Module Five

Module Five

Land Value Capture Implementation

5: Part 1

Module Five, Part One

To those who, seeing the vice and misery that spring from the unequal distribution of wealth and privilege,

 feel the possibility of a higher social state and would strive for its attainment.

- Henry George, author of Progress and Poverty

This last section of the Land Rights and Land Value Capture course empowers you with the information you need in order to implement this enlightened public finance policy. The impetus for implementation can begin with just a small core of mobilized citizens in alliance with politicians who are true representatives of the people. With the assistance of  powerful tools of information technology, coordinated educational campaigns can build a critical mass of support for implementation.

5.1.1 Mobilizing Citizen Campaigns, Asking the Right Questions

 

The constitutions of several countries and commonwealth governments already claim the land and natural resources on behalf of the people as a whole. Various methods of land value capture for public benefit could be effected by insisting on securing these common ownership rights, already in their existing constitutions. Thus citizens can mobilize to enforce their constitutional rights via land value capture policy. In some places, substantial increases in the amount of land value captured can be gained simply by complying with existing land assessment laws.

Questions to ask when building a movement for land value capture:

  • Is there presently any local taxation at all?
  • If so, is it on land only or also on improvements?
  • What percentage of revenue at the state/local levels is provided by the national level?
  • What percentage of the tax base comes from each of these categories: wages, capital, sales, land, natural resources.
  • Are there stable local governing institutions that could administer local revenue if there was any to administer?

Land Titles

  • Are they registered centrally, at the local, state or national level?
  • Is this information easily accessible and if so, how?
  • Is there a black market in land titles?
  • Can the courts be trusted to adjudicate disputes fairly?
  • Are there competing jurisdictions for public funds?
  • Is there a "real estate industry"? A mortgage market?
  • In areas where these markets exist, how do land registries and jurisdictions compare to areas where they don't?

Types of Land titles:

  • In your area are there traditional, tribal land-tenure systems?
  • Are there points of intersection between competing land tenure systems? Where are they?
  • Is land tenure different in rural and urban areas? How so?

Land Titles in Action:

The margin between urban/rural and formal/informal areas is important. That is where market-based land value is being created where none existed before.

  • Where are land sales taking place?
  • Where, and how, is the transition from informal/traditional to asset/collateral taking place?
  • Who is educating the sellers about emerging markets?
  • What information are they collecting?

Answers to these questions will be useful in order to determine how to proceed to establish a land value capture system.

While the answers are being compiled, citizen activists can move forward with general information campaigns via a website established for this purpose, media press releases and public presentations and discussions. Brochures and other material can be downloaded from this website and printed for distribution. Use can be made of the Land Value Capture Endorsement Form to build initial and ongoing public support.

5.1.2 Using Information Technology

Cities and towns are putting property values, tax information and answers to some of the above questions into computer databases and onto the web where this information is transparently and easily accessible. If your city has not yet done so, citizens should insist that it be done. Geographic information systems (GIS) are computer maps containing detailed data. The use of GIS for land value capture is greatly enhancing the ease of implementation.

Here is a map of New York state showing the progress being made by the counties in their conversion to digital mapping of information important for land value capture as of 2005:

 

The website Google Earth, with free sotware that can be downloaded, can be an invaluable aid to land value capture implementation projects. Google Earth contains satellite imagery, maps, terrain, and the ability to import spreadsheets. To get an idea of the capabilities of Google Earth, go to:  http://earth.google.com/

An information and database system for land value capture should include who owns what land, the current assessed land valuation, land use, zoning, current and alternative proposed uses, and what type and amount of property and other taxes are already being collected. Often government departments involved in land management and administration compile such data. If this information is not yet accessible, it needs to be compiled.

5.1.3 Components of a Land Value Capture System

Every improvement in the circumstances of society tends either directly or indirectly to raise the real rent of land,... - Adam Smith,Wealth of Nations, Book I, p. 275

The components of a good land value capture system are:

  1. Registration of land title so that ownership and/or use rights to land are transparently clear. It would be unjust to implement land value capture without land registration because the rights of the government over the governed would be arbitrary. Land privatization is not necessary to implement land value capture. Constituting tribal, clan or extended family land as types of leaseholds can suffice. What is necessary is to determine who has claims to particular areas of land. The process of land registration can also reveal where land claims are disputed and where a land rights arbitration process is needed to prevent outbreak of violent conflicts.
  2. Spatial definition of legal land parcel units - knowing exactly what land is claimed by whom.
  3. Clearly defined legal restraints on land use - the rules of land utilization such as zoning laws defining "highest and best use."
  4. Trained and certified assessors to conduct valuation of land authorized by an agency independent of the tax setting and judicial review authorities.
  5. Geographic information systems (GIS) for use by all agencies involved with land value capture administration with a public access (website) portal for all citizens. Information technology is greatly increasing the efficiency and simplicity of administering a land value capture system of public finance.
  6. A designated public authority responsible for determining the precise method of land value capture to be utilized, collection of funds, monitoring results and impact, and public education concerning the specifics of land value capture policy. Decisions need to be made regarding issuance and frequency of billing statements.
  7. A land value assessment appeals process and compliance system for ensuring that the land value fee is paid and up to date and/or debts are registered against title. Compliance can be encouraged through a small reduction if the fee is paid by a certain date, a penalty for late payment. Compliance can further be encouraged via elimination of public services including protective services to the site or land confiscation. Non-compliance would be noted on the web so if there is a failure to pay that information would be public. It could also be publicized in the local newspaper under the statuatory listings section or posted in the main city square. An appeals process should be clear and easily available.
  8. A recommended compliment to a land value capture system is a "Participatory Peoples Budget" process charged with educating the citizenry about this method of public finance and with the power to make informed and enforceable decisions regarding allocation of a portion (recommended at least two thirds) of public funds received via land value capture. For example, citizens might decide that rather than building an expensive sports stadium it would be best that basic services such as clean water, sanitation, and needs for food and shelter were first secured for all residents. This chart shows some of the information citizens would need for a Participatory Peoples Budget process:

