Urban expansion

Taxes stemming from lande-use change
Description

Specific tax when a legislative reform increases land value (particularly agricultural lands turning into urban lands, but can also be used in case of an increase of the floor area ratio or land-use change).

Advantages

Links directly legislation changes and land value capture (although other factors are taken into account in the valuation process). Makes it possible to capture part of the capital gains on exchanged goods, on a consistent basis (sell or purchase price) which does not call for a detailed database. Politically (quite) harmless. In theory, good method to prevent speculation on land.

Drawbacks and precautions

Capital gains on land value are captured only at the time of the handover (because otherwise those gains would only be virtual, difficult to measure, evolving and disconnected from actual revenues, which makes it questionable in legal terms and difficult to implement politically). This tax can act as a brake on properties and land transfers (owners waiting for looser regulations to sell), thus contributing to market inflexibility, decreasing supply and price increase.  

Operation

Land owners, public players in charge of change of use.

Negociated or voluntary contributions from project developers to cover for the cost of internal infrastructure
Description

Voluntary contribution from developers directely negociated by local governments on a case-by-case basis, and can take the form of monetary or land payment. In case of Community Benefit Agreement, the agreement is negociated beween a developer and local communities affected by the project (or their representatives), taking into account spillovers from the building project on public equipment, infrastructure, affordable housing, but also on employment and support for associations. 

Advantages

Widely-accepted method to finance infrastrucure, because it avoids conflicts and ensure that the project will have benefits for local players where it operates.

Drawbacks and precautions

Within this framework, the local governments’ and project developers financial contribution vary considerably , depending on the power balance between public and private entities. This power balance is influenced by several factors: public officials’ level of qualification and integrity, dynamism of the real estate market, competing projects, etc). In case of a Community Benefit Agreement, the issue of local interlocutors’ representativeness may arise. Project benefits and the distribution of added value linked to it can occur at the expense of local public authorities’ share, and risk of pandering to special interest groups.

Prerequisites

Detailed cost valuation prior to planning; Existing institutional representation to promote the interests of the residents.

Success factors

Spokesperson genuinely promoting the interests of the residents.

Fees for adapting external infrastructures
Description

Financial contribution used to finance investments in public infrastructure outside the project area, but that requires adjustment due to this development project.

Advantages

Allows the financing of actual costs incurred by new development projects.

Drawbacks and precautions

Concerns only new constructions, so is used intermittently. Identifying the appropriate level of private involvment may prove a challenge. For residential development, the cost is generally transferred to the final purchaser (within the market boundaries). But a lot more difficult and arbitrary to identify, hence not extensively implemented

Prerequisites

Impact studies compulsory, with a methodology clearly defined.

Success factors

Need for minimum consensus on legitimacy of funding parties involved in the development. More difficult for development fees.

Operation

Developpers, insitutions responsible for public investment.

Examples
Taxes and other charges on urban planning operations aimed at financing internal infrastructure construction
Description

Contribution (which can take the form of money, lands or work carried out pro-bono by the developer) aiming at making private developers support part or all public costs incurred in their operations. Those contributions concern new building and are ploughed back into the same area. 

Advantages

Payment directly deducted from land rent, easy to implement politically (except for the promoters’ influence), fast money collection  (when starting construction work or receiving the building permit).

Drawbacks and precautions

Concerns only new constructions, so is used intermittently. Identifying the appropriate level of private involvment may prove a challenge. For residential development, the cost is generally transferred to the final purchaser (within the market boundaries). 

Prerequisites

Impact studies compulsory, with a methodology clearly defined.

Success factors

Need for minimum consensus on legitimacy of funding parties involved in the development.

Operation

Developpers, insitutions responsible for public investment.

Land pooling or readjustment
Description

The goal is to restructure private or partly private properties in a given area, with public intervention (Regulation, authorization, financing, and even targeted expropriations), in order to maximize their usefulness and construction of infrastucture financed entirely or partly by owners  (through land transfers, whose sale revenue is used by public revenue to finance investments  and lands  dedicated to public use; and financial contribution). They can take place in peri-urban areas with little or no built-up sites (land readjustment) or in the under-used urban areas (land redevelopment). Those lands, (or built-up surfaces in case of redevelopment) are redistributed between owners based on their value after operation.This restructuring can be initiated by land owners, local governments, public or private developers, public or private transportation companies (metro-vehicles for instance), and even the local population. It is a consensus-based process, with a minimum approval threshold that varies across countries. 

