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:
- 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;
- 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.
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.
- 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:
- what land data and valuation systems currently exist,
- how effectively they operate,
- how to build upon and improve these systems and
- 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:
- physically possible;
- legally permissible;
- financially feasible; and
- maximally productive.
Current appraisal theory uses three standard approaches in estimating land value:
- the cost approach;
- the sales comparison approach; and
- 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.
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.
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.