of build-to-rent.
• Where an adjacent site is consolidated with a land parcel that already qualifies for the concession, and the adjacent site provides additional build-to-rent dwellings to the property, the additional dwellings do not have to separately meet the 50-dwelling threshold.
• Build-to-rent properties must comply with any relevant affordable housing policies that may be imposed under the planning law.
• Build-to-rent dwellings must be made available to the general public, without restriction, apart from restrictions necessary to ensure public health and safety, to promote announced Government policy or to ensure dwellings designated for affordable or social housing are used for that purpose.
• The dwellings and common land that comprise the build-to-rent property must be held within a unified ownership structure (which can include a group of entities holding joint ownership) and must not be held in such a way to be de facto subdivision or divided ownership of the land.
• The dwellings that comprise the build-to-rent property must be managed by a single management entity, with on-site access to management for tenants.
• Each tenant must be provided a range of lease term choices, including a genuine option to enter into a fixed term lease of at least three years.
• Each tenancy must be subject to a residential tenancy agreement under the Residential Tenancies Act 2010. The landlord must comply with all obligations under that Act.
• Revenue NSW may have regard to any other factors that it considers relevant in deciding whether a property is being used for build-to-rent.

There is some considerable ‘grey area’ in these guidelines (particularly the last point).  This will create some risk for any developer looking to invest in reliance on the land tax concession being available.

If, on application, Revenue NSW does not accept that a particular development is ‘build-to-rent’ housing that is eligible for the land tax concession, taxpayers may object to consequent land tax assessments (time limits apply).

If the objection is not upheld there are rights to a merit review in either the NSW Civil and Administrative Tribunal (NCAT) or the Supreme Court (again, time limits apply).   The tribunal or the Court would have the same discretions that Revenue NSW had when it considered the application.

The Mills Oakley Sydney planning and environment team have considerable experience in challenging land valuation and (land-use related) land tax assessments.  We can assist in this area if developers or landowners need advice.

The bottom line

Many developers will continue to prefer developing conventional residential flat buildings or shop top housing — where they will retain relative freedom to subdivide (and be able to flexibly cater to investors or owner-occupiers as the market demands).

Nonetheless, there will be some circumstances, particularly in a B3 Commercial Core zone, where a developer may perceive an opportunity to develop residential accommodation that might not otherwise be permitted.  Nonetheless, there will be a complex path to both securing development consent and the associated land tax concession.