Advantages

Enables the public intervention in areas where real estate is highly fragmented and mostly private, without bearing the costs and risks of expropriation. Investment costs are also at the expense of owners, who can initiate the operation. It is easier politically and more equitable than expropriating, because it necessary involves a participatory process, at least partially. 

Drawbacks and precautions

Finding the right balance between collective bargaining and imposition, engineering and land restructuring call for high level technical expertise and support of the institutions concerned. Time-consuming and often complex process

Prerequisites

Suitable regulatory framework, accurate and consensual evaluation system on land value before and after the operation.

Success factors

Trust between all parties involved.

Operation

Local governments, land owners, developpers, public transportation operators, local population.

Examples
Medellin and Bogota: PDF icon Land Readjustment
Joint development of the PPP with initial public control over lands
Description

Equity partnership with private players in order to develop local urban real estate. One or several public partners provide lands, modify city-planning rules, and sometimes contribute to the investment costs. They are in turn remunerated through profit-sharing systems when real estate is sold or rented and/or through the handover of parts of the property assets. 

Advantages

Risk (and benefit) sharing between the private and the public sector: private partners do not have to purchase lands, public partners bear little or no investing costs. The public partner benefit from private expertise regarding real estate operations (and even sometimes regarding airport, underground transportation...).

Drawbacks and precautions

The higher the risk, the higher the private operator's margin, which limits self-financing possibilities for the project and/or elements of general interest and/or increase public financial contribution. 

Prerequisites

Suitable Regulatory framework (authorizing and securizing this form of partnership), similar or convergence of interests between the several public entities involved, availability of private partnerships that have the right competencies and are interested, suitable types of private financing if needed

Success factors

Public players' internal capacities that allow them to build a balanced partnership, flexibility to adapt to changing market conditions.

Operation

Public insitutions that own the land, control urban legislation and sometimes inject capital, private partners (property developers, dearlers).

Buildings permits sales or transfers, fees for planning applications
Description

Separation of land property right from right to build, and sale of those rights by local governments in exchange for compensation in kind, at a fixed or auction price. Those rights to build are enforceable in determined areas. They can also be used as payment for private lands acquired for public use or to mitigate the costs (or lack of profits) born by the private players who are acting for the general interest (for instance, maintenance of heritage building that prevents from using the full rights to build attached to the land, or preservation of a natural space).

Advantages

Public investment can be financed by private investors and operators. In case of auction sales, local governments achieve greater capital gains on land value increase.

Transfers, sales or change of use of additional building permits.

Drawbacks and precautions

Those mechanisms can only be applied in cities and areas with great potential for profit, and are based on a pricing system that can trigger social exclusion.

Prerequisites

Legislation allowing the sale of rights to build. Existing a real estate market for in case of auction sale.

Success factors

Planning schemes channeling development for the valuation of additional construction permits (few  construction permits “a minima” attached to properties), enough land pressure (also foster by developers) to encourage densification, and densification that adapts to current or planned infrastructures. 

Operation

Public institutions in charge of urban legislation (which grant rights to build), private owners and property developers, investors (if those rights take the form of tranfereable securties).

Examples
Ho Chi Minh-Ville: PDF icon Sale of land-use rights
Long-term leases
Description

Sale of a specific right of use (use, density, etc.) more or less clearly defined, for a determined, generally long, period  (50 to 99 years), on a land that remains under public ownership. This right of use can generally be traded on markets

Advantages

Compared to selling lands, the sale of rights of use implies to contractually agreeing on a definition of “right of use”, requiring any modification (greater density for instance) to be set out in a written addendum that lead more easily to additional payment from the beneficiary than in a situation where public authorities change urban parameters on private properties.

Prerequisites

Same as above. This mechanism is used mostly in countries where lands are publicly owned (leasehold, as opposed to freehold), but can be extended to emphyteutic lease on public lands.

