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Land Economic Rent Computation for Urban Planning and Fiscal Purposes G Model JLUP-697; No. of Pages 14 ARTICLE IN PRESS Land Use Policy xxx (2008) xxx–xxx Contents lists available at ScienceDirect Land Use Policy journal homepage: www.elsevier.com/locate/landusepol Land economic rent computation for urban planning and fiscal purposes Emília Malcata Rebelo ∗ Research Centre for Territory, Transports and Environment, Faculty of Engineering of Oporto University (Portugal), Department of Civil Engineering, Territorial, Urban and Environment Planning Division, Rua Dr. Roberto Frias, s/n, 4200-465 Porto, Portugal article info abstract Article history: This article proposes an innovative methodology to compute economic rents of land designed to current or Received 1 August 2007 potential offices uses. It consists in the establishment of a cause-and-effect relation between offices’ price Received in revised form 21 July 2008 levels and correspondent levels of land rent, considering the main factors that influence property prices, Accepted 24 July 2008 the ones that guide public and private activities’ location decisions and the inter-dependencies between land and real estate property markets. The rationale subjacent to this research is that land economic Keywords: rent is determined by the difference between offices market price and a set of costs correspondent to Urbanistic management land acquisition, planning and building processes, and a profit margin. An assessment of surplus values is Economic land urban rent Property valuation methods provided in order to compute it as the difference between total land market value (land economic rent plus Surplus values economic return on land use) and correspondent tributary patrimonial-value according to legal valuation Offices markets proceedings (settled on property law). In order to reach these goals, variables that exert influence on Hedonic regression models urban planning and municipal management were identified, an urban management information system was designed and implemented, and an integrated and interactive model to support decisions in urban planning – concerning real estate offices and land prices and characteristics – was developed. These tools were applied as a case study to Oporto city (Portugal). They embody updating functionalities, setting up as an on-going support to policies of municipal land use management (particularly applied to offices uses). A proposal is made to integrate similar models in territorial plans as valuation tools to support better approaches to assess the impact of planning decisions on real estate and land values, thus informing a more equitable, efficient and local-based tax basis. Implications of this analysis for urban planning and fiscal settings are proposed. © 2008 Elsevier Ltd. All rights reserved. Introduction have lacked to access spatial economic-financial impacts of their performance: (1) they do not appraise the consequences of their Territorial planning impacts on land and real estate prices contents on the settlement of land and real estate market prices; (2) do not appropriately define how private property shall accomplish Territory is a first-order good, where individuals’ social and eco- its social function; and (3) do not even analyse market segmenta- nomic life express through a complex network of relations (Pardal, tion (Pardal, 2006a,b). As (1) new forms of territorial appropriation 2006a). Considering urbanism is a public service in the scope of the emerge; (2) clear rules referring to surplus values settlement and State, one of the most important attributions of urban planning con- distribution do not exist; and (3) the planning system does not sists in making land available for the different kinds of uses, accord- delimit central and local administration’s scopes; processes of ing to planned land classifications and assignments, and based on use assignment, values-building and land appropriation become rated prices (Anderson, 2005; Pardal, 2003). Planning shall arrange doubtful, and many different agents act outside the law, what public and private sectors’ tasks and scopes, what implies a territo- creates market uncertainty and suspicion (Pardal, 2004, 2006a). rial strategic perspective where justice, trust and technical and sci- Landowners try to reach the maximum possible profit margin when entific accuracy interact (Pardal, 2006a,b). Urban planning increas- they sell land to developers, but this increases risk the latters face. ingly conditions land uses and values. However, it must not be Promoters, public administration (through taxes), and credit insti- guided by a strict market rationale, and cannot disproportionately tutions (through credit offer to development and construction), by pursue demand needs. Portuguese territorial plans systematically their