land resource economics wednesday, feb. 15. characteristics of land unique – fixed in location...
TRANSCRIPT
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Land Resource Economics
Wednesday, Feb. 15
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Characteristics of Land
Unique – fixed in location Heterogeneous in topography, geology,
hydrology, fertility Room and Situation (Hite) U.S. ~2.3 billion acres, 37% publicly owned MI ~ 37 million acres, 21% publicly owned
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Private land market:
Land allocated among alternative uses based on demand for those uses and cost of providing those uses (supply)
Opportunity cost is the cost of a use (value of alternative use that is being given up)
Rent is the benefit of a use (returns to land after all other inputs have been paid for)– Different parcels earn different amounts of rent in
different uses
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$
Q of commodity
MC
P = MB
Q*
RENT
Graph shows MB (price) and individual land owner’s costs of production.
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Why rent varies:
Fertility/productivity Topography/hydrology Location Institutions
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Why is it important to know rent earning potential?
Allocation among competing uses– Consider uses A and B
Trees vs. crops Crops vs. office park
– Margin of transference That point at which rents from use B become just as
attractive as rents from use A
– Bid/rent function (rent gradient)
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Rent $
Distance from population center
Rent to Developed Use
Rent to Undeveloped Use (Agriculture)
Margin of Transference
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Basis for development decisions– NPV for existing use– NPV for alternative use
Account for costs of changing the use, e.g. costs of construction, etc. for development
Why is it important to know rent earning potential?
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Why is it important to know rent earning potential?
Calculate land values– Capitalization of future rents
– PV = present value– FV = future value– r = discount rate– n = number of years until future value is realized
nr
FVPV
)1(
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Capitalization of rents into value:
Agricultural use, average $200 rent/acre per year
After 10 years, sell for $10,000/acre
10)06.1(
000,109)06.1(
200...2)06.1(
200
)06.1(
200200
V
V=$7143.75
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Agricultural use, average $200 rent/acre per year
V=a/r– a = annual rent– r = discount rate
Capitalization of rents into value:
V = 200/.06 = $3333.33
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Determine contract rental payment Important for selecting among
alternative leasesActual payments may depend upon
other opportunity costs – e.g. wages for non-farm work
Why is it important to know rent earning potential?
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Contract rental payment
Lease land for agriculture If annual rent is $200, would not pay more
than $200/month for lease– else cutting into returns to labor and capital costs
Lessor/Lessee consider other opportunities– Off farm jobs
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Rights of property in land
Envision property rights in land as a bundle of sticks.– Each stick
represents a right.– Different forms of
ownership are different collections of sticks.
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Private property in land
Rights and limits to rights are clear Rights are enforced Rights are transferable Rights are exclusive
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Most common type of private ownership is fee simple.
Right to possess and use Right to sell Right to lease Right to mortgage Right to subdivide Right to grant easements Right to devise
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Property in land is exclusive but it is not absolute.
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Rights reserved for government:
Right to tax Right to take for public use (eminent domain) Right to control the use of (police power) Right of escheat
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Taxation
Property tax– Based upon value of real property
May have a personal property tax
Revenues generated to serve enforcement role and provide public services
Taxation may impact use– e.g. use value taxation in agriculture
Taxation may impact value
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Fair market vs. use value taxation
Agricultural use, average $200 rent/acre per year If, after 10 years, could sell for $10,000/acre
– V = $7144
If development is not an option, remain in farming– V = $3333
If taxes are assessed at $.02 per dollar of value– Property taxes are $142.88 at fair market value– Property taxes are $66.66 at ag. use value
Lower taxes, eventually land values climb
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Eminent domain
To take for public use– to generate a good
Requires compensation
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Police Power
Control of land use to protect public health, safety, morals and general welfare– to prevent a bad
Based on common law doctrine of nuisance No compensation required
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The “Takings” Issue
Eminent domain requires compensation.– Taking land to generate a good without compensation is a
“taking”
Police power does not require compensation.– Do not have to pay people to prevent a bad
Are there “regulatory takings”?– when use is restricted?– when all economic use is prevented?
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Rights of property in land have been redefined:
Deed restrictions or covenants Fee Tail Life estates Easements Wetland regulations MI Land Division Act
– Subdivision control Zoning
When sticks are shortened or removed from the bundle