Success factors

Public expertise in land/ real estate management as well as in urban planning, especially critical when local governments take greater risks, and when land surface gets bigger. Local governments can capitalize on this know-how in building a specific operational structure (Structural Plan). Urban planning must enhance land value on strategic areas controlled by the local government, and allow some flexibility in local development planning parameters (use, density…) to optimize the lands’ worth.When purchasing public lands previously used, there must be a clear and consensual compensation process set up for initial owners/users to avoid conflicts carrying a potentially high political and financial cost. The public institution that owns the land, if it is not the main beneficiary from capital gains on land value, must benefit from the project, in order to avoid institutional blockages. It is also true for all the institutions involved, whose role is critical in the valuation process. 

Operation

Land owners (public and private if acquisition), public institutions involved in urban development (regulation and investment), initial land users, private developers and final users.

Public land sale
Description

Use of public real estate capital (existing capital or set up for this purpose) as a financing and implementation tool for public policies, by selling or renting (sometimes to the highest buyer and/or with a more or less defined agenda linked to it) public lands or properties that have been valued by public authorities (through investments or normative changes) and/ or that are not in use (often implying a cost for local governments). Those lands can initially be public or purchased from private/public owners. Local governments can sell bare or serviced lands as well as constructed sites but they can also keep those lands to rent them as a real estate product. The level of risk, the cost and the capacity to capture capital gains on land value increase along with local governments’ degree of involvement. Real estate can be directly managed by local governments, or through a specialized public entity, that can be shared across local governments and/or the State, and, if required, financed by its own resources (provided by public authorities), with debt (with the land itself sometimes used as collateral, at initial, future or intermediate value) or through a specific taxation system.  The proceeds can take the form of a monetary payment, handovers of serviced lands or properties and or public work (infrastructure; social housing…) on site or off-site. This mechanism may be used under a concession scheme that includes other financing means (e.g : user-pay). 

Advantages

Allows the preservation of public lands to be held for use in the public interest/ to better maintain the form and content of urbanization and/or to capture most of the surplus on capital gains from the increase in land value due to urban development (if it has not been anticipated in purchasing prices when acquiring lands) to finance general interest measures (equipment, social housing,...), and by then selling it back or renting part of it to private players. Allows also the mobilization of public and non strategic assets in order to finance public policies, to reduce operational costs (security…) and to increase the land supply.

Drawbacks and precautions

When purchasing lands: high public capital lockup and need  for a clear upstream definition of future land use in order to avoid holding the land inefficiently. Purchasing, expropriating and even the mobilization of occupied public land raise the issue of compensation to initial owners or users, which can lead to conflicts and a decreasing ability to capture capital gains on land value. When re-saling lands, one-off revenues largely depend on the location and on the interest from potential buyers (the bigger the transaction, the higher the commercial risk). The limited absorptive capacities of the resale market and/or the local governments’ lack of ability to overcome this obstacle (through subsidies) may leave little room for maneuver. Leasing induces lesser but more steady revenue streams; nevertheless it requires public expertise in this area.  Maximizing capital gains on land value may prove incompatible with achieving certain social objectives or building high-quality properties. 

Prerequisites

Suitable regulatory framework, existing framework in case of auction sale. Availability of operators and adequate financing sources when local governments support part of or all the land development process.

Success factors

Public expertise in land/ real estate management as well as in urban planning, especially critical when local governments take greater risks, and when land surface gets bigger. Local governments can capitalize on this know-how in building a specific operational structure (Structural Plan). Urban planning must enhance land value on strategic areas controlled by the local government, and allow some flexibility in local development planning parameters (use, density…) to optimize the lands’ worth.When purchasing public lands previously used, there must be a clear and consensual compensation process set up for initial owners/users to avoid conflicts carrying a potentially high political and financial cost. The public institution that owns the land, if it is not the main beneficiary from capital gains on land value, must benefit from the project, in order to avoid institutional blockages. It is also true for all the institutions involved, whose role is critical in the valuation process. 

Operation

Land owners (public and private if acquisition), public institutions involved in urban development (regulation and investment), initial land users, private developers and final users.