     

     

    5.1.4 Gradual Shift and Revenue Neutral Initially

    The increase in the value of land, arising as it does from the efforts of an entire community, should belong to the community and not the individual who might hold title. - John Stuart Mill, English philosopher, economist, and social reformer (1806-1873)

    In areas not yet having a well-established system of taxation, a decentralized approach to land value capture recommends starting at the local level with land registration and land value assessment. In countries such as Australia when local governments levy land value only revenue fees this is called a "site rating" system. A 2% land value capture fee would be put in place the first year followed by a 2% increase each year thereafter until arriving at 10% land value capture by year five. There should be annual reassessments during this period. A percentage of land rent can be passed up to higher levels of governance for services better accomplished by more centralized government.

    In cities or countries with well-established existent systems of taxation, land value capture is best administered gradually and at least initially as a "revenue neutral" - revenue remaining constant - tax shift, not an increase in taxes. The benefits of this approach is that economic incentives will immediately start moving in the right direction and then proceed at a strong steady pace.

    In jurisdictions with an existing property tax falling on both building and land value, to implement land value capture it is necessary to separate these two values. Many places already legally require land and improvements to be separately assessed. The Assessment Registry has records of each property's land and building values, which many municipalities currently tax at the same rate.

    With the values of buildings and land recorded separately, the next step is to adjust the tax rates. Because we want to begin shifting the tax off of buildings and onto land, the tax rate on buildings must be decreased and the tax rate on land must be increased. It is important to gradually phase in the change so that taxpayers who will see an increase can make adjustments as to how they manage their property.

    So a common rule-of-thumb is to decrease the building tax rate by 20% and increase the tax rate on land enough to ensure that the shift remains revenue neutral at least in the beginning of the transition. This shift – reducing the rate on buildings while increasing the rate on land value – would occur annually until ideally there are no taxes remaining on buildings. Thereafter the rate applied to land value can be increased until the desired rate is reached, which ideally would be capture of full land rent.

     

    A similar step-by-step phase-in process should then proceed (or have already begun) in the reduction and elimination of other forms of taxes. Reductions on income taxes would begin with those falling on the lowest income workers. Sales tax reductions would begin with sales from basic, necessary goods and services. Throughout the stages of implementation the land value of parcels should be frequently reassessed, ideally at least on an annual basis.

    Since most taxation levied by central government falls on wage income, value-added, or sales, land value capture should be coordinated with movements to reduce these taxes and further decentralize and enhance government capacity at the local level. State/regional and central government public funding can be procured via capturing rent of other natural resources exclusive of surface lands and/or a percentage of surface land rent can be passed up to central government for its services which can include the distribution of funds to other areas of the country to assure overall country-wide balanced development.

    Land rent is roughly estimated to be 10% of current land value. Thus if you calculate 2% land value capture for year one, 4% for year two, 6% for year three, 8% for year four, and 10% for year five, you will arrive at substantial land rent capture with greatly reduced or ideally, no taxes on wages and production. With each increase in the land value capture percentage other taxes should be eliminated by the same amount. Thereafter, with close monitoring of assessed land values, the land value capture fee can be increased to the point of full land value capture.

    An online calculator is available to give those interested in implementing land value capture the percentage of land value necessary in order to collect a specific amount of public revenue. This calculator is most useful if land value records are kept by city administrators who have accurately assessed and recorded the current value of all land parcels. As data improves, results improve. The calculator along with further descriptive information is at: http://gltn.lvtproject.org/

    A best practices model for a land valuation and record system developed by the Center for the Study of Economics can be found online at: http://www.marylandlandtax.org/calculator and http://www.lvtproject.org

    5.1.5 Monitoring and Evaluation

    Regarding monitoring and evaluation, a number of studies which evaluated the impact of land value capture have relied on analysis of the number of building permits issued in a city both before and after the shift and at intervals thereafter. This has served as a general indicator of overall improvements underway. Decrease in crime and arson and increase in employment have also been used as indicators of positive results. It is now recommended that analysis of gini coefficients - a measure of wealth distribution – should also be included in the monitoring of the impact of the shift to land value capture. In cities with stable populations (for example, not having a rapid influx of refugees) another useful indicator would be to chart the number of homeless people at regular intervals.

    Various quality of life indicators are now recommended in lieu of GDP for monitoring and measuring progress of social and economic well-being. For links to many of these go to Beyond GDP.

    After the full shift to land value capture, public finance administration is simplified with no fiscal expense for assessing houses and other buildings or to track wage income or sales taxes. Tax administration’s primary job would be to assess, monitor, and post land values for transparent, free and easy public access (on the web) and to collect the land rent at regular intervals.

    Regarding implementation of land value capture on leasehold land, here is a model land lease agreement that determines lease fees based on land values: Community Land Trust Lease Agreement Based on Land Rent

    Hong Kong and Singapore were established and grew under a land lease system. For more information go to: SWOT Hong Kong and SWOT Singapore

    Information on estimating land values to be found in the next section can also be useful in implementing land value capture on leasehold land.

    Most well-maintained properties would pay less under land value capture than under systems which tax both land and building values. Under land value capture only, properties like the ones above would pay more and thus the owners’ incentives would be to make improvements or to sell to someone willing and able to do so.

    Owners of underutilized and vacant lands like this pictured above in urban areas with easily accessible nearby infrastructure would be encouraged to put these lands to good use, perhaps for housing or light industry, under a land value capture system. Alternatively, this land could be developed as a public park, thus increasing land value in the surround area that then can be captured for additional public benefits.

Module 5, Assignment 1

 

  1. Explore Google Earth at http://earth.google.com/. Enter your own street address and watch what happens. Write your comments below.
  2. Do a websearch to find out what information your locality has on the internet that could answer some of the questions asked in the beginning of this section. If no information is available online, make a phone call or better yet visit your local public authorities to ask how you can obtain this information. Write a short report below.

