Land Value Capture through the Land Use Zoning process

Tim Wright 6058318

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Contents

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Introduction Council Rates Capital Value vs Land Value Capital Gains Tax Developer Contributions Developer Contributions in other parts of the World Urban regeneration in the Australian context Conclusions Recommendations for Auckland

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Introduction The concept of land value capture when linked to the land use zoning process relates to the increased unearned value experienced by the landowner and the Governments attempt to claim or capture all or a portion of that unearned value increase. The capturing of land values as they increase via the zoning process can take on many forms and can impact different parties. The two main parties, which will be discussed, are the landowner and the developer. Developers are often the ones affected most in the New Zealand system, as they are responsible for paying Development Contributions. Landowners, on the other hand, are only really penalised via the rating system in terms of land use zoning as their rates are a reflection of the zones worth on the private market. This paper will first look at the various mechanisms that the Council or Government could use to capture value from the land use zoning process. It will then provide recommendations that would best suit the Auckland context.

Council Rates Council rates are collected annually and used to fund community infrastructure such as roads, parks, public transport, events and communities facilities. Rates are based on the Capital Value of property, which in simple terms is based on what someone is prepared to pay for property. This includes not only the value of the land but also any improves on that land, such as dwellings, (Auckland Council, 2013). Land Value is different from Capital Value in that it only accounts for the probable value of the land and does not account for any buildings on the land, (Auckland Council, 2013). Rates are linked with the land use zoning process. This is because zoning of land effects values because different zonings allow different forms of development to be achieved. For example a piece of land upzoned from a single dwelling use to an apartments use will be worth more in the open market and will therefore have a higher capital value, which will translate into an increase in rates. The zoning of land provides a reasonable amount of certainty in relation to land worth, especially when combined together with other factors such as location. When land is upzoned the market adjusts reasonably quickly to the potential that the land now has for future intensification or redevelopment. Therefore a raise in a rate is a way of capturing the increase in land value that the upzoning of land creates. Rates are also linked with land efficiency. If land is used efficiently than the amount of rates required to service the land will be less. For example if you take a 500sqm lot with a single dwelling on it, rates will be required to be spent on the upkeep of the nearby roads, the local public transport route and the maintenance of the local park. The amount collected from the rate maybe more or less than the real expenditure required for this infrastructure. Typically in low density areas, the rate collected is not sufficient to meet the expenditure required and therefore expenditure is sourced elsewhere. Page | 3

Now take a similar 500sqm lot, but now this contains two dwellings. Now nearly double the amount of rates can be collected. Because the land area is halved the Capital Value of the two properties will decrease so the rates collected will not be double, however they will be more than if only one dwelling was present. The expenditure required for two dwellings will increase as opposed to where only one dwelling was being served. However the rate at which the amount of rates collected increases with land efficiency is higher than the amount of rates required to be spend to serve the community as shown on the below figure 1.

Figure 1: Rates are linked with land efficiency, (Wright, 2013).

There will come a point where the efficiency of land is such whereby the rates collected overtakes the amount of expenditure required to service the community. In this case a profit margin is created. Council then have an opportunity to either decrease rates or they could use the profit to fund other projects.

Capital Value vs. Land Value The Capital Value of land is currently used to determine the level of rate payable, however perhaps Land Value would be more advantageous to encourage greater land efficiency, leading to more rates in general and therefore more value capture. Increasing land efficiency is more or less the same as intensifying land. Private developers, who are responsible for nearly all of the increase in intensity, are concerned primarily with the attributes of the land; they are less concerned with the existing buildings on site. Existing buildings often have little value to a developer and can on occasions be more of a nuisance than a benefit. Therefore developable land or market attractive land is comparable with land value.

