Long Form Brochure: Land Rights and Land Value Capture
Land Rights and Land Value Capture - Long Form Brochure
Land Rights and Poverty
Land Value Capture: Equitable, Efficient, Sufficient
Land Value and Development
Financing Transit and Other Infrastructure
Improving Living Conditions of Slum Dwellers
How Would LVC Effect Other Vulnerable People?
Who Pays More, Who Less with LVC?
LVC and Rural Land
LVC and Gender
Climate Change Considerations
Land Conflict Resolution
The Components of a Land Value Capture System
Land Value Assessment
1. LAND RIGHTS AND POVERTY
1.1 The roots of poverty, slums and most social and economic injustice lie in the original dispossession of people from their land. No matter how advanced or complex an economic system might be, there is no escaping the fact that all tangible wealth originates in the raw material of land and natural resources.
1.2 Underpinning the massive wealth divide between the very rich and the rest of the people worldwide is the monopolization of land and the subsequent treatment of land as a market commodity for sale and speculation. When nature’s gifts are treated in this manner they yield an unearned income (land rent) for a few while land prices rise to the detriment of the many who must work longer and harder simply for a place to be. Lacking secure land tenure, millions live precarious lives with chronic fear of eviction and displacement.
1.3 World security is disturbed by struggles over territory and natural resources. Slumdwellers and landless people who organize for land rights are killed, beaten and jailed. Human rights pronouncements have yet to forcefully assert the equal right of all to the earth itself. These problems of land conflicts, resource wars and economic injustice cannot finally be solved until we recognize that the earth belongs to all and implement effective practical policies based on the equal claim of each to the earth as a birthright.
1.4 The mismanagement of the land and inequality in land tenure can result in subsequent economic failures, as happens too often with development efforts. If we want to correct our problems of the past and prevent failures in the future, we need to foster an approach to land tenure that fairly and efficiently rewards productive efforts, promotes affordable land access and prevents poor land management.
1.5 This brochure describes how “land value capture”, a key policy recommended in UN Habitat’s Action Agendas, addresses the land problem that lies at the root of the wealth divide. Land value capture is a fundamental synthesis of the best of “left” and “right”: a reconciliation of justice and efficiency in economic relations. As such, this approach to economic relations and public finance has the potential to build powerful political alliances to solve the problem of wealth inequality. The information herein is one component of the Global Land Tool Network’s program for land value capture.
2 LAND VALUE CAPTURE: EQUITABLE, EFFICIENT, SUFFICIENT
2.1 Recovering land value for the benefit of everyone provides a strong and sufficient source of public finance with little or no need to tax labor and productive endeavors. In most countries today, citizens groan under the weight of taxes on wages, property and commerce. People’s taxes increase with every effort they make to improve the quality of their lives. Land value capture, on the other hand, is unique in that it does not penalize those who work and produce.
2.2 Although sometimes presented as a “tax” for practical purposes, land value capture can be thought of as a user fee - a payment to society for the use of land whose value is determined in relation to the benefits conferred upon land by society as a whole. It is not an arbitrary levy upon the fruits of labor, as is the case with most taxes.
2.3 Since a thriving economy and better public services increase site values, land value capture is a self-financing alternative to oppressive taxation. The recovered land value can finance additional public goods and services while the private sector, freed from tax burdens on enterprise, is given full incentive to improve property and build decent, affordable housing that is needed nearly everywhere.
2.4 By encouraging efficient and appropriate use of land, land value capture eliminates the “leap-frog development” that characterizes urban sprawl and encourages a more integrated development pattern that puts all urban land to good use. Land value capture harnesses economic incentives in a number of ways that assist the goals of good urban planning.
2.5 The world’s resources, if used wisely, fairly and efficiently, will comfortably and sustainably support all people. A robustly applied system of land value capture discourages land hoarding and gives an orderly approach to land reform promoting affordable land access, thereby giving more people an opportunity to produce for themselves, ending the hunger and poverty incorrectly sometimes ascribed to overpopulation.
2.6 Adam Smith, in The Wealth of Nations, said that any “tax” should be a charge for services which benefit all people and are more efficiently performed by a single cooperative effort. He postulated four principles of taxation which any source of public revenue should meet:
- Light on the production of wealth and does not impede or reduce production.
- Cheap to collect, requiring few collectors, and easy to understand.
- Certain; cannot be avoided, little opportunity for corruption, and provides adequate revenue.
- Equitable and fair, payment for benefits received, impartial and just.
2.7 Land value capture is the only public revenue source that meets all of these criteria. It is the most equitable and fair as well as the most efficient method of raising revenue needed to fund public facilities and services. Justice requires that land values, which are created by society and nature, be made available for public needs. This is the responsibility of good government.
2.8 Other potential sources of public revenue that compliment the land value capture approach and harness incentives for efficient and equitable land and natural resource use, fair wealth distribution and/or environmental protection include:
- congestion charges and street parking
- water withdrawals from surface and underground sources
- taxing air and water pollution by levying "effluent charges"
- hydrocarbons and mineral extraction
- leases on public lands used for timber cutting, etc.
- mooring boats, wild fish catches
- aircraft landing slots and gates
- telecom relay sites, electromagnetic spectrum, geosynchronous orbit slots.