turn, all fight to keep surplus values as high as they can (Pardal et al., 1996). Besides, as local territorialities have assumed increased relevance, land users are more and more dependent on state and ∗ Tel.: +351 225081482; fax: +351 225081486. municipal institutions, as well as on granted firms that explore E-mail address: [email protected]. infrastructures’ and services’ networks, that manipulate territory 0264-8377/$ – see front matter © 2008 Elsevier Ltd. All rights reserved. doi:10.1016/j.landusepol.2008.07.008 Please cite this article in press as: Rebelo, E.M., Land economic rent computation for urban planning and fiscal purposes. Land Use Policy (2008), doi:10.1016/j.landusepol.2008.07.008 G Model JLUP-697; No. of Pages 14 ARTICLE IN PRESS 2 E.M. Rebelo / Land Use Policy xxx (2008) xxx–xxx and, together with plans, threaten property rights, and – as a matter of different land policy tools, based on straightforward or indi- of fact – collect monopoly prices and rents (Pardal, 2003, 2004). rect interventions of urban planning and/or through fiscal tools (Correia, 1993; Lichfield and Darin-Drabkin, 1980; Smolka and Theoretical background Amborski, 2003). Thus, according to political implications, urban planning can (1) exert control on specific urban development of Public central and local administration’s strategies look for- sites and uses (not involving or temporarily involving land property ward to balance and coordinate population’s and institutions’ free by public administration, or through direct participation of public initiatives, on the one hand, with a more regulating and norma- administration in public–private partnerships); (2) exert control tive planning performance, on the other, in order to avoid strong on general or particular urban development through fiscal tools; intra and inter-urban and regional imbalances, thus assuring bet- or (3) exert general influence on land markets through dissemina- ter urban living conditions. Mechanisms of tertiary sector’s prices tion of information and guidelines on public participation (Correia, formation – particularly concerning offices prices – and their rela- 1993). tions to current land rents, seems to reflect deep dynamics whose Values of land plots depend on land use policy that settle juridi- causes and effects should be analyzed, as well as the influences they cal, economic, administrative and functional land appropriation exert on urban development. rules (Pardal, 2006a). They have, then, a territorial-based compo- Both real estate and land price levels are influenced (1) by sup- nent – that depends on location, dimension, juridical status and ply and demand amounts and elasticities (Harter-Dreiman, 2004; allowed use and respective intensity, which are factors controlled Lipsey and Chrystal, 1983; Rebelo, 2003); (2) by the structures of by plans and society – and other component that results from real estate and land markets; (3) by how much firms are willing landowners initiatives and investments, that consequently should to pay for their sites; and (4) by how much promoters/builders are be taxed at a different rate (Arnott and Petrova, 2006; Correia, 1993; willing to pay for land. As a consequence, land prices condition real Lee, 2003; Pardal, 2004, 2006a). Therefore, land territorial-based estate prices, and at the same time, are conditioned by them (Clark, value represents the price – settled by land policy – that should be 1995; Granelle, 1970; LeFeber, 1958; Thoman et al., 1968). reasonably supported by socio-economic activities that use it (Lee, According to neo-classical urban economists, whenever compe- 2003; Pardal, 2006a). tition exists for land uses, real estate assets’ prices exert influence Surplus values translate price increases that result from its on land plots (George, 1879; Ricardo, 1817; Smith, 1843). This change of use or from use intensification, or – indirectly – from pub- assumption is, furthermore, the foundation of the “backwards lic investments. They are engendered by administrative decisions method” to compute land values that assume promoters play a core concerning urbanisation choices, and correspond to qualifica- role in real estate markets (Aydalot, 1985; Topalov, 1973). Never- tions of the territorial system; thus they are independent from theless, other authors defend that land actively intervene in real landowner investments. The lack of clearness, monitoring and estate price settlement as a consequence of planning orders and control over surplus values generation and distribution sustain of firms’ location choices due to land heterogeneous characteris- speculative price-levels, and punishes the sector of civil construc- tics and competition for specific plots’ use (Dunn, 1954; Dunse and tion, on the one side, and final buyers of real estate units, on the Jones,
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