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A question of land value

Let’s say that we have a piece of development land worth $100. That is the market value of the land based on its highest and best use at this particular point in time. Now let’s assume that the land was just encumbered with a new burden: inclusionary zoning. All of a sudden there is now a requirement to make available X% of any residential units built at 50% of average market rents for the area.

Technically, the land is now worth less than $100. And there is a school of thought out there that, in instances like this one, the price of all land should automatically reset downward to offset and account for the inclusionary zoning burden. But as I have argued before on the blog, land prices tend to be fairly sticky, unless the owner is distressed and really needs to sell.

So what can often happen is that the land owner will stubbornly cling to the original $100 number. The thinking being, “I was once told that my land is worth $100 and so that’s the minimum price I’m willing to accept.” In this scenario, you may need a broad increase in rents in order for a transaction to occur. This way the market rate units might be able to fully subsidize these new affordable units, preserving any margins and justifying the original $100 number.

Of course, the impact of inclusionary zoning is a hotly debated topic and there are a number of variables to consider. And so I will leave it at that for today. The real purpose of this post is to consider another permutation. Let’s once again say that we have a piece of development land worth $100. But instead of being owned by 13 siblings — and 3 cousins that live abroad and can’t be reached other than by fax — it’s owned by the government.

In this case, the government wants to sell the land and is considering two options. It can either (1) sell it for $100 and maximize immediate taxpayer revenue or (2) it can sell it for $80 with the condition that the buyer agree to deliver X% of affordable units (and a bunch of other goodies and positive externalities). I would also add that this fictitious town is experiencing what some might call a housing crisis.

If you were a private sector actor, you would probably choose option 1. You would take the additional $20 and retire to Florida (I’m off by a few zeros). But this is the government we’re talking about and presumably the government is thinking about the broader public good. Which option do you think is better at maximizing that?


  1. Jakob P.

    To answer that question, it’s important to look at the timescale and alternative investment options for evaluating the returns.

    The $20 extra are a one-time gain. The below-market rents are an ongoing benefit for the public good. How long does the builder guarantee below-market rents, for 20 years or for 100 years, does the provision carry over to future owners? What else can the government do with $20? Are we selling the public land because we need the money for other projects (and what are their public benefits, and for how long?), or because as a city we haven’t built up the capacity to develop them by ourselves without the profit requirement?

    As a private actor, you rarely ever plan on the scale of decades. As a government, given the amount of variables involved and the fact that people rarely ever talk about the time horizon to be considered, I don’t think the decision is ever a clear-cut one. (That’s one saving grace / good excuse for government projects changing direction whenever new leadership is voted in.)

    Generally, I lean towards the camp of “if something is important to you and you want it done properly, do it yourself”. Property sold to private entities is property that won’t see public good considerations in the long run. Whether you sell for $100 or for $80, you better make sure that you’re getting a hell lot more value out of the proceeds than an appreciating, long-term usable property would get you directly. Because the moment you sell, something like 10% of the sale value immediately go down the drain of various middlemen skimming value off the top that are a write-off for the public good.


  2. If everyone knew about the inclusionary zoning policy from day one, there is nothing wrong with it. However, it is unfair to apply inclusionary zoning policies when people bought the land absent them. A simple solution would be to allow the zoning density, tax any land value gain through any rezoning, and allow a 50% (or whatever) density bonus for affordable housing.
    Government is so good at saying no, that’s why we have housing shortages (high land values mean housing shortages). It needs to figure out ways to say yes…


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