2.9 Most often, the taxable capacity of land is such that land value capture can yield more than local government needs to fulfill its basic responsibilities for the provisioning of basic services for all. In the more developed countries land rent represents more than 30% of gross annual production. For more information on this topic go to The Taxable Capacity of Land, The Taxable Surplus of Land: Measuring, Guarding and Gathering It, and Adequacy of Land as a Tax Base, both by Mason Gaffney which can be linked to online at: http://gltn.lvtproject.org/description.html
3 LAND VALUE AND DEVELOPMENT
3.1 Land value is generated by the community which resides upon it and any value gained by that land is generally due to the improvements and other activities made by the community as a whole, such as streets, sidewalks, waterworks, energy sources, schools, businesses, mass transit stops, police and fire protection, parks. Land value also increases due to proximity to other value-creating mechanisms in the area, such as a harbor or river transport. In other words, the value of a piece of land is created for the most part by its locational amenities. This is why otherwise identical houses can be worth more in one neighborhood and worth far less in another.
3.2a Although the personal contributions made by individuals can also improve (or damage) the value of an area of land, most increases in land value are the result of an increased demand for valuable land locations. This is why the value of highly developed land in the center of the city will almost always be worth more than less developed land on the edge, and why downtowns are usually full of businesses, tall buildings, large institutions, and apartments, and outlying neighborhoods are mainly homes, small shops, and more open spaces.
3.2b The most valuable land by far is city land. Ted Gwartney, a professional land valuer, has compiled data showing that well over half the value of city real estate is pure land value. In big, key cities, prices per unit of land go astonishingly high, dwarfing most other values by comparison. For example, at the height of the Japanese boom, in 1990, land prices in that great city rose so high that the appraised value of the land under the Imperial Palace in Tokyo was as great as all the land in California! At the same time, within California, most of the land value was in the cities, even though California is the premier farm state in the US.
3.3 Because of the nature of land and the origin of its value, land value should be taxed or “captured” by public authorities and used to finance further benefits, not absorbed and lost in the rising value and rent gains of individual properties.
3.4 Buildings and improvements, on the other hand, like the labor necessary to create them, are the rightful property of the people that spend the time and money to produce such things. Because the community as a whole had no productive part in the process, taxing these forms of private property is like confiscating personal wealth for the unfair use of others. If a property owner invests $10,000 into her house, the value of her house will rise, but then so will her taxes if building values are taxed. That increase in building value instead should remain with the owner, and not be taxed.
3.5 Thus the basis of public finance should reward productive efforts while unproductive activities such as land speculation, which contributes to boom and bust land prices, and land hoarding should be discouraged. By reducing and stabilizing land prices, land value capture also reduces the burden of interest payments that land buyers must assume when they borrow to purchase land. If owners of urban vacant land and run-down properties are unwilling or unable to utilize their land to its best potential and afford the to pay land-based taxes, then they shouldn't hold onto it. Land value capture nudges land into more productive hands that can build needed housing and start useful social and business enterprises which can further enhance public revenue.
3.6 An effective way to eliminate the problems of vacant properties, poor land use, land speculation, and the resulting blight is to shift city taxes (including municipal and school taxes, as well as sales, income or business taxes) to a land value only basis. By taxing the value of land as opposed to the buildings there will be multiple benefits. There will be a more than sufficient base of public finance to pay for infrastructure and public services, incentives for major building improvements by the private sector, an end to poor land use, increases in employment and business activity, rapid economic recovery, and the prevention of having land used as a speculative commodity. Though some might think this "sounds too good to be true", hundreds of empirical studies support these claims.
3.7 With increased public funds, a city can invest in more quality services and infrastructure which leads to further tax base gains. Because better government services and infrastructure increase the value of land, a land value capture system of public finance ensures that this increased value will be recovered as tax revenue for social benefit instead of being capitalized and absorbed by private land owners.
3.8 Combined with reductions in taxes on all housing units, other buildings, and productive commercial activities, land value capture stimulates economic development up to the limits allowable by zoning and other land use regulations. Building renovations and new construction is encouraged while rewarding compact, vertical, and otherwise efficient use of land. Instead of vacant lots and ground-level parking, urban areas will experience “infill development” and retain jobs and residents. Valuable downtown land will be well-utilized and improvements will be made to homes and businesses in neighborhoods.
3.9 Growth then radiates smoothly from more intensive use in the urban centers to rural areas without pockets of vacant or poorly utilized land in between. Urban sprawl is curtailed and rural land is more readily retained in its natural state, available for parks and nature preserves. There is also less pressure to build on agricultural land near urban areas. Rational and balanced development which curbs sprawl thus also makes better use of existing infrastructure of transportation, utilities, fire and police protection and other public services. All of these factors increase social cohesion and form the basis for an interesting, safe, “walkable” city.
3.10a Land for safe parks and green spaces in downtown areas is facilitated in at three least ways with land value capture:
- Land is more affordable for public purchase for public spaces because of the elimination of the land price bubble due to land hoarding, under-utilization, and speculation;
- Because parks and green spaces are desirable public goods, living close to them enhances land values in their vicinity, thus bringing more revenue into the public coffer; and
- Capturing full land rent yields a strong base of public revenue to fund upkeep and protective services for parks and green spaces.
3.10b Land rent is the price paid annually for the exclusive right (a monopoly) to use a particular parcel of land at a specific location. People receive wages for work, capital receives interest for investment, and land receives rent for the exclusive use of a location. Equity and efficiency require that the local general public, whose labor and activities altogether create land value, should receive the land rent in exchange for legally exclusive private use of land sites. Land value capture is the mechanism for enabling this approach to raising public revenue.
3.11 Equality of opportunity to be productive can only be accomplished by recovering all of the socially created land rent and ensuring that all people benefit from its value. The community should use what is needed for public services and improvements such as schools, hospitals, parks, police, roadways, utilities and defense -- and reserve a fund for emergencies.
3.12 If the value of land rent exceeds the community's needs for public services a method of dispensing of the surplus revenue can easily be found. One approach is to divide the surplus at the end of each fiscal year and then to distribute an equal portion to each citizen in that community. This is similar to the method used in Alaska where all citizens receive annual payments from the state’s oil rent investment fund – a significant source of added income and a practical way of fulfilling the equal right to resource rent. Many countries were started on the premise of using land rent to fund public services. Unfortunately, many countries now suffer economic loss because they no longer collect the rent of land for public benefit and instead levy taxes on productive activities.
