Land Value Capture by Urban Development Agreements: the case of Lombardy Region (Italy) A. Oppio[1], F. Torrieri[2], M. Bianconi [3] 1
2
Department of Architecture and Urban Studies, Politecnico di Milano Department of Industrial Engineering, Università degli Studi Federico II di Napoli
[email protected];
[email protected];
[email protected]
Abstract. This paper focuses on the interaction between land use planning and infrastructure provision, and offers an overview of the methods that are used in different development contexts to share the costs of local infrastructures and facilities between the public and the private sector. Over the last forty years or so, in the face of intense fiscal pressure and a drastic reduction in the transfer of resources from the central government, local authorities have increasingly been searching for alternative means to fund the provision of off-site infrastructures and facilities Starting from the analysis of the Urban Developments Agreements carried out in Lombardy Region over the last 15 years, the paper provides an overview of the surplus value capture mechanism, as it result from land use change and development with the aim of pointing out the issue of its allocation between public and private parties. Keywords: Land Value Capture, Urban Development Agreements, Lombardy Region.
1
Land value capture mechanisms
1.1
The notion of Land Value Capture
Land value capture refers to fiscal instruments through which public authorities can capture increases in properties values that are unrelated to actions of land owners (OECD, 2017). When value increases depend on public policies, the reason for value capture is related to the costs of public investments, which advantage specific land owners rather than the entire community. Differently, in the case of rezoning decisions, land value increase for private owners is not only due to the special urban development they are going to foster, but it represents a kind of extraordinary gain endowed by public decisions. In the past, large house-builders and other developers were in charge of providing on-site services (local estate roads, linkup to mains water and drainage, car parking, etc.), while the public sector was responsible for off-site provision - major roads, water supply, sewerage, and a range of other physical infrastructure and community
2 facilities such as schools, hospitals, and green spaces. The expectation was that the State should meet most of those costs and then recoup them by means of general or local taxation. However, over the last forty years, in the face of intense fiscal pressure and a drastic reduction in the transfer of resources from the central government, local authorities and their arm length agencies have increasingly been searching for alternative means to fund the provision of off-site infrastructure and facilities (Nelson, 2003; Urban Land Institute, 2010). On the one side, this led to a general preference for the adoption of user charges and hypothecated taxes over general taxation, but it also meant that as part of the development process, developers and/or landowners are increasingly asked to contribute to public goods that previously were provided by the State (Altshuler and Gomez-Ibanez, 1999). The privatisation of utilities and the contracting out of public services added a further dimension to this trend (Goss, 2001; Stoker, 2003; Karrer, 2008). Countries with different administrative and fiscal traditions have different planning tools in place aimed at capturing land value. What almost all planning systems have in common is that they impose a levy on new development in order to fully or partially finance the provision of new local infrastructure, or the upgrading of the existing one (Hagman and Misczynski, 1977; Reimer et al., 2014). In some cases, standard charges are set, while in other instances contributions are negotiated within the framework of integrated programmes or complex partnership arrangements in addition to, or in lieu of, fixed tariffs. Forms of payment vary and can occur in cash, infrastructure or land. While some of those mechanisms have historically featured as a core component of regulatory regimes, and have therefore a long and checkered history, others have emerged relatively recently. Starting from the description of the value capture mechanisms (section 1.2), the paper focuses on negotiated exactions within Urban Developments Agreements carried out in Lombardy Region (Italy) over the last 15 years (section 3). Finally, after an ex-post analysis of the incidence of public benefit gained by public administrations through the negotiation with private developers (section 3.1), the issue of the allocation of the surplus land value between public and private parties is discussed (sections 3.2 and 4). 1.2
Types of land value capture mechanisms
Several forms of value capture mechanisms exist: i) Impact fees; ii) Joint developments; iii) Property or land value taxes; iv) Land banking; v) Tax increment financing; vi) Betterment levies; vii) Development agreements (Malme and Youngman, 1994, 2001, 2004; OECD, 2017). The most common value capture mechanism is “Impact fees”, that typically have to be paid by land owners as a contribution to infrastructures, which directly services their plots (Rosenberg, 2006). “Joint developments” are the second most common land value capture mechanism. Public authorities and private developers develop land jointly, thus sharing the resulting gains and the potential losses (OECD, 2012). “Property or land value taxes” can be considered as a value capture mechanism when above all the property price on which they are based reflects market values rather than being updated according to a general index
3 such as a house price index or the GDP deflator (Fensham and Gleeson, 2003). “Land banking” is the practice of making profits by reselling undeveloped or underdeveloped land (van Dijk and Kopeva, 2006). It can be used effectively by public authorities, when land-use plans zone primarily those greenfield sites for development that are owned by publicly controlled land banks. “Tax increment financing” (Levinson and Istrate, 2011; Medda and Modelewska, 2011) is the difference in tax revenues stemming from a potential investment project. This difference is generally used to finance the investment project. “Betterment levies” capture the increase in property values due to land rezoning or infrastructure provision for large areas allowed by public authorities. Finally, the “Development agreements” or “Negotiated exactions” between local governments and developers are another common value capture mechanism. By this kind of agreements developers provide public services and/or financial contributions for obtaining planning/building permissions or rezoning decisions that allow more profitable development than the one defined by the urban plan. They are characterized by a contractual nature (Wegner, 1986) thus allowing public authorities and developers to find specific solutions to specific problems by a flexible mechanism. This shift from ‘taxation’ to ‘regulation’ has been described as one of the key factors driving local government reform over the last two decades (Altshuler and Gomez-Ibanez, 1999; Morphet, 2007). The following sections will focus on the exactions negotiatied within Urban Development Agreement in Lombardy region (Italy) with the aim of sheding a light on the fairness of the exchange between public and private parties (Curti, 2006).