 

5: Part 2

5.2.1 Land Value Assessment

 

It is important that rent of land be retained as a source of government revenue. Some persons who could make excellent use of land would be unable to raise money for the purchase price. Collecting rent annually provides access to land for persons with limited access to credit. - Franco Modigliani, Nobel Memorial Prize in Economics

 

Both experience and common sense confirm that the less city properties are assessed, the less government revenue will be available from true land values. Undervalued land assessment will weaken the ability to collect higher amounts from vacant or poorly utilized properties. This in turn will reduce the ability to shift taxation off of well-utilized properties (and taxes on labor and enterprise) and limit the push for land to be utilized for housing and other productive uses. In addition to increasing blight, when valuable land in developed areas such as cities remains idle due to speculation and negligence it also forces the outward expansion onto previously undeveloped land, putting more farms and open space at risk for sprawl.

Without up-to-date and accurate land value assessments, the amount of value that can be captured from land will not correctly present the amount of public revenue that can be collected via land value capture. Land values fluctuate, going up or down based on the real activity of the overall economy and the ever-changing conditions of a particular city or community so reassessments should be made regularly, ideally on an annual basis.

The task of property assessment is much simpler, easier, and cheaper when public revenue is raised from land value only. The value of land can be estimated with an acceptable accuracy, at a cost which is very small compared to the revenue to be obtained. Information technology and new software programs developed for purposes of land value assessment are making an enormous contribution to enhancing the capacity of public authorities to implement this fair and efficient approach to public finance.

 

The value of land can be estimated with an acceptable accuracy, at a cost which is very small compared to the revenue to be obtained. A proper system of assessment and taxation of land can provide for the proper economic use of the land.- Sanjeeb Mishra, a member of the Indian Administrative Service, District Magistrate and Collector, Ganjam (Orissa, India).

 

An appraisal is essentially an expert opinion of the value of a land site; the assessor must present one that is supportable and comprehensible. The assessor must develop and use specific terminology suitable and pertinent to land appraisal.

The land value assessment or appraisal process is an organized procedural analysis of data. The assessment process is essentially the valuation of rights to use or possess surface land sites. Other kinds of resource rights include subsurface mineral rights, riparian (water) rights, grazing rights, timber rights, fishing rights, hunting rights, access rights and air rights.

The assessor bases his estimate of land value upon basic economic principles which serve as the foundation of the valuation process. There are many economic principles which people and assessors must understand and use when implementing judgment to estimate land values. It is necessary to discuss a few of the more important principles.

Principles of Valuation

 

I think in principle it's a good idea to tax unimproved land, and particularly capital gains (windfalls) on it. Theory says we should try to tax items with zero or low elasticity, and those include sites. - James Tobin,, Nobel Memorial Prize in Economics, 1981

 

Here are the classic principles of land valuation:

  • The principle of substitution maintains that the value of a property tends to be set by the price that a person would have to pay to acquire an equally desirable substitute property, assuming that no expensive delay is encountered in making the substitution. A person would pay no more for a site than would have to be paid for an equally desirable site.
  • The principle of supply and demand holds that the value of a site will increase if the demand increases and the supply remains the same. The value of the site would decrease if the demand decreased. Land is unique, since the supply is fixed; its value varies directly with demand.
  • The principle of anticipation contends that land value can go up or down in anticipation of a future event occurring, or a future benefit or detriment.
  • The principle of conformity contends that land will achieve its maximum value when it is used in a way that conforms to the existing economic and social standards within a neighborhood.

Land value can be thought of as the relationship between a desired location and a potential user. The ingredients that constitute land value are utility, scarcity and desirability. These factors must all be present for land to have value.

Land that lacks utility and scarcity also lacks value, since utility arouses desire for use and has the power to give satisfaction. The air we breathe has utility and is generally considered important, since it sustains and nourishes life. However, in the economic sense, air is not valuable because it hasn’t been appropriated and there is enough for everyone. Thus there is no scarcity – at least at the moment. This may not be true in the future, however, as knowledge of air pollution and its effect on human health make people aware that clean and breathable air may become scarce and subsequently valuable.

By themselves, utility and scarcity confer no value on land. User desire backed up by the ability to pay value must also exist in order to constitute effective demand. The potential user must be able to participate in the market to satisfy their desire.

While land is the gift of nature, certain legal, political and social constraints have been imposed in most societies throughout the years. Every nation imposes certain public limitations on land ownership and use for the common good of all citizens. Four forms of governmental control include:

  1. Taxation -- Power to tax the land to provide public revenue and to return to the community the costs incurred to pay for the various public benefits, services and environmental protection provided by the government;
  2. Eminent Domain -- Right to use, hold or take land for common public uses and benefits;
  3. Police Power -- Right to regulate land use for the welfare of the public, in the areas of safety, health, morals, general welfare, zoning, building codes, traffic regulations and sanitary regulations;
  4. Escheat -- Right to have land revert to the public's agent, the government, when taxes are not paid or when there are no legal heirs.

 

Factors Contributing to Land Value

Many factors contribute to land value, including:

The physical attributes of land:

  • Size of site
  • Shape of site
  • Ease of access to site
  • Topography of site quality of location, fertility and climate
  • Convenience to shopping, schools and parks
  • Availability of water, sewers, utilities and public transportation
  • Absence of bad smells, smoke and noise and
  • Patterns of land use, frontage, depth, topography, streets and lot sizes.

Legal or governmental forces:

  • Type and amount of taxation
  • Zoning and building law
  • Planning and restrictions.

Social and demographic factors:

  • Population growth or decline
  • Changes in family sizes
  • Typical ages
  • Attitudes toward law and order
  • Prestige and education levels.