3.13 Land value capture is the most fair, neutral, and stable source of public finance, as well as the most effective way to balance government budgets. Taxes on businesses, sales, labor, tourism, people, and other sources only serve to drive these critical foundations of the tax base out of town. Many of these taxes and their rates are arbitrary and regressive, meaning that they are less likely to be based on the "ability to pay" rule of taxation, which can leads to tax policy becoming highly politicized.
3.14 A number of cities in the state of Pennsylvania in the US have shifted their local property tax base towards land value capture to varying degrees during the past thirty years. The Center for the Study of Economics has collected 237 empirical studies of these cities, each with positive results. Here are some of the findings:
- 45 studies showed that the municipalities adopting land value capture saw a spurt in new construction and renovations. Six of the 18 cities studied experienced a 97% increase within three years.
- 63 studies showed that these municipalities outperformed their neighboring communities in such redevelopment. For example, in the three years after adopting just the first stage shift towards land value capture, Allentown experienced a 32% growth (in dollar value) of construction and restoration activity which was 1.8 times more than Bethlehem, a nearby city of similar size which had received substantial federal grants in the same time period but did not implement land value capture.
- 83 studies determined that most voters paid less during the revenue neutral shift from taxation of buildings to land value based public revenue.
- Since the city of Pittsburgh reverted to broad-based taxation in 2001, the city experienced a 19.57% decline in construction and renovation, a 54% increase in the number of property owners paying higher taxes, and a significant increase in overall space-rent for non-landowners.
3.15 The reason Pittsburgh took these steps backwards is because newly elected public officials and the private assessment company they hired did not understand the effects of a property tax shifted towards land value capture during a period of property reassessment. The learning from this experience is that ongoing professional training of public officials and tax administrators as well as citizen education about this approach to public finance is essential.
3.16 For further reading: The Taxable Surplus of Land: Measuring, Guarding and Gathering It, The Role of Ground Rent in Urban Decay and Renewal, and Red-Light, Green-Light Taxes, all by Mason Gaffney; Development and Derelect Land by Nicolaus Tideman. The Pennsylvania study and other research on the implementation of this policy can be found at the Center for the Study of Economics website at: www.urbantools.org
A SWOT (strengths, weaknesses, opportunities, threats) analysis of the cities in Pennsylvania which are partially implementing land value capture can be found here along with several SWOTs from other countries: http://course.earthrights.net/node/89
4 FINANCING TRANSIT AND OTHER INFRASTRUCTURE
4.1 There have been dozens of studies showing that public transportation increases the value of land. A review of 96 reports on the subject (Smith, Jeffrey J. and Thomas A. Gihring, Financing Transit Systems Through Value Capture: An Annotated Bibliography)
- Dallas, Texas, USA real estate near light rail lines is worth 25% more than similar real estate elsewhere. When site values around Houston were falling, the drop was less near bus stops than elsewhere.
- In Toronto, Canada, assessed value near subway stations increased 45% (downtown) to 107% (suburbs) compared to 25% elsewhere.
- In Newcastle, U.K., house prices are 20% higher near rail stations.
- In Helsinki, Finland, property located within walking distance of railway or metro stations increased 7.5% over other locations.
- Washington’s Metro, which cost $9.5 billion to construct, generated $10 - $15 billion in increased land value.
- Homes near Portland, Oregon’s light rail stations are typically worth 10% more than elsewhere, despite being at higher density.
- Atlanta and Washington real estate developments around transit stations command a premium of $3 to $4 per square foot. Apartment rents in Washington area decrease by about 2 ½ % for every 1/10-mile distance from a Metro station.
- In London, the Jubilee rapid transit extension cost #3.5 billion and raised the annual rental value of land around it by #1.3 billion.
- In Santa Clara County, California commercial parcels are valued about 23% higher if near a light-rail stop. Around the Pleasant Hill rapid transit station in California, average home prices decline $1578 for every 100 feet distance from the station. In Queens, New York, the decline was $2300 per 100 feet.
- Land for office use, within ¼ mile of San Francisco BART stations, is valued at $74/square foot, compared to $30/square foot for land more than ½ mile away.
4.2 Similar to transit investment, all other infrastructure installations and improvements significantly increase the value of land by substantial amounts. The millions of dollars spent by a city to enhance the quality of life for its citizens should return to the city (i.e. the whole community), not to private site holders. Land value capture does this, correcting the misallocation of investment value and providing a wide range of additional benefits impossible through other forms of taxation.
4.3 If a government needs funds to finance infrastructure or is running a budget deficit, it can tap into the full value of its investment in the land by taxing it at a larger rate instead of going into further debt, floating bonds or cutting vital public functions. Since government budgets are generally a small fraction of the total amount of taxable annual value of land in a community, taxing land at a higher rate is the "smartest" way to balance the budget without damaging economic growth.
4.4 Land value capture is also the most fair and often beneficial tax for taxpayers. Shifting property taxes by increasing rates on regressive taxes like the sales, income, and per-capita taxes provides no relief at all, as the cost of the tax increases are easily passed back to the taxpayer through higher prices for goods and services, rent hikes, reduce investments, and lower wages, especially for those we need to help most: seniors, the poor, the disabled, and other low- or fixed-income citizens.
4.5 Plus, by pressuring owners to manage their land effectively, this policy harnesses private incentives to eliminate the damage done in every corner of the city by blight and land speculation.
