1. Inefficiencies in Land Markets
February 23, 2005

2. Benefits = $1400/yr Cost = $600/yr Net benefits = $800/yr
Little House on the Prairie
Benefits = $1400/yr
Cost = $600/yr
Net benefits = $800/yr

3. Flood Zone A River Runs Through It RIVER
10% chance of storm that will cause flood

4. Expected value of net benefits = .9(800) +.1(-600) = 660
No storm 90%
Storm 10%
Benefits
$1400
Costs
$600
Net Benefits
$800
-$600
Expected value of net benefits = .9(800) +.1(-600) = 660

5. Standard reaction to risk: purchase flood insurance
Cost of premium: $140/year [based on 10% probability of having to pay $1400]
Benefits
$1400
Costs
$740
Net Benefits
$660

6. Does the land market function properly and result in the efficient uses of land?
Ex. 1 – Land values may be artificially high and send the wrong signal to buyers and sellers
Subsidized flood insurance
Bail-outs

7. Subsidized flood insurance $35/year (instead of $140)
Benefits
$1400
Costs
$635
Net Benefits
$765

8. Bail-outs
Benefits
$1400
Costs
$600
Net Benefits
$800

9. 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

10. $ S or MC MC with mortgage interest deductions D or MB qe q*P*
MC with mortgage interest deductions pe
D or MB qe
Residential lot size

11. Growth Management Direct Indirect Urban growth boundaries
Urban service area boundaries
Zoning
Indirect
Impact fees
Transfer taxes
State investments

12. Ex. 3 – Externalities in the land market may result in inefficient uses of land$ q* P*
D=MPB + MSB S pm
D=MPB only qm
Acres of farmland

13. S=MPC + MSC q* P* $
S=MPC only pm D qm
Acres of land developed

14. Farmland Preservation
Property rights tools – zoning
Taxes – differential assessment
Market
purchase in fee or purchase development rights
create development rights market

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

16. Conservation Design/Zoning

17. 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

18. 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)

19. 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)

20. Purchase of Development Rights
Fair market value is $7144 (can develop)
Agricultural use value is $3333 (cannot develop)
Development value is
$ $3333 = $3811
Public or private entity pays landowner $3811; removes development rights stick from the bundle

21. 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

22. In Michigan:
Farmland owner enters PA 116 agreement.
Farm income is $200 per year.
Property tax is $66.66.
3.5% of income is $7.
Income tax credit is $ $7 = $59.66

23. 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