Economic forces:

  • Value and income levels
  • Sustainability of small business
  • Growth and new construction
  • Vacancy and
  • Availability of land.

The influence of these factors expressed independently and in relationship to one another, helps the people and the assessor measure land value. Land valuation involves determining the highest and best use of the site given a combination of these elements, estimating the value by current appraisal theory, and reconciling to a final estimate of value.

An assessment (or an appraisal) is essentially an opinion of value made by an experienced knowledgeable person. Specialists are known as assessors who base their estimate of land value upon basic economic principles which serve as the foundation of the valuation process. Almost everyone can learn how to do this and learn to do it better.

Procedures for Analysis of Data

 

Our ideal society finds it essential to put a rent on land as a way of maximizing the total consumption available to the society. ...Pure land rent is in the nature of a 'surplus' which can be taxed heavily without distorting production incentives or efficiency. A land value tax can be called 'the useful tax on measured land surplus'. - Paul Samuelson, Nobel Memorial Prize in Economics

 

The assessment or appraisal process is an organized procedural analysis of data. This procedure involves seven specific phases, each of which contains numerous procedures.

1. Defining the Assignment

The goal is to estimate the supply/demand value of all land sites within a given district. This will include manufacturing enterprises, apartments, commercial enterprises, single family home sites, government land, farms and all other land and natural resources of various descriptions.

The assessor should be able to support his estimate of land value, both in discussion and in writing. The assessor must define and use specific terminology suitable and pertinent to land appraisal. Economic Land Rent is defined as the value paid or imputed for the exclusive right to use a land site’s location or natural resources over and above that paid for the most marginal (or unproductive) land in the region.

2. Determining the Data Required and Its Source

A land market assessment system is based upon data related to land attributes. These data generally include maps; aerial photographs; descriptions of physical characteristics like size, shape, view and topography; permitted uses; economic usefulness; present uses; available utilities; proximity to town centers or employment; and site improvements like streets, curbs, gutters, sidewalks and street lights. Governments have much of this data available in their different agencies.

How are values currently being determined and paid by land owners or occupiers? Are records being maintained for the values or fees that are currently being paid by land owners or occupiers? If land values have been estimated in the past, attempts should be made to build upon the existing systems while making constant improvements to data collection.

3. Collecting and Recording the Data

Most governments do not have all of this information available in a single data base capable of analysis. Assessors must determine:

  1. what land data and valuation systems currently exist,
  2. how effectively they operate,
  3. how to build upon and improve these systems and
  4. how to implementprocedures for collecting additional data to improve the estimates of land values.

     

    If no effective land revenue systems are in place they can be created in a manner similar to the following. Assessors should ascertain what land data presently exists and how it could be assembled for use in a land valuation system. They should collect and maintain the data needed from any existing records even though it is not currently stored in a single source. They should determine what additional data would be valuable and from what sources it can be obtained. They should develop ongoing procedures for collecting any additional data required to determine land values and the data should be collected for the differences in characteristics for each site. Land and property sales is a key factor.

     

    The assessor may train a small team to find and record the additional desired data. The data should be displayed in a useful manner such as on a land value map or a computer printout. In an area with no systems or data in place, simple relationships could be drawn for permitted use (zone), distance to amenities (location), physical characteristics (size, topography, view, and so on) and other significant factors. Data could be collected and analyzed on a neighborhood and type of potential use basis. This could be printed out in large format and displayed in the town square.

    In economics, von Thünen rent is an economic rent created by spatial variation or location of a resource. It is 'that which can be earned above that which can be earned at the margin of production'.

    Conversations with residents and businessmen could help to define the parameters which people in the local community use to determine favorable land location. An interview might reveal that the distance to transportation, such as a river, roadway or public transportation, weighs greatly in people's minds. Or, other factors may predominate, such as homogeneity of a neighborhood or distance to shopping and schools. Planners, government officials, real estate agents, appraisers and others involved in real estate may also provide useful data.

    Even if no land sales or market evidence exists, the specific factors which influence land value are well understood by most people in any area of the world. The assessor's job is one of skillfully determining the relative priorities identified by local people.

    Profit at the central market depends not only on the market value of the product  but also on the transportation costs to get the product to the market.

    A sample of typical and varied land sites within a city could be selected to demonstrate a land valuation system. Based upon a study, land market values could be assigned by a competent assessor. The assessor could train a few people to collect and analyze existing data, then analyze the sample survey data and set standards for the base market values in the area. The difference in market value of the attributes that enhance or detract from a typical site could be added or subtracted to the base land value for the other sites in the study. These features should be recorded on the land value map, which would show the primary sites with values declining as desirability decreases or increasing as desirability increases.

    Several examples of land assessment systems will be considered, from a simple example with no significant land data, to a more complex example with plentiful land data. The methods employed will depend upon the land market data that currently exists and how that data can be assembled for use in a land assessment system.

    Above is a simple graph showing changes in real estate prices for five major Australian states during a twenty year period.

    Verifying the Data

    Since the appraisal process is an opinion of land value that is not based upon the personal experience of the assessor, the data collected should be verified with two different sources. Sales data should be verified with a person directly involved in the transaction. For example, one party could be the selling agent responsible for the sale. Another party could be the site owner who agreed to the sale amount. Additional sources might be government land agents or officials who have firsthand knowledge of the sale. Inaccuracies can also be brought to light by concerned citizens if the data is made available to the public.

    5. Analyzing and Interpreting the Data

    Further on in this section there is detailed information on several methods of analyzing and interpreting land data that can be used to secure the goal of estimating the value of all land sites.

    6. Estimating the True Land Value

    Once the analysis has been concluded, it will be possible for the assessor to make a rational estimate of the land value of every land site. This estimate will serve as the basis for the value that will be paid by a site owner or user for the exclusive use of a location (site). The assessor would assign preliminary land value estimates based upon the comparative estimated usefulness and desirability of the sites. Initially, they could accomplish this task in a general manner, with the understanding that refinements would be made to reflect new information and public opinion.