5 IMPROVING LIVING CONDITIONS OF SLUM DWELLERS
5.1 Slum dwellers have migrated to urban areas either because land conflicts and appropriations have forced them off their rural lands and/or in the hope of finding employment. Their informal settlements have insecure land tenure, very poor quality housing and little or no water, sanitation, transportation and other public services. Many slum dwellers also experience food insecurity and health problems. Yet most slum dwellers are able and willing to work and actively seek wage employment or self employment.
5.2 How could application of a full and robust land value capture system of public finance improve the lives of slum dwellers? Assuming that such a system is gradually but steadily implemented in stages during a five to ten year period, we can expect that:
- The city would have a significant source of revenue without having to tax wage income or productive activities, so slum dwellers who find employment would bare no tax burden on their productive activities, thus increasing their purchasing capacity. Market forces would be harnessed for real wealth production, not for land speculation and real estate investment and profiteering.
- Slum dwellers who run small business enterprises would likewise have no pressure to pay taxes from their earnings. There would be no complaints that they were operating in “the gray economy.” Their efforts would more readily be considered as legitimate and socially acceptable.
- Economic incentives harnessed by land value capture would put “infill development” pressure on underutilized or vacant land sites, thus enhancing economic development and the potential for jobs and housing for slum dwellers.
- The necessity for clear and transparent land tenure records in order to implement land value capture would reveal who is making what claims to the land that slum dwellers inhabit. Thus it will be a matter of public record who is currently collecting land rent from slum dwellers and how much they are taking as private appropriation of these funds which should in fact be captured for public benefit of slum communities.
- As a slum is a highly concentrated population per any given land area, and as slums are usually located in less desirable and therefore on lower cost land than land elsewhere in the city, an accurate assessment of the value of the land of slums and the apportionment of the land value capture fee to be paid will be significantly less per individual or family than in other areas of the city.
- The recorded payment of the land value capture fee by those using any particular land area of the slum will confer rights to continue to use that land area, thus helping to settle land disputes and security tenure for land users.
- Absentee landlords who claim title to slum lands will have to pay their fair share of land rent into the public fund. If they do not then their security of land title will be at risk
- Those who own buildings and useful structures in slum areas will not need to pay taxes on any of the improvements they make to their current buildings or to any new ones. Slum dwellers who own land or who can effectively claim secure use rights via payment of the land value capture fee to local authorities, would be encouraged to make improvements to their dwellings. Absentees, now unable to profit from the private capture of land rent, will also now have an incentive to make building improvements and hire slum dwellers to do so. Employed slum dwellers will be better able to afford improved housing. Or absentees might decide to simply abandon their land claims, or put their land up for sale at a price affordable to slum dwellers.
- Other areas of the city will be improving as well due to the elimination of land speculation and land price inflation combined with the elimination of taxes on wealth creation. As land prices stabilize or even decrease, residents will have more savings to invest in further improvements, again with the possibility of more jobs for slum dwellers and more affordable housing being built which can give slum dwellers the opportunity to move out of the slums.
- As land price decrease or stabilize, slum dwellers who might choose to pool their savings, as some are already doing in Nairobi and elsewhere, can more readily afford to buy land on which to form new communities and build new dwellings.
- As increasingly affordable land becomes available due to the pressure against land hoarding exerted by the land value capture policy, some former slum dwellers, gaining access to land in outlying areas, would no doubt start growing food to bring to market, thus further building a local based economy.
- In addition to these private incentives for improvements to be made by slum dwellers and other residents of the city, the land value capture system will have created a substantial amount of public funds which can be utilized for public benefit. All accounting of funds received via land value capture would be by law a matter of public record readily accessible to all.
- With knowledge of their fair share of the public funds, slum dwellers and their allies would be politically empowered to insist that the money generated from land value capture be used to meet their basic human need for clean water and sanitation, public transportation, health services and education.
- These public services, combined with the steady decongestion of the slum areas as former slum dwellers found opportunities for employment and livelihoods elsewhere, would improve the quality of life and health for slum dwellers.
- As living conditions and public services improve throughout the city, land values might again begin to increase. Public authorities would need to capture the full land rent and utilize these funds for public benefit.
- It is conceivable that a city after a few years of land value capture in place could reach the stage of harmonious and balanced growth and development. Public authorities in consultation with the citizenry might then decide to distribute a portion of land rent back as direct “citizen dividend” payments, yet another beneficial result of a public finance policy based on the human right to land rent, the “social surplus.”
5.3 To secure land tenure for slum dwellers or squatters in informal settlements, land boundaries should be clearly demarcated, use rights for specific parcels clearly established, and land values accurately assessed. These lands might best be legalized as leaseholds at least for a period of time because land values escalate immediately, often substantially, once legal land tenure is established. After such tenure is granted and titles secured for individuals on specific private parcels, poor people sometimes sell their parcels for immediate (but one-time only) cash benefit. In many cases such landless people sink into poverty again.
5.4 With land value capture applied to leased land, use rights for occupants are secured, conditional only upon payment of a land lease fee. This could be quite low at first, a kind of subsidy, rising as the occupant’s economic condition rises. With a lease system, poor people do not need to purchase land for housing and thus do not need to pay compound interest on mortgage costs of land. They need borrow funds only, if needed, for the cost of the dwelling itself.
5.5 Similarly, with a landlease system, the private sector construction industry, when building multi-level apartment units, for instance, need not carry land mortgages for land purchase. Thus they can put more capital directly into increasing the supply of decent, affordable housing.
5.6 Additionally, municipalities with a strong established land value capture system can use some of these funds to establish zero- or low-interest revolving home loan funds for poor and low-income people.