2
The Urban Development Agreements
2.1
The terms of negotiation
In the context of Urban Development Agreements, two main evaluation perspectives are generally considered: i) the private developer’s perspective focused on the viability of urban developments; ii) the public perspective aimed at capturing a part of the surplus value generated by the new land uses. The first evaluation instance mostly deals with the gain envisaged by the developer’s proposal rather than the return expected by implementing the traditional urban plan. The second is related to the amount of the surplus value that should balance the flexibility given to the private parties. On side, developers considers as legitimate the return given by their own proposal and entrepreneurial capabilities. Instead, on the other side, public authorities require a percentage of developers’ return being it dependent on cross-synergies and cross-externalities created through investments and decisions both public and private (Camagni, 2008). Generally the two parties seem to have opposing interests at stake: the more one part gets, the less the other party gets and both they want as much as they can get.
4
3
The case study
3.1
The Urban Development Agreements in Lombardy Region
Since 2014 in Italy the minimum incidence of value capture for public authorities has been defined by a national law as a percentage of the capital gain obtained from the urban development (DL. 133 del 12/9/2014). Given this national line of action, each regional government shows a variety of interpretations and operational recommendations defined at local level. In Lombardy Region, for example, the urban planning law prevails on the national one, thus the incidence of 50% is not entered in force and there are many different practices. In most of the cases decisions about the overall surplus value’s allocation rule are taken case by case, according to variations of the functional programs defined over time. This high degree of flexibility allows to define specific agreements but at the same time it increases the risk that they are used ineffectively across different development projects. The difficulty for the public authorities to estimate the adequacy of the value capture with respect to the overall surplus values generated by urban transformations and to sustainable growth objectives when they enter into negotiation with private parties is very common to the Urban Planning Agreements fostered in Lombardy Region. This kind of negotiated planning has been firstly introduced in Lombardy region since 1986. The Urban Planning Agreements have enhanced urban transformations according to the following main features: i) institutional cooperation between different government levels; ii) subsidiarity; iii) stakeholders’ involvement for strategies and actions’ definition; iv) local private public partnership; v) public investments’ efficiency and effectiveness; vi) functional mix; vii) achievement of environmental and social objectives. Among the large number of Urban Development Agreements carried out across the last seventies years, a sample of 15 case studies have been selected. They represent successful experiences since they have been definitively completed. Table 1. The Urban Development Agreements under evaluation: provinces and size.
5 Urban Development Agreement
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Abbiategrasso - Area dismessa Ex Nestlè Arcene - Via Leopardi e Immobili Masciardi Brivio - Recupero area dismessa Cernusco sul Naviglio - Ex area Arcofalc Cremona - Ex Feltrinelli Legnano - Ex Opificio Cantoni Nave - Comparto Nave Centro P.A. 8/1 Rozzano - Quinto de Stampi - Ex Cartiera Rozzano - Valleambrosia Rozzano - Rozzano vecchia Segrate - Cascina Ovi Segrate - Causa Pia Temù - Comparto 19, Lotto 71 Vimercate - Via Mazzini n. 34 Vimodrone – Comparto Nord/Ovest
Province MI BG LC MI CR MI BS MI MI MI MI MI BG MI MI
Size (m2) 17.527 95.100 9.955 32.035 283.440 128.345 25.436 97.600 86.204 88.539 44.290 138.878 11.493 2.090 225.403
Volume (m3) 40.000 53.000 22.000 54.000 124.431 180.000 37.600 93.262 78.762 53.200 57.222 85.815 11.176 8.158 329.080
By an ex-post analysis of the incidence of land value capture for public authorities across these 15 case studies (Oppio and Torrieri, 2017), it has been possible to point out that the difference between the extra-contribution negotiated within the agreement and the obligations the private developer must pay to the public authorities according to the regional law and local regulations (L.R. 12/2005 art. 44) is generally positive, but extremely variable (See Graph 1). More in deep, the incidence of land value capture is higher when private functions are predominant, and this can be explained by the greater potential expected profit for the private developer. Nevertheless, a more accurate analysis of the agreements has revealed that very often the amount of land value capture is not proportional to the expected profits for the private, so that the negotiation seems to be done on a case by case approach.