    Public Examination and Analysis of the Land Values

    The preliminary land value assessment, estimated for each site, could then be displayed on a land value map. Public examination and analysis of the land values for land sites would help to clarify any errors in making assessments. People who occupy land acquire skills in noticing slight differences in land characteristics. They can explain to the assessor why and how differences should be reflected in the conclusions about land values.

    Once an adequate sample survey has been completed and had favorable public review, the result can be used throughout the total area. These sample data results could be used to estimate the comparative value of each land site. Thereafter land value should be reassessed on an annual basis adjusting for changes in value.

    Methods Used to Analyze and Assess Land Value

     

    The landowner who withdraws land from productive use to a purely private use should be required to pay higher, not lower, taxes. - James Buchanan Jr., Nobel Memorial Prize in Economics, 1986

     

    Valuation of the land involves first determining the highest and best use of the site, estimating the value by current appraisal theory, and reconciling to a final estimate of value.

    The four criteria for determining highest and best use are; what is:

    1. physically possible;
    2. legally permissible;
    3. financially feasible; and
    4. maximally productive.

     

    Current appraisal theory uses three standard approaches in estimating land value:

    1. the cost approach;
    2. the sales comparison approach; and
    3. the income capitalization approach.

     

    The most reliable way to estimate land value is by sales comparison. This appraisal technique is dependent upon utilizing truly comparable market or sales data which have occurred near enough in time to reflect market conditions relative to the time period of the appraisal. When few sales are available or when the value indications produced through sales comparison require substantiation, other procedures may be used to value land. There are seven procedures that can be used to obtain land value indications:

     

  5. Sales comparison - Sales of similar, vacant parcels are analyzed, compared, and adjusted to provide a value indication for the land being appraised.

     

     

  6. Proportional Relationship - Relating a site to a known standard site. The difference can be expressed as a percentage. This procedure can be used when there is little value evidence in existence.

     

     

  7. Land Residual Technique - It is assumed that the land is improved to its highest and best use. All operating expenses and the return attributable to other agents of production are deducted, and the net income imputed to the land is capitalized to derive an estimate of land value.

     

     

  8. Allocation - Sales of improved properties are analyzed, and the prices paid are allocated between the land and the improvement portions.

     

     

  9. Extraction - Land value is estimated by subtracting the estimated value of the depreciated improvements from the known sale price of the property.

     

     

  10. Ground Rent Capitalization - This procedure is used when land rental and capitalization rates are readily available, as in well-developed areas. Net ground rent, the net amount paid for the right to use and occupy the land, is estimated and divided by a land capitalization rate.

     

     

  11. Subdivision Development – With this approach land value is estimated as if the land were serviced with infrastructure and available for sale in smaller parcels. All costs including infrastructure and carrying charges are subtracted from the estimated proceeds of sale, and the net income projection is discounted over the estimated period required for market absorption of the sites.

     

With the appraisal process and these several possible approaches to value understood, it is appropriate to consider which methods and procedures should be used to analyze and interpret the land data. The choice is based upon what data is available, its reliability and usefulness in making a value estimate.

Standard Units of Measure

Land markets can be estimated on the basis of a certain value per unit and the unit is often one of the following:

 

  1. Per Dwelling Unit Site
  2. Per Square-Foot
  3. Per Acre
  4. Per Front-Foot

 

The selection of the most appropriate unit, or combination of units, is important. It is a decision which can only be made after a careful analysis of the market and the available data.

The standard residential site may respond well to a value Per Dwelling Unit Site. A commercial use may be better estimated by using a value Per Square-Foot or Per Front-Foot. A farm or rural site may be better estimated by using a value Per Acre. Once the market value per unit of measure has been established for the standard site representative of the area, the value will become a base to which all other sites can be compared.

Per Dwelling Unit Site -- Sale evidence will frequently indicate that minor variations in sites, whether frontage or size, have little effect on markets. The assessor could select the standard Dwelling Unit Site, both as to location and market. They would proceed to make judgment decisions in relating the other sites to the site that was selected as the standard site--rating them as standard, superior or inferior. An individual site could have some characteristics that are superior and others that are inferior. The Per Dwelling Unit Site method is useful in the valuation of apartments and homes. It may also be combined with the use of another method such as the per square-foot method.

Per Square-Foot -- The value per square-foot unit of measure has application in estimating value for commercial, industrial and residential lands where the applied rate will be more constant over the entire site. The size of the site limits or enhances the use and market value of a site.

Per Acre -- Beyond the limits of the urban area, there will be those parcels that are so much larger that they will not respond well or at all to dwelling unit site value, a square-foot or front-foot unit measure. Where these larger parcels are the norm, the unit of measure can best be expressed as a value per acre. The adjustment factors might relate to agricultural benefits, such as soil fertility, distance to markets or water supply.

Per Front-Foot -- This method has been useful in the downtown portion of intensely developed cities where people pay a premium for exposure to customers. For those sites that are not identical to the standard site, it will be necessary to make appropriate adjustments for variations in width, depth and other attributes that differ from the standard site. The total departures from standard front-foot market can be expressed as an adjusted frontage. It is against this adjusted frontage that the adopted front-foot value will be applied.

There is a principle of commerce that commodities are cheaper by the dozen. By the same token it could be that frontage feet are cheaper per unit when the total exceeds the average, or standard width. A width table is a series of percentage adjustments greater or less than 1.0 needed to adjust the actual Market per Front-Foot of any site and equate it to the Front-Foot value of the adopted Standard Site.

 

Standardized Adjustments

A standardized method is the application of the comparative method to land markets under review. Adjustments are made for divergences from the standard site by the use of a specific set of rules. The most common examples are those used for distance and size. The methods were born out of the necessity to produce sound and impartial market estimates in a limited amount of time recognizing the accepted principles of valuation.

