Inefficiencies in Land Markets

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Inefficiencies in Land Markets

• February 22, 2006

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Little House on the Prairie
Benefits 1400/yr Cost 600/yr Net benefits
800/yr
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A River Runs Through It
RIVER
Flood Zone
10 chance of storm that will cause flood
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No storm 90 Storm 10
Benefits 1400 0
Costs 600 600
Net Benefits 800 -600
Expected value of net benefits .9(800)
.1(-600) 660
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Standard reaction to risk purchase flood
insurance
Cost of premium 140/year based on 10
probability of having to make a 1400 payout in
any given year
Benefits 1400
Costs 740
Net Benefits 660
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Ex. 1 Land values may be artificially high and
send the wrong signal to buyers and sellers
Does the land market function properly and result
in the efficient uses of land?

• Subsidized flood insurance
• Bail-outs

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Subsidized flood insurance 35/year (instead of
140)
Benefits 1400
Costs 635
Net Benefits 765
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Bail-outs
Benefits 1400
Costs 600
Net Benefits 800
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Ex. 2 Costs of land ownership may be
artificially low and send the wrong signal to
buyers, e.g. Subsidizing Sprawl

• Sprawl defined as low-density, auto-dependent
  residential and commercial development
• Subsidies
• Provision of utilities
• Mortgage interest deductions
• Transportation development

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S or MSC

pe
D or MB
qe
Residential lot size
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Growth Management

• Direct
• Urban growth boundaries
• Urban service area boundaries
• Zoning
• Indirect
• Impact fees
• Transfer taxes
• State investments

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Ex. 3 Externalities in the land market may
result in inefficient uses of land

• External benefits from using land for agriculture
• Ecological benefits
• Aesthetic benefits
• External costs of developed uses
• Water runoff from impervious surfaces
• Air pollution from automobile exhaust

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S

pm
DMPB only
qm
Acres of farmland
14

SMPC only
pm
D
qm
Acres of land developed
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Farmland Preservation

• Property rights tools zoning
• Taxes differential assessment
• Market
• purchase in fee or purchase development rights
• create development rights market

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Zoning

• Exclusive
• Concern about windfall/wipeout syndrome
• Non-exclusive
• Large minimum lot size
• Cluster zoning
• Conservation design

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Conservation Design/Zoning
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Taxes

• Differential assessment
• Preferential assessment agricultural land is
  assessed for property tax purposes at a lower
  rate than is other land
• Deferred taxation agricultural land is taxed at
  a lower rate but some or all of the taxes are
  captured at time of development
• Restrictive agreements contractual arrangements
  that give agricultural land owners lower property
  taxes in exchange for agreement not to develop

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Deferred taxation (penalty)

• When land is converted, owner must repay a
  specified amount of the tax benefits realized (10
  years of benefits is common).
• Owner of land enters into differential assessment
  program.
• Property taxes assessed at 66.66, rather than
  142.88
• When land is developed, owner must repay 76.22
  for each year of preferential assessment up to 10
  years (maximum penalty is 762.20)

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Market

• Purchase in fee
• Purchase development rights (PDR)
• Lease development rights (this is essentially the
  Michigan model)
• Create market for transfer of development rights
  (TDR)

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Purchase of Development Rights

• Fair market value is 7144 (can develop)
• Agricultural use value is 3333 (cannot develop)
• Development value is
• 7144 - 3333 3811
• Public or private entity pays landowner 3811
  removes development rights stick from the bundle

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Lease of Development Rights

• Landowner receives regular (e.g. annual) payment
  in exchange for keeping land in agricultural use.
• Michigan Circuit breaker program (PA 116)
• Farmers sign development rights agreements
  (leases) and receive income tax credits for the
  duration of the agreement
• Income tax credits depend upon level of property
  taxes and agricultural income

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In Michigan
Farmland owner enters PA 116 agreement. Farm
income is 200 rent plus 50 salary per
year. Property tax is 66.66. 3.5 of income is
8.75.
Income tax credit is 66.66 - 8.75 57.91
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Transferable Development Rights
8 units/acre
2.5 units/acre
Sending Zone area to protect
Receiving Zone deemed suitable for development
.1 units/acre
10 units/acre