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).
Land Valuation
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.
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.
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.
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.
Land owners (public and private if acquisition), public institutions involved in urban development (regulation and investment), initial land users, private developers and final users.
Sale of public land Sale of public land or assimilated Sale of public land or equivalent Sale of public land or equivalent Sale of public land or assimilated Sale of public land or assimilatedSale 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
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.
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.
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.
Land owners (public and private if acquisition), public institutions involved in urban development (regulation and investment), initial land users, private developers and final users.
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).
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.
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.
Legislation allowing the sale of rights to build. Existing a real estate market for in case of auction sale.
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.
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).
Sale of land-use rightsEquity 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.
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...).
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.
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
Public players' internal capacities that allow them to build a balanced partnership, flexibility to adapt to changing market conditions.
Public insitutions that own the land, control urban legislation and sometimes inject capital, private partners (property developers, dearlers).
Public-private joint development with initial control of landThe 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.
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.
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
Suitable regulatory framework, accurate and consensual evaluation system on land value before and after the operation.
Trust between all parties involved.
Local governments, land owners, developpers, public transportation operators, local population.
Urban Expansion Land Readjustment Land Readjustment Land ReadjustmentContribution (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.
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).
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).
Impact studies compulsory, with a methodology clearly defined.
Need for minimum consensus on legitimacy of funding parties involved in the development.
Developpers, insitutions responsible for public investment.
Development / impact fee Development / impact feeFinancial contribution used to finance investments in public infrastructure outside the project area, but that requires adjustment due to this development project.
Allows the financing of actual costs incurred by new development projects.
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
Impact studies compulsory, with a methodology clearly defined.
Need for minimum consensus on legitimacy of funding parties involved in the development. More difficult for development fees.
Developpers, insitutions responsible for public investment.
Public land valuationVoluntary 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.
Widely-accepted method to finance infrastrucure, because it avoids conflicts and ensure that the project will have benefits for local players where it operates.
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.
Detailed cost valuation prior to planning; Existing institutional representation to promote the interests of the residents.
Spokesperson genuinely promoting the interests of the residents.
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).
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.
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.
Land owners, public players in charge of change of use.
Taxation of land-value captureLand owners pay a predifined contribution to cover (in whole or in part) for the repairing or construction of infrastructures, or to provide services on this territory. The amount is drawn down as a single transaction or through multiple payments over the years, thus being used as a loan garantee to finance investment.
Mechanism where land owners support parts of or the full investment cost in the city where their lands are located, without having to wait for the sale of real estate properties, as opposed to the tax on capital gains on land value. Financing can even occur before any operation.
It is difficult to evaluate the investment impact on properties (in terms of capital gains and relative quality-of-life benefits), and thus the distribution of costs among land owners as well as the area boundaries within which landlords have to contribute financially. This can lead to strong opposition from landlords, which can be reduced by providing greater visibility to the investment and by unraveling the relationship between taxation and investment. There is the issue of poor land owners unable to pay the tax, which can be addressed through means-tested tax exemptions.
Detailed and consensual data bases on land and property prices, if cost distribution depends on this valuation. Existing local tax system (land tax generally) that reduces collection costs.
Land owners of the concerned areas, institution responsible for the financing (in most of the case, the municipality).
Special Assessment Betterment levy on existing real estateVoluntary contribution (whole or partly) by land owners (or at least with a majority ownership) to investments and public services development.
Private financing of investments through a consensual mecanism, with the possibility for the mecanism to become binding for all parties above a majority treshold (ex: 2/3 majoirty in California to create districts).
This mechanism leads to territorial inequalities, as richer territories are able to finance greater investments, and are reluctant to implement offset mechanisms, such as tax equalization.
Depends on the owners' ability to mobilize and structure themselves.
Land owners of the concerned areas, institution responsible for the financing (in most of the case, the municipality).
Taxation of the difference between land or property value before and after execution of a public work, a legislative change, or general price developments on the real estate market. The calculation can become increasingly complex depending on the circumstances.