5.7 Here are three FAQs:
5.8 Question: Won’t the land value fee get passed on to poor tenants?
Answer: Land value capture, instead of enabling the holder of land to charge that much more for his land, gives him no power to charge an additional penny. On the contrary, by making it more costly to hold land idle, it tends to increase the amount of land which owners must strive to secure tenants or purchasers for. Thus the effect of a tax on Land Values is not to increase the rent that the tenant must pay the owner for the use of the land, but rather to reduce it. And since the tax must be paid out of what the land will yield the owner, its effect would be to reduce the price for which the land could be sold outright. (To read a compilation of 11 economists’ views on this issue go to A Tax on Land Value is Not Passed On to the Tenant, a compilation of quotes from 11 economists on the subject compiled by Bryan Kavanaugh at: www.wealthandwant.com/HG/why_the_landowner_cannot_shift.html)
5.9 Question: What if a person living in on slum land has no capacity whatsoever to pay their apportioned land value capture payment fee because they have no source of cash income or need what little they have to buy food? Would they be evicted?
Answer: Slum dwellers should have the legal option to contribute a certain number of hours of his/her labor for the benefit of the community equal to what they would pay in cash as their land value capture fee. Grassroots community leaders could well decide where such labor could be best directed.
5.10 Question: But what if the person is too weak or sick to work?
Answer: With improving living conditions overall, one or a combination of these possibilities can help such a person: 1. family members of the weak or sick person will have increased capacity to care for them; 2. some of the people contributing labor in lieu of cash payments for their land value capture fee could take care of people needing assistance; 3. the stronger basis of public finance can fund social services for people in need; and 4. assistance from private charities can be more readily available for those truly in need of help when those who can help themselves have found opportunities to do so.
6 HOW WOULD LVC EFFECT OTHER VULNERABLE PEOPLE?
6.1 When new policies such as a land value capture are introduced to a community some people understandably express concern about any potential negative effects of such a major change, especially for the most vulnerable people such as seniors, the unemployed, and low- or fixed-income residents. If an older owner lives on highly-valued land, will they be forced from their home if they cannot afford the higher taxes? Will land value capture pressure landlords to sell off rental properties or raise rents if the building is on extremely valuable land?
6.2 Beyond the many positive market dynamics that make the LVT a highly progressive tax, the government can further protect vulnerable citizens' rights to affordable housing by enacting, if deemed necessary, additional policies to protect against displacement.
6.3 Here are four examples:
6.4 1. Allow deferment with interest. Land value capture should be viewed as a charge on the land. In other words, even if the land is transferred the new owner is liable. New owners will most likely insist on the land value fee being paid prior to finalisation of the transfer. Payment of outstanding tax can also be enforced before transfer can be registered. Therefore while the revenue is deferred there is no risk of loss. Low rates of interest can be applied on the basis of income, age or disability.
6.5 Deferment leaves the economic incentive to move to land that is more affordable without forcing it. It allows the old to stay in the famly home until they move on, one way or another, and the land value fee would then be paid when the home is sold or inherited. Deferment with interest does add complexity but (a) it is not difficult for a computer to calculate interest on a balance, (b) few are likely to choose to defer according to actual experience with this option, and (c) over time the need to defer the land value payment should diminish because the policy encourages a fairer distribution of wealth overall. Eventually it can be anticipated that only impoverished elderly homeowners or people who have become temporarily or chronically disabled will need to take advantage of this choice.
6.6 While public revenue may be decreased slightly with a deferment allowance, the secured land value tax debt is an asset held by the government that will be realised later.
6.7 2. Citizen’s dividend. A citizen’s dividend is a direct cash payment in equal amount to all citizens. Careful studies (Land Values Research Group, Australia, et.al.) of the amount of land rent that can be captured in a developed economy indicate that the figure is as high as one-third of GDP. Over time a robust system of land value capture will yield substantial funds out of which a dividend can be paid on a regular basis.
6.8 A citizen’s dividend treats tenants and landowners alike regardless of income or wealth. Of course, those holding more or better located land than others will pay more into the system than they would receive in their dividend. A citizen’s dividend guarantees a base income that will in some cases be a substantial addition to earned income and can be used to help pay housing rent or the land value capture fee but also leaves the citizen free to make their own economic choices, to invest in capital or in consumer items.
6.9 3. Homeowner’s exemption. In most areas of the world most homeowners would pay less to the government under a land value capture system then they do when both buildings and land are taxed. In this regard land value capture is politically acceptable to a substantial number of voters. Some studies have shown (state of Maryland, USA) that by exempting a certain amount or percentage of land value on the homeowner’s primary residence that nearly all homeowners would pay less than they do with buildings plus land value taxes.
6.10 The downside of this approach is that it favors home owners (who already have an advantage in most cases) over renters, it requires a larger bureaucracy and thus is more complex to administer, and it may open the door to other exemptions that could potentially distort or decrease the fairness and effectiveness of a land value capture system.
6.11 The problem of favoring homeowners over renters can be solved by giving a land value credit of a certain cash amount to renters, too. They would pass it on to their landlords, who are thus incentivised to allocate more land to rental housing. Normally the more rental housing that becomes available, the more affordable is the rent, so this can be a win-win approach.
6.12 4. One more method to make certain that land value capture does not displace poor people is to permit all or a portion of the land rent to be paid in the form of voluntary service which would be directed by community organizers and/or by registered non-governmental organizations.
6.13 It is important to understand that even by itself, land value capture lowers housing costs by encouraging increased supply and tempering land price inflation. This is true for both single family homes and space-rent in apartment buildings.
7 WHO PAYS MORE, WHO PAYS LESS WITH LAND VALUE CAPTURE?
7.1 Owners of abandoned, boarded up buildings, vacant lots, and structures not well-suited to highly valuable locations (such as a single story building in the heart of downtown) would most likely pay more under a land value capture system. They would thereby be encouraged to make improvements to their property or sell their land to someone who is willing and able to do so.