It is essential to use discretion and judgment and only treat standardized methods as guides. The use of formulas should be the result of local market analysis and testing. Sales are sought that are similar except for the one difference that is being analyzed. A value for this difference will result. The main virtue of the method is its administrative adaptability, permitting land values to be estimated on the basis of strict comparability. Mistakes become more easily detectable, particularly in cases of errors of judgment and mathematics.

Adjustments for Unique Features

After the base value has been estimated, the differences in individual sites must be considered. Some sites have unique advantages or disadvantages compared to other sites. Actual real estate values vary for each site and are dependent upon numerous individual features, qualities, characteristics and restrictions.

Adjustments will have to be made for differences between the standard site and every other site. The assessor will want to study the typical differences and make individual refinements. There may be reasons for an increase in value for characteristics which are better than the standard site. They would make a positive adjustment for desirable characteristics, such as superior location, view, topography, services or access.

There can also be reasons for loss of value for characteristics which are inferior to the standard site. They would make a negative adjustment for undesirable characteristics, such as poor location, longer distance to transportation, longer distance to the civic center, wet ground in the winter, over-abundance of rock or poor access.

Student assignment: Please go here: http://www.meritax.co.za/presentation.html and click on Mr. Merry Tax for an animated presentation covering several of the topics of this module, use rights courtesy of professional valuer Peter Meakin and his team of property assessors and land value experts.

Land Value Maps

The land values which have been calculated should be displayed on a land value map. This will allow the assessor to review his data and value conclusions. A field review will allow him or her to make further necessary adjustments for other variables observed in the review and finish the project. The assessor will find that when the results of the land value analysis are presented, and the major adjustment criteria utilized, the public can understand the logic of the assessments.

Transparency is of considerable importance when implementing land value capture. All information including how information is obtained should be posted on a website and the information can be presented in a number of ways, for example, graphs, charts, land value maps, topographical and aerial maps. A "Google Earth" approach would enable citizens to easily view each land parcel and then click to find out pertinent information such as zoning and other regulations, ownership, and assessed land value.

Johannesburg, RSA

Land Value Scape

Computer Estimated Land Values

There are many jurisdictions that have both prior market value estimates and some site data available on a computer. They may be capable of using this data as a basis for updating market estimates.

Many government agencies have already collected limited data about land on a computer system. By analyzing market trends, new land market estimates could be made with a single updating factor for each permitted land use within a neighborhood.

An entire country would be capable of annual reassessments, updated by computer data entries. A simple model used for computer calculation of land values for 1,000,000 land sites could be based upon a careful analysis of the sales of a sample of 12,000 sites. A local valuation committee of land experts could define the land use classes, neighborhood areas and market values for each standard site in the area. A Geographic Information System can be used to display land values, characteristics and statistical data. All of this can be posted on websites.

The advantages to using a computer assisted market update include the abilities to:

1. Facilitate frequent update of assessments ensuring equitable treatment of all property owners.
2. Eliminate arithmetic errors in land value calculations.
3. Improve the assessor's productivity in land value assessment.
4. Employ standardized assessment techniques that have proven to be effective.

The information in this section on Land Value Assessment was extracted from Estimating Land Values, by Ted Gwartney, MAI, Assessor, Greenwich, Connecticut, USA. The complete document can be found at:  Estimating Land Values

The spirit of our age, with the image of the earth as seen from space emblazoned in our mindscape, insists that the circle now be drawn to include all, each and every one of us, as equal claimants to the whole earth itself. This quantum leap worldview can and surely will be the basis for profound changes in institutions of governance, economics and law. The right to the earth itself as a right by birth is the most fundamental human right of all. Land Value Capture is nothing less than a vital key to effectively securing earth rights for each and every one. We hope you have enjoyed the Land Rights and Land Value Capture course and that the insight, knowledge and information you have acquired will be of assistance in your efforts to make the world a better place for everyone.

5: Appendix

Module Five

Appendix

(City
Name) Land Value Capture Endorsement Form


I/We support shifting taxes OFF of
wages, business, homes and other buildings and ONTO the accurately
assessed value of land sites in order to discourage land speculation
and property deterioration and to encourage quality affordable
housing and the renewal and revitalization of the City of (City
Name).

Circle One: Yes / No / Undecided


I/We recommend that the members of our organization
study possible effects of a shift to land value capture in (City
Name). Circle One: Yes / No / Undecided

I/We urge the
Mayor and City Council to fully study land value capture’s
potential impact on the economy of (City Name). Circle One: Yes
/ No / Undecided

Individual Endorsement


Name (print)
____________________________________________________________

Signature
_______________________________________________________________

Address
_____________________________________________ Zip
_______

Phone_____________________ Fax _________________ Email
__________________

City Council District Number or City
Council Member Name: _____________________

Organization /
Affiliation (for identification only)
________________________________

Organizational Endorsement


Authorizing Individual Name (print)
__________________________________________

Authorizing
Individual Signature
______________________________________

Authorizing Individual
Title ________________________________________________

Organization
___________________________________________________

Address_______________________________________________________
street
_____________________________________________________________
city
state
zip

Phone
__________________Fax ______________ E-mail ________________

City
Council District Number or City Council Member Name:
_____________________

Optional Contribution


Enclosed is $ ___________ to assist
in educational activities associated with this effort. Please
make checks payable to _________ and send to ___________. For any
questions call _____or _______ at

Phone:

www.
Thank you for your support!

Community
Land Trust (CLT) Lease Agreement Based on Land Rent

School of Living (SoL) has been leasing
land as a Community Land Trust for about 30 years. SoL has been
leasing land primarily but not exclusively to intentional
communities. The leases usually provided a discount to younger
intentional communities by a formula that increases the fee as more
members join with the goal of the CLT collecting 100% of the full
lease fee when the community has grown to its full complement of
members. The lessees own the improvements they make on
the land and the rent to the CLT does not increase when the lessees
make improvements. Lease fees do change as land values in the
surrounding area change.