If the tax is levied on sales, it can capture part of capital gains on traded goods, on a precise basis (purchase or selling price), that does not require detailed data bases. Easy to implement politically. Theoretically, this tax can be a good way to tackle land speculation. If the tax is levied at the time of the public action which supposedly will result in capital gains, it can capture a significant part of those capital gains
It is difficult to consensually evaluate the amount of capital gains realized, and its territorial boundaries. Strong opposition from land owners, with the poorest experiencing payment difficulties. It is hard to capture capital gains that are only virtual if taxation happens at the same time that the investments adding value to the land take place. When capital gains are captured at the time of the transfer, it results in tax revenues that are difficult to collect and to directly redeploy to other investments. Furthermore, this tax can impede land and property transfers, thus contributing to market inflexibility, decline in supply and upward pricing pressure.
Definition of precise criteria to allow proper land valuation (before/after) for effective taxation (excluding transactions).
Taxation based on land and property values located on the local government’s territories. Its goal is to gain from the provision of local urban services and from real estate value increase. The tax is based on the current or rental value, but can also depend on real estate characteristics (surface area, use, number of windows…). The tax rate can be adapted to different uses, for instance to put a heavier tax burden on the least dense urban projects (Use –value tax assessment), or in order to apply different tax rates to land and build-up areas (split-rate tax).
Continuity/ Consistentcy, relative stability (depending on the actualization quality, which, if efficient, follows real estate market trends). Social justice, because this tax is paid recurrently and is proportional to the capital gains. Tax modulation theoretically allows public authorities to promote certain uses over others, to fight against land speculation and to reduce the amount of vacant buildings. Land taxation based on the constructive potential incites owners fully use of this potential.
Increases management complexity, especially when looking at revaluation methods and changes in land value. High implementation and management costs. Tax is made visible which makes it very unpopular, especially since it affects all the landlords and that its proceeds are not redeployed. In practice, it tends to privilege individual over collective housing and residential over business properties.
Some form of registry already in place, choice of a method for land valuation. Precise criteria to define differentiated areas when modulating tax rates.
Exhaustive, up to date and reliable registry.
Land owners, public players that benefit from this tax.
Process aiming at anticipating increase in the real estate tax revenues that can be caused by several factors: the development of new activities; the arrival of new inhabitants on degraded lands as a result of the area rehabilitation through public investment. The tax base on this area is frozen when TIF is introduced, and every additional tax revenues are allocated to investments on the area or to repaying loans (taken out to finance local projects).
Helps mobilize future tax revenues to finance urban rehabilitation programs, particularly for underprivileged city centers.
Expensive type of financing because of the provision for the risk of creditors increasing tax revenues on lands; high level of risk for borrowers related to the non-achievement of forecasts.
Suitable regulatory framework. Requires local governments to have access to credit/bond issues and for the investors to be interested in this type of financing scheme.
Realistic project based on reasonable expectations, taking into account the potential for revitalization and land valuation on the territory, promising real estate market.
Institution benefiting from land taxes and loans; project manager for public investment, new real estate local owners.
Use of local tax debts (particularly land tax ) to pay for corresponding land or properties.
Allows public authorities to turn assets whose recoverability is questionable (unclaimed assets, without owners, joint tenancies…) into cash.
Financing restricted to goods for which tax debt applies and to the amount of the tax debt (plus any possible accrued interests; penalties and fees).
Suitable regulatory framework.
Optimization and actualization of the land tax base, which involves a census (registry) and evolving valuation methods on lands and properties.
Prerequisite and factor proven to significantly increase tax revenues on lands. Valuation methods that are based on market value are the most efficient, because they are linked to the quality of local urban services. It contributes to social justice.
Political issues induced by the necessary update of cadastral records(Mexico) and valuation modes (France). Uncertainty associated with the calculation method based on market value, because of market volatility.
Availability of qualified workforce and necessary equipments (especially computer equipment).