Graph 1. Correlation between functional mix and Public Benefit.
6 3.2
Land surplus value: measures, power in negotiations and rules of allocation
Given the flexible and contractual nature of Urban Development Agreements, the expost analysis has pointed out that the amount of public benefit is defined by a case by case approach with a very limited control on its fairness and appropriateness by public authorities. Since changes of use by planning permissions affect land value, part of this uplift will flow to landowners and to developers with respect to an appropriate level of return for compensating the investment risk. Within this context, decision support systems are needed to evaluate the surplus value generated by the development, and hence to support local authorities to define how much they could ask to developers in the form of land, infrastructure components to be provided or commuted sums. The current surplus value models are based on the assumption that the value of a development project (or site) equates the monetary residual or surplus available once a site has been developed. More precisely, it is defined as a percentage of the difference between the land final value resulting from the urban development, transformation costs and expenses included, and its initial value (Micelli, 2004, 2011; Camagni, 2008; Alterman, 2012; Morano and Manganelli, 2014; Morano and Tajani, 2017). One of the most crucial as well as controversial issue is the land value that is used in the surplus evaluation models as threshold for estimating the overall value produced by urban developments. Many approaches suggest the use of market value of land, based on price signals from previous land transactions, rather than opting for different solutions such as existing value plus a given incentive. However, some critics claimed that such decision implicitly supports the transfer of increases in land value associated with planning permission to the landowner (Crosby et al., 2016). Such models embed generous assumptions related to the inducement needed to encourage landowners to release land for development. The critique moved to the market value approach is that such value is itself dependent on regulatory conditions. In other words, proposals to increase the benefit to be transferred to the local authority may appear unviable if the measure of surplus value is based upon transaction prices recorded in the past according to less stringent planning or environmental regulations. In the language of Ricardian rent theory, the market price of land does not determine the extent of planning charges, but rather it is the extent of planning charges that determines the market price of land
4
Conclusions and Future perspectives
This paper has critically reviewed the operation and the underlying assumptions related to the use of the land value capture mechanism applied in one regional context in Italy. In the past much of the literature on development impacts and mitigation makes relatively simple assumptions about projects (Healey et al., 1995). In reality, any technique used to estimate impact and decide upon mitigation is rooted in decisions belonging to the realm of public policy. In other words, the needs of the citizens trig-
7 gering public expenditure, including the provision of new infrastructure, are needs generated not by only one, but rather by a complex mix of causes, and hence any decision on who will have to pay for it will necessary be grounded on technical evidence as much as in value judgements (Bailey, 1999). No process of refinement of the scientific evidence base has been used to assess the impact of development that can alter this basic fact. It follows that any consideration on the effectiveness and equity of a given exaction system is explicitly or implicitly grounded on a comparative assessment of the available alternatives. These encompass systems aimed at taxing capital gain (e.g. local property taxes or stamp duties on property sales), user pays systems, and transfers of central/regional government resources. In addition, at the opposite ends of the spectrum, there are always the options to either halt development altogether, or alternatively, to allow the development go ahead without any built-in mitigation measure. More generally, changing circumstances force tax regimes to constantly adopt and adjust. If there would be a way to know the ‘correct’ value of a parcel of development land in a given context, the problem of deciding which instrument to use and which level of taxation to apply would vanish. While in the case of agricultural land, the ‘right’ price for a plot of land can be assessed in relation to its production value, in the case of urban land there are a number of intertwined aspects to be considered, the most important of which are definitely the building rights and obligations stemming from regulation. In Italy, the last thirty years were characterised by a growing flexibility allowed in managing plans; this occurred through the use of ‘revisions’ and ‘modifications’ procedures, and a more systematic use of negotiated development. It follows that, in order to be effective, land value capture practices have to cope with change.
