Landfill Site and Royalties (Non Domestic Valuation practice notes)

Scope

The scope of this Practice Note is solely to ensure a consistent valuation approach for this property Class/ Subclass/ Type for Non Domestic Revaluation 2023 and subsequent entry in the new Valuation List which becomes effective on 1 April 2023.

The basis of valuation for new entries in the Valuation List, and Rating Revision cases after 1 April 2023, is Schedule 12 (2)(1) of the Rates (NI) Order 1977.

Description

This Practice Note refers to property classified as:

Class: Miscellaneous Public Service Properties
Sub Class: Local Govt Specialised Properties
Type: Landfill

Or

Class: Commercial Unclassified
Sub Class: Other
Type: Landfill

This Practice Note relates specifically to landfill sites which may be in public or private control. This Practice Note does not include Civic Amenity Facilities, Recycling Facilities where the primary use of the site is the collection, transfer, sorting, processing, recycling or composting of waste products. This class of property is considered under the Civic Amenity Site Practice Note.

The Waste & Contaminated Land (Northern Ireland) Order 1997, which implements the EU Waste Framework Directive in Northern Ireland (NI), transferred the waste regulatory role from the 26 District Councils (now 11) to the Department of the Environment (DOE) now the Department of Agriculture, Environment and Rural Affairs (DAERA). DAERA is responsible for the drafting of legislation on waste, the implementation of waste management policy and the promotion of a more sustainable approach to dealing with waste in Northern Ireland. The legal definition of waste is stated in The Waste Regulations (Northern Ireland) 2011 as “any substance or object which the holder discards or intends or is required to discard”.

In line with The EU Waste Framework Directive, Northern Ireland has had a waste management strategy “Towards Resource Management” in place since 2006. A public consultation on the revised strategy “Delivering Resource Efficiency” took place in 2012, early 2013 and came into effect from 2013. It has seen the focus change from resource management to resource efficiency and sets out a new waste hierarchy for waste management as Prevention, Preparing for Reuse, Recycling, Other recovery e.g. energy recovery and disposal. It will also introduce new targets such as the recycling of 50% of household and 70% of construction and demolition waste by 2020.

One of the key objectives of the strategy is the reduction of waste that goes to landfill. Current targets for the reduction of biodegradable municipal waste (BMW) going to landfill are for 50% of 1995 levels by 2013 and 35% of 1995 levels by 2020. Local Councils are the main collectors of municipal waste and the Northern Ireland Landfill Allowance Scheme (NILAS) was introduced in 2005 to help reduce the amount of BMW going to landfill by allocating annual allowances for the amount of BMW that Councils can landfill. Under the NILAS regulations all landfill sites which receive municipal waste must make quarterly returns to the Northern Ireland Environment Agency.

At District Council level two (formerly three) sub regional bodies, comprising of geographic groupings of District Councils, have been established to plan and deliver waste management services within NI. (See Appendix 1 for details of Council Waste Management Groups and councils responsible). Energy from waste and the mechanical biological treatment (MBT) of waste to produce fuel are now also key elements of waste management for the Waste Management Groups and councils and these changes will see the future development of new specialised waste treatment facilities/ landfill sites in the coming years. This in turn may see the consolidation of sites and a reduction in the number of operational landfill sites in Northern Ireland.

Under the Waste Management Licensing Regulations (Northern Ireland) 2003 the Northern Ireland Environment Agency (NIEA) is responsible for the authorisation of all activities involved in the treatment, keeping or disposal of waste. The change in legislation in 2003 has resulted in landfill sites which had previously operated under a Waste Management Licence having to obtain a Pollution Prevention Control (PPC) permit under the Pollution Prevention and Control Regulations (Northern Ireland) 2003 to continue operating. It has resulted in some landfill sites being served a closure notice. Such sites must agree a closure plan with the NIEA detailing all the required restoration/ capping works and environmental management and monitoring procedures. The closed landfill site may continue to accept inert waste for restoration purposes only. Once the landfill site has been restored to the finished profile and no longer taking waste the site must still retain the waste management licence until the landfill site is no longer considered to have an environmental impact. At this stage the landfill operator can apply for surrender of the licence.