7.2 Properties with buildings suitable to their location values would be rewarded for their responsible and productive use of land. Owners that maintain, renovate, or even rebuild their properties will no longer be penalized for such improvements. The tax savings should encourage them to add even more value to their properties. These homes, businesses, and other properties have remained the faithful bedrock of the city's neighborhoods and economy, so supporting and expanding this core will be essential to improving the overall economy of the city.
7.3 Lifting the tax burden that these property holders have had to bear should help to raise their spirits, giving them a renewed sense of hope and a reason to reengage and reinvest in the city's future. By adopting land value capture form of public finance, the city will be well on its way to restoring high levels of home ownership, stable neighborhoods, and a large middle-class population.
7.4 Compare this approach with a city which has received an infusion of funds from an outside source, either from the national government or private investors, and does not capture land value. Knowing that such funds would be utilized to finance infrastructure or other improvements and that land values would thus be on the upswing, owners of the under-utilized land sites would likely hold onto them in order to speculate with the certainty that their sites will be worth more in the near future. Their behavior would be that of “rent-seeking” rather than becoming productive citizens.
7.5 The harnessing of incentives for economic betterment is another positive benefit of the land value capture system of public finance. If we want to have a land tenure system that efficiently rewards good and prevents bad and ugly land management then we need to end flawed tax systems that inadvertently yield blight, slums, poverty, and crime and apply a proven approach to building a city where everyone can have a good life.
8 LAND VALUE CAPTURE AND RURAL LAND
8.1 Worldwide concentration in land ownership has proceeded at an alarming pace for the past several decades. It is essential to now fundamentally reform our systems of land tenure and public finance in such a way that rewards productive labor rather than land speculation, efficiencies of scale and careful stewardship rather than impersonal big farm consolidations. Land value capture:
- Discourages speculation in land
- Reduces the price of land to equate with its value for production
- Enables new entrants to more easily obtain land
- Limits farm sizes to those of the most productive units
- Enables the reduction of taxation on earnings and capital
- Reduces interest rates as land became more affordable
- Prevents rural depopulation
- Discourages urban sprawl on farm land
- Encourages owner-occupation rather than absentee ownership
- Promotes more responsible use of land.
8.2 The combination of these ten benefits of land value capture can support the flourishing of ecological villages and farming communities in rural areas bringing forward an inspiring, hopeful, sustainable new way of living for millions of people around the world.
8.3 Land privatization is not necessary to implement land value capture policy, which accommodates a variety of forms of land tenure. Tribal, clan, and extended family land bases can remain intact with a land value capture system, by constituting communal lands as types of leaseholds. People in rural areas and on communal lands can choose whether or not to remit funds to central land value capture authorities, depending on whether or not the community determines itself to be well served by that authority.
8.4 For example, if it is a question of whether to pave a section of road leading to a village, the villagers themselves might decide whether or not to remit funds for the job, after the central authority [in essence] bids to do the job. But they might determine that they could do the job with their own labor and capital, perhaps with a different type of paving material from that chosen by the central authority. They would have that choice, through their own village governance, bolstered by land value capture funding. Villages would, in essence, have decentralized, democratic decision-making power over what to do with their own resources, both labor and capital.
8.5 Similarly, if a village wants electric power, it could decide to buy into a grid system where power is generated from a distance, or find it more advantageous to establish its own utility systems, using wind, solar, or micro-hydro power appropriate to its own needs and local energy generation capacity. If a locality determines it needs improved infrastructure for example, it could freely choose to 1) capture value from its own communities and submit these funds to central authorities; 2) confederate with nearby communities for this purpose; or 3) provide such infrastructure using its own local capacity.
8.6 Overall, decisions on collecting and using land value capture funds can be made in a much more decentralized fashion, by all municipal levels, village, town, or city.
9 LAND VALUE CAPTURE AND GENDER
9.1 Land value capture is strategically important for the political, economic and social empowerment of women.
9.2 There are enormous historical and present day gender disparities in land tenure worldwide. The largest and most valuable individual and corporate landholdings are predominantly owned and controlled by men. Public funds generated by land value capture would come primarily from these lands.
9.3 For women wanting to buy homes, land would inevitably be cheaper as those holding land for speculation sell. Sprawl and the premature development of rural lands would be diminished and so land prices in these areas would not inflate as is often the case under current economic structures. Lands that could be utilized by women growing produce or joining together in various economically productive ventures would thus be located closer to urban markets.
9.4 The work of women that is not commodified or measured in cash payments makes a considerable contribution to families, extended families, and society in general. Intact, communal land tenure systems, still existent in some regions of the world, often better support contributions of women who, sharing a common and contiguous land base, can better organize for cooperative endeavors. Extreme land privatization, with individual small lots suitable only for nuclear families, weakens and breaks the bonds of extended family and community.
9.5 Because of their role in child rearing and their important roles in community relationships, women are often more tied to place than men. Secure land tenure, affordable land access, and a fair, transparent, orderly system of finance–all promoted by land value capture policy–strengthen women’s power and voices in deciding political and economic policies.
9.6 When economic opportunities are strong elsewhere, as in rapidly developing urban areas, women should of course be free to choose to migrate to such areas. But where wages and opportunities for secure livelihood diminish in the urban or wage economy, women and their families should always have access to rural land for subsistence agriculture and shelter.