References 1. Malme, J. H., and Youngman, J. M. (1994) An International Survey of Taxes on Land and Buildings, Lincoln Institute of Land Policy: Washington. 2. Malme, J. H., and Youngman, J. M. (eds.) (2001) The development of property taxation in economies in transition: case studies from Central and Eastern Europe, World Bank Publications: Washington DC. 3. Malme, J. H., and Youngman, J. M. (2004) The Property Tax in a New Environment: Lessons from International Tax Reform Efforts, Andrew Young School International Studies Program Public Finance Conference: The Challenges of Tax Reform in a Global Economy, Stone Mountain, Georgia. Available at: http://www.issuelab.org/resource/property _tax_in_a_new_environment_lessons_from_international_tax_reform_efforts (Accessed 10th of May 2016). 4. OECD (2017), The Governance of Land Use in OECD Countries Policy Analysis and Recommendations. 5. Nelson, A. C. (2003) Paying for Prosperity: Impact Fees and Job Growth, A Discussion Paper prepared for The Brookings Institution Center on Urban and Metropolitan Policy. 6. Urban Land Institute (2010) Infrastructure 2010: Investment Imperative, Ernst & Young: Washington, D.C.
8 7. Altshuler, A., Gomez-Ibanez, J. (1999) L’economia politica e le esalazioni sull’uso del suolo, in F. Curti Urbanistica e fiscalita locale, Maggioli Editore. 8. Goss, S. (2001) Making Local Governance Work: Networks, relationships, and the management of change, Palgrave: London. 9. Stoker, G. (2003) Transforming Local Governance, Palgrave MacMillan: London. 10. Karrer, F. (2008) Il management dei servizi urbani tra piano e progetto, Officina, Roma. 11. Hagman, D.G. and Misczynski, D.J. (1977) Windfalls for Wipe Outs: Land Value Capture and Compensation, American Planning Association: Washington. 12. Reimer, M., Getimis, P., Blotevogel, H. (2014) Spatial Planning Systems and Practices in Europe: A Comparative Perspective on Continuity and Changes, Routledge: London. 13. OECD (2012), OECD Principles for Public Governance of Public-Private Partnerships, Paris, www.oecd.org/gov/budgeting/oecd-principles-for-public-governance-of-publicprivate-partnerships.htm (accessed March 2017). 14. Rosenberg, R.H. (2006), “Changing Culture of American Land Use Regulation: Paying for Growth with Impact Fees”, SMUL Rev., Vol. 59(177). 15. Fensham, P. and B. Gleeson (2003), “Capturing value for urban management: a new agenda for betterment”, Urban Policy and Research, Vol. 21(1), pp. 93-112. 16. Van Dijk, T. and D. Kopeva (2006), “Land banking and Central Europe: future relevance, current initiatives, Western European past experience”, Land Use Policy, Vol. 23(3), pp. 286-301. 17. Levinson, D.M. and E. Istrate (2011), Access for value: financing transportation through land value capture, Brookings Institute Metropolitan Infrastructure Initiative Series, Washington D.C. 18. Medda, F. and M. Modelewska (2011), Land Value Capture as a funding source for urban investment: the Warsaw Metro System, Ernst & Young Better Government Programme Poland.. 19. Wegner, J.W. (1986), “Moving Toward the Bargaining Table: Contract Zoning, Development Agreements, and the Theoretical Foundations of Government Land Use Deals”, NCL Rev., Vol. 65, p. 957. 20. Micelli E., (2004) Perequazione urbanistica. Pubblico e privato per la trasformazione della città, Marsilio, Venezia. 21. Micelli E., (2011) La gestione dei piani urbanistici. Perequazione, accordi, incentivi, Marsilio, Venezia. 22. Curti F. (2006), Lo scambio leale, Officina, Roma. 23. Camagni R., (2008), «Il finanziamento della città pubblica». In: Baioni M. (a cura di), La costruzione della città pubblica. Firenze: Alinea, 39-56. 24. Alterman R., 2012, Land Use Regulations and Property Values: the ‘Windfalls Capture’ Idea Revisited. In: Brooks N., Donanghy K., Knapp G., Oxford Handbook on Urban Economics and Planning, Oxford: Oxford U.P., 755-786. 25. Morano P., Manganelli B., 2014, «La stima delle aree fabbricabili a fini imu. Proposte per il superamento delle inadeguatezze nelle procedure messe a punto dai Comuni. Valori e Valutazioni, 12: 119-138. 26. Morano P., Tajani F. (2017). The Break-‐‑Even Analysis applied to urban renewal investments: a model to evaluate the share of social housing financially sustainable for private investors. Habitat International, vol. 59, p. 10-‐‑20. 27. Oppio A., Torrieri F., (In press) Public and Private Benefits in Urban Development Agreements, Green Energy and Technology, Springer.
9 28. Crosby, N. and Wyatt, P. (2016) Financial viability appraisals for site-specific planning decisions in England. Environment and Planning C: Government and Policy. ISSN 14723425. 29. Healey P., Ennis F., Purdue M. (1995). Negotiating Development: Rationales and Practice for Development Obligations and Planning Gain, Routledge: London Spon Press. 30. Bailey, S. J. (1999) Local Government Economics: Principles and Practice, Palgrave Macmillan. 31. Morphet, J. (2007) Modern Local Government, SAGE Publications Ltd: London