The NIEA has confirmed that there are currently 38 permitted landfill sites operating under a PPC permit. This permit includes regulations on the use of the site, type of waste and the tonnage of waste per year that the site may accept. Please note there are a number of different scenarios where a site may have a permit but not currently operating as a landfill site. For example, sites depositing waste may be an ancillary activity to the primary purpose of occupation or permits may be held for future use which is why there is often a difference between the number of PPC sites and the number of entries in the Valuation List.

Within NI the three main types of permitted landfill sites are currently:

1. Landfill sites - accepting only inert waste (inactive waste).
2. Landfill sites – accepting non-hazardous commercial waste.(active waste).
3. Landfill sites - accepting non-hazardous domestic, commercial and inert waste. (active and inactive waste).

Inert (inactive) waste is materials such as brick, concrete, stone, clay, soil. The EU landfill Directive defines inert/inactive waste as “…waste that does not undergo any significant physical, chemical or biological transformations… will not dissolve, burn or otherwise physically or chemically react, biodegrade or adversely affect other matter with which it comes into contact in a way likely to give rise to environmental pollution or harm human health. The total leachability and pollutant content of the waste and the ecotoxicity of the leachate must be insignificant, and in particular not endanger the quality of surface water and/ or groundwater”.

Active waste is waste that is anticipated to biodegrade producing leachate and landfill gas. It includes domestic BMW which is defined as ‘any municipal waste that is capable of undergoing anaerobic or aerobic decomposition, such as food or garden waste, and paper and cardboard’.

The waste disposal industry in NI has been impacted by increasing EU requirements, policy developments, legislative requirements and environmental targets highlighted above. Ensuring that a landfill site meets all necessary regulations, policies, improved pollution measures and technologies can involve vast amounts of expenditure and as noted above has contributed to the closure of some sites. Landfill operators are also liablefor the payment of Landfill taxes; a fiscal lever aimed at reducing waste tolandfill; the rate for active waste has increased from £88.95 per tonne in April 2018 to £96.70 per tonne in April 2021. The rate from inactive waste has increased from £2.80 per tonne in April 2018 to £3.10 per tonne in April 2021.

The reduction in waste going to landfill has been further decreased by the continuing reduction in local authority collected municipal waste going to landfill; in line with EU waste management targets; and the downturn in the construction industry. This reduction in waste has seen some landfill operators reduce gate fees to maintain tonnages coming on to their sites. It should be noted that the factors which determine gate fees are complex, including the age and size of the facility, waste contracts and technology and there can also be considerable variation in gates fees for similar sites in similar locations.

For rating purposes, a landfill site hereditament exists where waste is brought on to and permanently deposited on the hereditament. Hereditaments within this class of property are primarily located in former disused quarry sites with most sites being owner occupied. Sites can range from a small landfill site accepting only inert waste with minimal site infrastructure and limited buildings of a portable nature to a modern engineered landfill site accepting domestic and commercial inert and active waste with engineered containment cells, extensive site improvements, plant & machinery, landfill gas generation, office buildings and waste storage/transfer buildings. The remaining void space and remaining life of the void will also vary from site to site. The main valuation element of a landfill site for rating purposes is the quantity of waste deposited within the site and the royalty rate which is applied to it.

Legislative background

Schedule 12 Part 1 Paragraph 1 of the Rates (NI) Order 1977 applies.

“Subject to the provisions of this Order, the Net Annual Value of a hereditament shall be the rent for which, one year with another, the hereditament might, in its actual state, be reasonably expected to let from year to year, the probable average annual costs of repairs, insurance and other expenses (if any) necessary to maintain the hereditament in its actual state, and all rates, taxes or public charges (if any), being paid by the tenant”.

Valuation approach for 2023

The R&E method of valuation is to be retained as the approach for this typeof hereditament.

Research by the Practice Note author concluded that there was insufficient rental evidence available to develop a comparative approach.

In the absence of rental evidence, or a suitable unit of comparison to permit such rental evidence to be reliably analysed, the preferred method of valuation may be either the R&E method or the Contractor’s basis. Where the nature of the occupation of the property is primarily concerned with achieving anticipated profit, and the tenant’s rental bid is, therefore, likely to be based upon a consideration of receipts and expenditure, then in the absence of reliable rental evidence, the R&E method may be the most appropriate method of valuation to adopt.