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If Land Value was used instead of Capital Value then higher rates would be aligned more closely with where developers would target and intensify. Higher rates would then encourage owners to sell or intensify to relieve the burden of the higher rates. An example of this would be to take a 500sqm lot in Grey Lynn with an old run down single dwelling and comparing this to a 500sqm lot in Henderson with a large modern dwelling. Based on Capital Value the two properties may have a relatively similar rate value, however if you used Land Value the Grey Lynn property would be much more valuable and attract a much higher rate, due to locational reasons, this would align closely to market attraction as a developer would see more profit in intensifying the Grey Lynn property.

Capital Gains Tax Something that is currently topical at the moment in the New Zealand Labour Party is the idea of introducing a Capital Gains Tax for investments, (New Zealand Labour Party, 2013). In relation to property this is a tax on the profit made at the point of sale based on the difference between the adjusted original price and the final sale price. A Capital Gains Tax is another way for the government to capture a slice of the increased value of land brought about by such unearned events as the rezoning of land. Once a base percentage is set then exemptions could be introduced to further assist value capture and planning objectives in general. One such exemption or sliding scale of exemption could be for intensifying land. For example if a person owning a land subdivides and then sells land, this could be exempt from or attract a lower percentage Capital Gains Tax as it would create another rateable property, which would provide on-going income for the government as opposed to a one off payment. A sliding scale approach could be introduced depending on the level of intensification achieved in relation to the potential of the site. For example if a site could potentially house 6 dwellings and was developed as such then a full exemption could be made, yet if only 3 dwellings were created then only a 50% exemption could be made.

Developer Contributions Development Contributions in New Zealand are charged to pay for the extra community and network infrastructure required as a result of development projects that increase the intensity of land, (Auckland Council, 2013). Therefore things such as dwelling extensions that do not increase the intensity of land are usually excluded. As opposed to other forms of value capture, they are one-off payments and are triggered at the point of resource consent/development. There are usually paid for buy developers and the costs are passed on to the final buyers later on. While funding is supposed to be used for infrastructure with relation to the development area, there is often little accountability that this does occur. For

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example monies collected from a subdivision on the fringe of the city may be used to upgrade roading in an inner-city suburb. Being a one-off payment, the idea behind the contributions was to fund the initial construction of the infrastructure. On-going rates would then fund the continual maintenance and improvements. However, often developers as part of their overall development scheme will pay for and construct the required infrastructure anyway. Therefore the question needs to be asked why developers effectively have to pay for infrastructure twice in some situations. The answer probably is to do with the inefficiency of how land is developed, i.e. the density is too low, and therefore the amount of rates collected per dwelling is not enough to pay for the infrastructure used per dwelling. So Councils depend on other sources of income to cover their costs, such as developer contributions. It seems that developers are being unfairly burdened by Developer Contributions; they should be responsible for the payment and construction of infrastructure that directly effects their development but little else. We should be concentrating on ways to encourage the private sector to develop more intensely rather than trying to get as much money out of them as possible. One way of doing this could be to introduce a flat fee based on the size of the site; for example a per square meter fee based on the average land value in Auckland. This could be charged to any development that acted to intensify land and therefore would act to capture some of that value. This is different than how contributions are charged now, which is based on a charge per new dwelling or lot created. This acts to discourage land intensity by penalising developers to create more out of a given land area. By charging by the square meter, developers would be encouraged to developer an intensely as possible as the cost of the contribution would be shared out between more units. An alternative to basing the contribution charge on the average price of land in Auckland could be to base it on the individual land value of the site. However this may act to encourage more development on the urban fringe, where land values are less, and discourage development in innercity areas.

Developer Contributions in other parts of the World One benefit of the planning system in New Zealand in terms of contributions is the clarity of the zones and rules that effect land. It allows developers, Councils and the public a clear understanding of land worth. This allows Councils and Developers the ability to factor in expected costs and income easily. In countries that do not have a clear zoning and rules system, the process of capturing value becomes more complex. More in-depth analysis and negotiating are required to reach a contribution figure deemed acceptable to all parties. This is because the value of the land, unlike in the New Zealand system is not really understood until planning permission is granted. Difficulties also arise as to how a fair price is determined as developers are unwilling to share their costs and profits. Councils must therefore spend time and money attempting to figure out this information to negotiate with. The accuracy of this information would presumably depend on the quality of the processes and people in charge, (SGS Economics, 2007).