9.7 If, however, rural land has been enclosed as exclusive private property, the safety valve of secure tenure - the “right of return” – to land is no longer an option. Women and their families then become vulnerable to the entrapment of wage slavery, prostitution and beggary. Poorer women can take a stronger stance against labor exploitation when they have the safety valve
9.8 The equitable land rights promoted by land value capture furthers a transparent land tenure system that is not mediated by male roles. The exception would be where traditional male dominant tenure systems might endure even with a land value capture policy in place. In such circumstances it is important to have women included equally with men in deciding how land value capture funds are allocated. Women would then be empowered to choose to direct these funds in ways that would make improvements that would be most helpful to women.
9.9 For instance, women might choose to fund child care centers and schools rather than sports stadiums. If they did choose to fund sports stadiums they might insist that women’s teams have equal access to the field.
9.10 Women should become knowledgeable about land value capture in order to secure full economic and human rights to land via:
- Free access to the specifics of legal documents enabling the implementation of the land value capture system of public finance.
- Free access to land maps (cadastres) and land value assessments available in government offices and posted on public websites.
- Functional and effective land dispute arbitration in order to determine fair rights of use to specific land parcels as well as accurate land value assessments.
- Transparency, accuracy, and efficiency of public authorities entrusted with the implementation of land value capture.
- Participatory decision making in the distribution and allocation of public funds.
10 CLIMATE CHANGE CONSIDERATIONS
10.1 The state of the earth now requires that the costs of industrial production and human commercial activity no longer be externalized onto the local to global commons.
10.2 The policy of charging fees for use of land sites as discussed in this document can be extended to include other natural resources in the form of “green” taxes. To mitigate emissions into air, water and soil, fees can be imposed according to intensity of use. Here are some ways that land value capture can help address global warming and climate change:
- Tax pollution - Governments should directly levy carbon and other pollution charges and use these funds to develop renewable energy systems and to launch campaigns to “buy and invest in clean and green” technologies and products.
- Decrease wage taxes - Because energy taxes can be regressive, combine them with tax decreases on wage incomes or ideally, eliminate wage taxes altogether.
- Reduce or ideally eliminate taxes on buildings - This along with full land value capture will encourage infill development and more compact cities that make energy efficient use of public transportation and infrastructure while discouraging wasteful sprawl development patterns.
- Curb profiteering and speculation in land and natural resources – When investment of funds in these non-productive activities is discouraged via land value capture more funds are available for investing in new "green energy" technologies and environmentally sensitive design and production.
- Encourage more labor intensive, organic agriculture, rather than oil intensive giant agribusiness. - Land value capture will help keep land affordable for small farm agriculture and better reward farmers for their labor when their tax burden is decreased or eliminated. This form of agriculture also encourages healthy communities and decentralized, local based economies, decreasing the necessity for people to drive long distances to work or for food to be transported long distances to markets.
10.3 Ecological economics research and date indicate that true cost pricing of natural resource use and capturing that cost via ecotaxes and resource rental charges would be sufficient to eliminate taxes on labour and productive, sustainable capital.
Further reading: Sharing Our Common Heritage: Resource Taxes and Green Dividends at www.jamesrobertson.com/book/sharingourcommonheritage.pdf, Financing Local to Global Public Goods: An Integrated Green Tax Shift Perspective by Alanna Hartzok, and LVT - The Overlooked but Vital Eco-Tax by Karl Williams at www.cooperativeindividualism.org/williams_lvt_overlooked_ecotax.html.
LAND CONFLICT RESOLUTION
A similar pattern exists for conflicts around the planet: the economic prize of land and natural resource wealth and power-seeking to get that prize. Land value capture can work to directly address issues of territorial conflict. The key to peace is to equitably distribute the land rent throughout the area in dispute.
Those pursuing non-violent solutions to land conflicts would initiate information gathering to determine the approximate amount of land and resource rent that could be captured from the territory experiencing land conflicts. They would publicly and transparently post this information in the form of land and land value maps.
They then would consult with people living in the areas of conflict to solicit their ideas on how the land rent when captured for public use could be utilized. In this way those in the conflict zone would be encouraged to imagine a peaceful settlement to the conflict and a way forward to a future where all can attain their basic human needs.
The peacemakers would next put forth a proposal to establish a Land Rent Authority to administer annual land value assessments and the collection and distribution of land rent for the benefit of everyone. In places where there is no functioning land market from which to determine land values, the amount of land rent to be paid in order to secure title to specific disputed land parcels could be determined by land auctions, with those willing and able to pay the highest amount of land rent into the public fund receiving land title.
The Land Rent Authority once operative would also have the capacity to enforce the land value capture policy, at least until other functional structures of democratic governance are put in place. The Land Rent Authority thus would be a key to an overall peace plan for the area experiencing land conflicts.
Peacemakers would present this plan to establish a Land Rent Authority as a way to secure equitable land rights and fundamental economic justice for every person who wants to reside within the territory under dispute. The next step would be a time period dedicated to broadening the popular basis of support and endorsement for the plan, the goal being legitimization and approval of the proposal by as many people as possible.
After a substantial number of people have endorsed the proposal, the Land Rent Authority would be formally established and begin its work. The land of those who cooperate with the plan and willingly pay their fairly assessed land rent fee would be considered rightful title holders and the Land Rent Authority would protect and enforce their title rights.
Those refusing to pay their fairly assessed land rent fee, who in essence want to continue with their private land enclosure without fairly paying to the community their fair share for the rights to this privilege, would risk losing their land to those who are willing to compensate the community for private enclosure. In other words, there would be no basis for the Land Rent Authority to pay for and enforce title protection to lands unless the land rent has been paid into the common fund. In this way fairness in land rights would become a force of law.
It is important to understand that this approach to land conflict resolution is contained within a framework of "just law and order" as compared to simply "law and order."