Source: The Receipts and Expenditure Method of Valuation for Non-Domestic Rating Guidance Note produced in 1997 by the Joint Professional Institutions' Rating Valuation Forum which consists of the RICS, the IRRV, the RSA, the SAA, the VLA and the VOA.

Step 1

Gross Receipts will be determined by taking into account all income reasonably to be derived from occupation of the property. A period of three years accounts, prior to the AVD should give sufficient information to establish a fair and reasonable indication of the trading position. In the case of new ventures where trading accounts do not exist, refer to the accounts of similar ventures, or to the business plan prepared for the new occupier.

In general, receipts should include all income derived directly and indirectly from occupation of the property.

Step 2

The proper Cost of Purchases made in order to produce those receipts should be deducted to determine the Gross Profit. Such costs relate only to those purchases which form part of the venture undertaken.

Step 3

Deduct the Working Expenses from the Gross Profit to determine the Divisible Balance. Outgoings considered as allowable working expenses are those incurred as a result of the operation. For example, salaries, National Insurance payments, provision of services, insurance, phone bills, advertising, Head Office expenses. However, a mortgage payment, which is an expense of the business, is not an expense for a rating valuation.

Step 4

The Divisible Balance (or net profit) is the remaining sum available to be shared between the landlord, and the tenant. It comprises two main elements:

a. The Tenant’s Share – to provide a return on any tenant’s capital employed and a reward to the tenant for his venture reflecting the extent of the risk and the need for profit. It must be a proper and sufficient inducement, not merely a fraction of the divisible balance. A 50/50 split of the divisible balance is adopted as a last resort. This is deducted from the Divisible Balance to leave:

b. The Landlord’s Share – i.e. the amount available for the payment of rent and rates.

The above sets out the methodology for assessing a rent using the Receipts and Expenditure. It may also be possible to determine a ‘shorthand’ approach whereby a percentage is applied to the Gross Receipts to determine a rental value. The NAV can be devalued to an overall £/m2 for comparative purposes.

Having arrived at an initial valuation it will be necessary to stand back and take an overview of the assessment to ensure relativity with other comparable premises.

The estimation of the value of a landfill site by the adoption of a royalty rate is a well-established and accepted practice in rating valuation and market valuation. A royalty rate reflects what the tenant would be prepared to pay for the right to deposit the waste.

NI Rate per Tonne

The appropriate rate per tonne of waste will be applied to the average annual sustainable tonnage of waste deposited for the year beginning 1 April 2023.

The royalty rate adopted for the category of waste reflects the type of site (engineered/plain) and the required improvements to the void such as containment cells, site linings to deal with that particular type of waste. It also reflects all buildings, site infrastructure and plant and machinery directly related to and used in connection with the landfill site operations ie the waste that is permanently deposited on the hereditament.

Additional buildings on site not directly related to the process which are characteristic of a bulk class should be valued using the comparative method with reference to local rental information.

Plant and Machinery not already reflected in the royalty rate should be valued by reference to the LPS Cost Guide. For guidance on items of rateable plant & machinery consult with LPS Plant & Machinery Valuers and refer to the LPS Manufactories, Plant and Machinery Guidance Note.

Where landfill gas generators which produce electricity that is supplied to the NI electricity grid are located on site, guidance on the appropriate NAV, method of valuation and rateable occupier should be obtained from the LPS Electricity Scheme Valuer.

To clarify:

The royalty rate reflects the type of site, all buildings, site infrastructure and plant and machinery directly related to and used in connection with the landfill site operations i.e. the waste that is permanently deposited on the hereditament.

Only those buildings or plant and machinery not considered to be directly related to the process of landfill site operations will require an additional value. These will tend to be valued in comparison to other bulk class properties. Additional P&M would be in the nature of that found at other warehouse or factory properties.

Rent and Lease Questionnaire

For this Class of property RALQs were issued centrally by LPS and analysed by the Practice Note author.

Contacts

For advice on any aspect of this Practice Note contact LPS on 0300 200 7801.

More useful links

• Valuation Lists