A SoL CLT lease includes requirements
that the land be used for some public educational purposes as well as
ecological use restrictions. The educational use requirements
are not inherent to CLT philosophy in general but is included because
SOL is an educational organization. The ecological restrictions
are in recognition that future generations have a right to land that
has not been damaged by present generation and is common to most
CLTs. Another restriction commonly found in a SOL CLT lease is
that the land may not be used as collateral; philosophically we don’t
want to relate to the land as a commodity and practically it puts the
land in jeopardy.

In determining a proper lease fee
we take into account the restrictions in the lease and discount what
would be a fair market value for a long term lease without these
restrictions. We determined that 5% of market value is an
appropriate annual lease fee for a standard SoL lease. We
applied the principal that as land market value changed the lease fee
would also change.

Here is an example of such a lease fee
formula:

The annual rent for this land shall be
calculated according to the following formula and paid quarterly . .
. to the Lessor by the Lessee:

ANNUAL LAND RENT = T + (X)I or T + (V - Z)(5%)
whichever is greater

hereinafter known as the Rent Formula.

T equals the taxes assessed against The Land by any government or
government agency.

X is the annual Administrative Fee due to School of Living.
The beginning Administrative Fee is four hundred fifty dollars
($450.00). This amount shall be adjusted at the end of each
calendar year for inflation or deflation according to the current
Consumer Price Index for All Urban Areas "I" published by
the United States Department of Labor, using the calendar year 1999
as the base year.

"V" is the value of the land and shall be adjusted annually
to reflect changing land values as stated below. The parties
agree that the initial value of the land is $55,200.00. "V"
shall be composed of the initial cost of the Land multiplied by the
change (either + or -) in the Farm Real Estate Values (FREV) for
Amherst, Virginia. To calculate the average annual change in
the land value, the FREV increment shall be calculated by using the
FREV from the most recent 5-Year Census Reports that are ten years
apart, as compiled by the United States Department of Commerce,
Bureau of Census, Census of Agriculture, Geographic Area Series
Reports. This annual change in "V" is then used each
year until a new 5-Year Census Report is published. At no time
will "V" be less than zero.

Z is Land Principal Payments. Lessee may make payments to
Lessor over and above the minimum lease payments which lessee may
designate as Land Principal Payments, [Z]. "Z" shall
be the accumulated total of all such payments. Should such
payments be made, Lessee shall retain equity in the land in the
amount of Z and the right to transfer this lease for the value of Z
adjusted for inflation in the event this lease is terminated.

First note: The inclusion of the
"Z" factor was at the request of the lessee. There are
variations in each of the SoL leases because each lease is
negotiated. In this lease fee the lessee pays taxes plus 5% of
the current value of the land, no modifications for fewer residents
or more residents.

In each of the leases there is an
administrative fee component so that SoL will always have funds
generated from lease fees with which to fulfill its minimum
administrative requirements as lessor. The lease fee formula
just cited has the administrative fee increasing by the CPIU so the
"x factor" will be in constant dollars. The leases are
intended to continue in perpetuity and who knows what the purchasing
power of $500 this year will be worth in 100 or 200 years thus the
inflation index. But in this formula we do not use the CPI
inflation index to determine the change in the land value component
of the lease fee: rather it is based just on 5% of whatever the
current fair market value of the land is, regardless of changes in
the CPI. That’s why I suggest this formula is better
reflection of our principals.

Also this formula allows for the lessee
to reduce the annual lease fee by making voluntary "principal
payments". So if the land had a fair market value of
$60,000.00 this year and the lessee had paid SOL $60,000.00 in
"principal payments" there would be no annual lease fee due
except the "x-factor" adjusted for inflation, until the land
value rose above $60,000.00 at which point the lessee pays 5% of that
additional value per year once that amount exceeds the x-factor.
SOL then has $60,000 with which to buy additional land and lease that
out.

Here is our latest update on the basic
lease fee formula where SoL owns all the equity in the land. This
lease fee formulas assigns each individual member of the intentional
community his or her own "y-factor" which is based on a fixed
percentage of the value of the land at the time that person becomes a
resident and that component of the lease fee will not change during
that persons residency. And like a 30-year fixed mortgage it
gets eliminated from the lease fee after that person has been a
resident for 30 years. Taking a long view look at this lease
formula SOL still receives 100% of the increased land value over a
period of time since there will be successive 100% turnover of
residents.

Here is an example of this new formula
used at Heathcote Center:

The annual rent shall be calculated
according to the following formula and shall be paid quarterly by the
Lessee to the Lessor:

[(X)(K)+Yт] (U)

is hereinafter referred to and known as
"the Rent Formula." In the above formula:

X equals Six Hundred Seventy-Five
Dollars ($675.00).

Yт equals the sum total of the Y
factors.

(2) Definition
of Y factor: Each person of majority age living on the Land during
the preceding year for a period of ninety (90) days or longer shall
be assigned an individual Y factor, the amount of which shall be
fixed for that individual’s term of residency and shall be one
six-hundredths (1/600) of the Value of the Land for the year in which
he or she first became a resident.

The Value of the Land … shall be the
tax assessment value determined by the State Department of
Assessments and Taxation of Maryland for the year in which the
individual first became a resident of the Land…

(3) It is
agreed that the Y amount for each of the 12 residents of the Land at
the signing of this Lease shall be Two Hundred Seventy-Five Dollars
($275.00). It is further agreed that, if any individual resides
on the Land for 30 years, then that individual’s Y factor shall be
reduced to zero dollars ($0.00). … The 30 years of residency need
not be continuous, but only years of actual residency shall be
counted, not years of absence. If an individual returns after
being absent from the Land for 5 years or more, that individual’s Y
amount shall be recalculated for the value of a Y as if the
individual were new to the Land, for the remaining portion of the 30
years.