Defining the parameters of sovereignty is a key component of the world order dialogue as it struggles to reach consensus regarding the boundaries and prerogatives of power. Sovereignty is the status of a person or group of persons having supreme and independent political authority. In dealing with the concept of sovereignty, we are dealing with the reality of power. It is a power over territory, over land and water, oil and minerals, as well as those life forms which have miraculously emerged out of the mud of the earth.
The kings and queens of Europe, Asia, and Africa were sovereigns. They reigned supreme and were thought to be divine. They descended from those having the strongest might and force to prevail over territory. The larger and richer the territory they could hold under their power and authority, the higher their status. They were both feared and courted by other humans.
These were the dominators who ruled the land and made the rules. Their rules became law. Their territorial law was most often a form of "dominium" -- the legalization or formalization of control over lands originally obtained by conquest and plunder. All real estate was in essence the royal estate. Might made right, as the rules of power became the laws of the land.
Land value capture policy, however, stems from a moral and ethical framework of “just law” based on equal rights to land and natural resources as a birthright. As such it leaves “might makes right” in the dust of neanderthals and neocons.
The use of legitimate force under just laws and institutions constituted to secure the equal human right to land and natural resources is no different than law enforcement currently established to protect citizens against crimes. The payment of the land rent fee legitimizes and enforces the right to private, exclusive land title. Non-payment of the land rent fee forfeits the right to enforcement of title protection and therefore private and exclusive land use rights.
It is evident that democracy as presently constituted is insufficient to provide peace and economic human rights. It is also necessary to assure economic justice, and the foundation of economic justice is the compensation of land rent paid to all the members of the community for the private use of the land which rightfully belongs to everyone.
This form of land tenure - private use rights secured on condition of payment of full land rent to the community with no taxation on labor and productive activities - furthers both individual initiatives for wealth production AND a fair distribution of wealth. There is no trade-off of one or the other. There is instead a full social synergy.
International covenants on economic human rights to food, shelter, health care, and education have been widely endorsed. Unfortunately there has been a great lack of clarity regarding precise mechanisms for implementing economic human rights for all. By preventing land, a gift of nature, from being hoarded or used as a basis for land speculation and profiteering, land value capture sets the stage for securing all other economic human rights.
The exercise of both common and individual rights in land is essential to a society based on justice. But the rights of individuals in natural resources are limited by the just rights of the community. Denying the existence of common rights in land creates a condition of society wherein the exercise of individual rights becomes impossible for the great mass of the people.
Land value capture is a practical approach for securing common rights to land rent while retaining individual rights to the products of labor. Land value capture is thus an important key to the implementation of economic human rights within free and democratic societies whether they currently lean towards capitalism or socialism. Its potential for land conflict resolution is considerable in either case.
The Global Land Tool Network is primarily focused on public capture of rent from surface land value. For information on resource rent capture institutions that can help resolve conflicts over oil and other natural resources go to Alaska Permanent Fund, Bayelsa State Oil Fund Commission Bill, How to Tax Mineral Rents and Experiences with Oil Funds: Institutional and Financial Aspects.
12 THE COMPONENTS OF A LAND VALUE CAPTURE SYSTEM
12.1 The components of a good land value capture system are:
- 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.
- Spatial definition of legal land parcel units - knowing exactly what land is claimed by whom.
- Clearly defined legal restraints on land use - the rules of land utilization such as zoning laws defining “highest and best use.”
- Trained and certified assessors to conduct valuation of land authorized by an agency independent of the tax setting and judicial review authorities.
- 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.
- 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.
- 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. An appeals process should be clear and easily available.
- 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 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.
12.2 In some cities or countries, especially those with currently 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.
12.3 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 municipalities currently tax at the same rate.
12.4 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.
12.5 So a common rule-of-thumb is to decrement the building tax rate by 20% and increment 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 this would be capture of full land rent.
12.6 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.
12.7 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.
12.8 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.
12.9 An online calculator is available to give those interested in implementing land value capture the percentage of land value necessary 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: gltn.lvtproject.org
12.10 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: www.marylandlandtax.org/calculator and www.lvtproject.org
12.11 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.
12.12 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 (such as on the Web), and to collect the land rent at regular intervals.
LAND VALUE ASSESSMENT
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 implement this fair and efficient approach to public finance.
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.
- 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:
- 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, which are provided by the government;
- Eminent Domain: Right to use, hold or take land for common public uses and benefits;
- 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;
- 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.
Many factors contribute to land value, including:
The physical attributes of land:
- 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:
- The type and amount of taxation,
- Zoning and building laws,
- 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.
- Value and income levels,
- 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.
The assessment or appraisal process is an organized procedural analysis of data. This procedure involves seven specific phases, each of which contains numerous procedures.
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 was defined as the value paid or imputed for the exclusive right to use a land site location or natural resources.
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.
- 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:
- What land data and valuation systems currently exist,
- How effectively they operate,
- How to build upon and improve these systems and
- How to implement procedures 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.
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.
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.
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.
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.
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.
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
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:
- Sales comparison: Sales of similar, vacant parcels are analyzed, compared, and adjusted to provide a value indication for the land being appraised.
- 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.
- 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.
- Allocation: Sales of improved properties are analyzed, and the prices paid are allocated between the land and the improvement portions.
- Extraction: Land value is estimated by subtracting the estimated value of the depreciated improvements from the known sale price of the property.
- 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.
- 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:
- Per Dwelling Unit Site
- Per Square-Foot
- Per Acre
- 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.
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.
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.
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:
- Facilitate frequent update of assessments ensuring equitable treatment of all property owners.
- Eliminate arithmetic errors in land value calculations.
- Improve the assessor's productivity in land value assessment.
- 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: www.henrygeorge.org/ted.htm
For land value assessment for purposes of land value capture on leasehold, community land trust, and land held under “customary rights” go to information in the Implementation section of the online course on Land Rights and Land Value Capture.