inefficiencies in land markets february 22, 2006
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Inefficiencies in Land Markets
February 22, 2006
Benefits = $1400/yr
Cost = $600/yr
Net benefits = $800/yr
000,16$05.
800$
r
aV
Little House on the Prairie
Flood Zone
10% chance of storm that will cause flood
RIVER
A River Runs Through It
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
200,13$05.
660$
r
aV
Benefits $1400
Costs $740
Net Benefits $660
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]
200,13$05.
660$
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aV
Ex. 1 – Land values may be artificially high and send the wrong signal to buyers and sellers
Subsidized flood insurance Bail-outs
Does the land market function properly and result in the efficient uses of land?
Benefits $1400
Costs $635
Net Benefits $765
Subsidized flood insurance $35/year (instead of $140)
300,15$05.
765$
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aV
Benefits $1400
Costs $600
Net Benefits $800
Bail-outs
000,16$05.
800$
r
aV
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
Residential lot size
$S or MSC
qe
pe
D or MB
q*
P*
MC with mortgage interest deductions (MPC)
Growth Management Direct
– Urban growth boundaries– Urban service area boundaries– Zoning
Indirect– Impact fees– Transfer taxes– State investments
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
Acres of farmland
$
D=MPB only
S
qm
pm
q*
P*
D=MSB
Acres of land developed
$
D
S=MPC only
qm
pm
S=MSC
q*
P*
Farmland Preservation
Property rights tools – zoning Taxes – differential assessment Market
– purchase in fee or purchase development rights– create development rights market
Zoning
Exclusive– Concern about windfall/wipeout syndrome
Non-exclusive– Large minimum lot size– Cluster zoning
Conservation design
Conservation Design/Zoning
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
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)
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)
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
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
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.
In Michigan:
Income tax credit is $66.66 - $8.75 = $57.91
Transferable Development Rights
2.5 units/acre 8 units/acre
.1 units/acre 10 units/acre
Sending Zone – area to protect
Receiving Zone – deemed suitable for development