The parties agree that the sole purpose
of assigning individuals a specific Y factor is for the purpose of
determining the total amount of annual rent that the Lessee,
Heathcote Center, Inc., shall pay to the Lessor, School of Living,
and does not in any way create a contract between that individual and
either School of Living or Heathcote Center, Inc.

(4) U equals
the use factor applied to the Land for alternative uses of the Land.
It is agreed that the use factor for this Land with the uses as
enumerated in paragraph 6 below, shall be one (1). If the
Lessee ever desires to use the Land for purposes other than those
enumerated in paragraph 6 below, a new use factor shall be negotiated
between the Lessee and the Lessor.

(5) K equals the
inflationary or deflationary factor and shall be the change (either +
or -) in the Consumer Price Index for All Urban Areas (CPI-U),
non-seasonally adjusted, 12 month percent change December to December
published by the United States Department of Labor. The
percentage is used to increase or decrease the previous year’s K
factor by multiplying the previous year’s K factor by 1 + the
percentage change. The K factor until April 1, 2005 shall
be 1.000.

In the above model, the y-factor of
1/600ths was determined by the anticipated number of adult residents
being 20. Essentially, SoL would be collecting 3 1/3% of the value of
the land each year plus the administrative fee. Also, in the
above lease fee formula we use the County tax assessment to determine
land value. Maryland bases its tax assessments on 100% of FMV
and has periodic re-assessments every 3 years. We looked very
closely at their re-assessment process and believe its adequate for
our lease fee purposes. BTW, Heathcote benefits from a
preferential tax assessment for land enrolled in an agricultural use
program, and that lower value is passed through the lease.

EQUITY LEASES

In these lease models what usually
happens is that the intentional community (or individual or family)
already owns land and wants to put it in the SoL CLT and get a lease
back for the land. Since there are individuals
living on the land that have already paid for the land once (or in
some circumstances paying a mortgage that pre-existed the title
transfer to the CLT) the SoL philosophy is that those individuals
should not have to pay a second time by also paying a lease fee to
SOL, but as new people come onto the land then a lease fee would be
due SoL. In a full equity lease the lessee retains the value of
the land when it was put into the CLT and if that lessee wishes to
transfer their leasehold interest to another person they would be
entitled to get only their equity adjusted for inflation and SoL
would get any increase in land value. As in all leases the
improvements are owned by the lessee and is entitled to whatever
price they negotiate with the new lessee. SoL has had equity
leases both with individual families and intentional communities.
With intentional communities the same principals apply even though a
lease is not transferred by a pro-rata lease fee being due SoL when a
new member joins the group.

Here’s an example:

The rent for this land for the
period beginning with the signing of this lease shall be calculated
according to the following formula, and paid to the Lessor by the
Lessee:

ANNUAL RENT = T + X(K) + M

hereinafter known as the rent formula.
In the above formula:

T equals the taxes assessed against The
Land by any government or government agency. Such taxes may be
paid directly to the assessing agency by the Lessee and receipt
therefor promptly forwarded to the Lessor.

If the Lessee
does not make any tax payment when due, the Lessor may do so and add
that amount to future rent, including any penalties not the fault of
the Lessor.

M equals the mortgages currently
outstanding against The Land or any future mortgage on The Land
entered into under the provisions of section 9 ENCUMBRANCE.
Mortgage payments will be made by the Lessee directly to the
Mortgagee on a timely basis.

If the Lessee
does not make any mortgage payment when due, the Lessor may do so and
add that amount to future rent, including any penalties not the fault
of the Lessor.

X equals six hundred seventy-five
hundred dollars ($675.00) per annum and shall be paid quarterly on
the 1st day of November, February, May and August. The first
payment due on November 1, 2006 shall be one hundred sixty eight
dollars and seventy-five cents ($168.75).

K equals the inflationary or
deflationary factor and shall be calculated the first day of November
of each year. K shall be composed of the change (either + or -)
in the Consumer Price Index for All Urban Areas (CPII-U), Not
Seasonally Adjusted, 12 month percent change December to December,
published by the United States Department of Labor using 2006 as the
base year. The percentage is used to increase or decrease the
previous year’s K factor by multiplying the previous year’s K
factor by 1 + the percentage change. The K factor until
November 01, 2008 shall be 1.000.

EQUITY.

A. The Lessee shall have an equity in The Land of
Ninety-Seven Thousand Five Hundred dollars ($97,500.00) adjusted for
inflation or deflation by the Consumer Price Index (CPI-U), Not
Seasonally Adjusted, using November, 2006, as the base, minus any
amounts outstanding on taxes, mortgage(s), or delinquent payments to
Lessor.

The Lessee shall have the exclusive right to transfer equity and/or
use rights, subject to the terms of this Lease and more specifically
the following conditions:

Any transfer of The Land shall be done at a price as near as possible
to Fair Market Value as agreed to at the time by Lessee and Lessor.
Any sums obtained from the granting of the rights under this lease by
any manner whatsoever, in excess of the equity as above defined,
shall belong to the Lessor. In the event that Lessee should
decide to transfer equity at a price less than Fair Market Value the
difference between Fair Market Value and the price obtained shall be
deducted from Lessees equity and not from Lessor.

The Lessor shall be under no obligation to pay equity to the Lessee
from its own funds. Equity of the Lessee may be recovered by
the Lessee only through the assignment, transfer or sublease of this
lease.

B. When a new person becomes a member of the Lessee
[Community] … the Lessor shall be entitled to any increase value of
The Land above the equity value held by the Lessee, in proportion [to
the ownership percentage acquired]. ….

C. Should this lease cease to exist as a result of termination,
the Lessor shall use best efforts to re-lease The Land. In such
event, the new Lessee(s) shall pay to the Lessor the Fair Market
Value of The Land and the Lessor shall pay to the previous Lessee(s)
or their assigns, their equity value as defined in the first
paragraph of this section, minus any costs incurred.