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A benefit of this however is that an existing landowner also has little idea of land worth and therefore cannot sell land for an inflated price as easily, therefore developers can is some cases benefit from buying land cheaply. However, in the UK outline planning permissions allow landowners to only seek permission for certain aspects of development. For example a landowner could seek permission for only building heights and massing. This would then give that land owner a good idea on the development potential of the land, which he could then use to value the land and set the price accordingly. In New Zealand, developers do often attempt to develop beyond what planning zones and rules allow; however there is no value capture system currently in place to offset this. If such a system were to be introduced questions would need to be asked as to whether it would fit in with the culture of the New Zealand planning system. The Council would surely come under scrutiny for making deals for development over and above what is allowed. The public may view this as a form of bribery. Developers would need assurance that once a deal was done that would be the end of the matter, however with third party appeal rights leading to the Environment Court, there would be little guarantee of this. Another factor in need of consideration would be weather the approval of one such scheme that ignored the rules create unwanted precedents.

Urban regeneration in the Australian context A common regeneration method in Australia is to identify a parcel of land for regeneration, then act to purchase the land by market means or compulsory acquisition if necessary, then rezone the land and either develop it themselves (all Australian States have their own development corporations for such projects), sell it to developers or create a public private joint venture partnership (SGS Economics, 2007). The parcels of land are usually areas that have come to the end of their economic viability (such as old industrial areas in inner-city locations, Subiaco, Perth, WA), require expensive remediation (such as old power station or tannery sites, East Perth, WA), or will be disturbed be large scale infrastructure projects (such as constructing underground motorway links, Northbridge, Perth, WA). Therefore current owners are less likely to put up a fight when the Government attempts to acquire the land. This method has been very successful in Australia for first creating good quality renewal projects, but also for capturing the value uplift generated by the rezoning. This type of method would translate well in the New Zealand context; the only issue would be finding appropriate pieces of land that are attractive.

Conclusions In relation to capturing land value as a result of zoning, the New Zealand system seems to favour existing landowners and punish developers and new home buyers. Landowners do not pay any Capital Gains Tax (CGT), which is common in many countries; basically they are only responsible for the payment of rates based on the capital value of their property. Developers on the other hand are Page | 7

burdened with: buying land based at market values (often already inflated due to current mechanisms); as well as the payment of Development Contributions. The contributions are inevitably passed onto new home buyers. A more equitable scenario would see the unearned value of property enjoyed by existing home owners captured and the creation of incentives for developers to develop intensively, which in the long term could act to lower the per capita expenditure on community infrastructure as land would be used more efficiently.

Recommendations for Auckland The following recommendations would act to better capture unearned increases in property value and also encourage more intense develop, which would ease the burden of Council expenditure in the long term. 1. Change the way rates are valued from Capital Value to Land Value. 2. Introduce a Capital Gains Tax, with a sliding scale exemptions system for when a site is intensified. 3. Change how Development Contributions are to be paid from a per new dwelling or lot basis to a per square meter of site size basis based on the average land value across the Auckland Region. 4. Create a Public Development Authority and investigate potential sites that could be worthy of development or redevelopment and look into the opportunity to acquire land or entre into a joint venture arrangement with the private sector. Such a current opportunity could exist around the land required for the new CBD rail links as this land will need to be altered or demolished as a result.

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References

Auckland Council, 2013, Rates and Valuations, www.aucklandcouncil.co.nz, Auckland, New Zealand.

New Zealand Labour Party, 2013, Affordable and Healthy Homes, www.labour.org.nz, New Zealand.

SGS Economics, 2007, Value Capture Mechanisms: International models and their relevance to New Zealand, Ministry for the Environment, New Zealand.

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