Land value capturing sounds complex - and yet all it means is the different ways in which land values can be 'captured' or made money out of. Commonly a form of public financing, it refers to the act of recovering back, or making money from various land related tools, such as taxes and surcharges.
The concept is simple - as the government invests in development of public infrastructure of a certain zone, it will attract investment and property rates will rise. The local government can then step in to levy a set of economic instruments to tap this increase in land rates, and generate revenue that can then be utilized for other government initiatives which may be underfunded. This way, it can generate its own revenue.
Typically, it is the way returns are made from a public infrastructure project. For example, if the government decides to build a highway and plans Transit-Oriented Development at a premium, that premium is Land Value Capture. Increase in property taxes? Same. Development charges? Hike in lease rates? Yes, land value capture.
Land Value capture is especially important in poorer zones, as there is a need to make returns from public projects that may or may not give returns. Strategically planning investment around pockets of government land may help in divesting land at higher rates and capture the difference.
Some of the methods of land value capturing include:
Property Tax
Property tax is a stable revenue source for local governments. Increasing taxation can directly increase revenue, however, this can be met with resistance from citizens if there has been no substantial improvement to their property. The challenge lies in creating and maintain land records and titles so as to charge and recover this tax from the property-owners.
Development Charges
Development charges or betterment charges may be charged at a premium to developers for improving access to utilities for the site. This increases the value of their projects and generates revenue for the local government. Impact fees may also be charged for large projects that require overall upgradation of municipal infrastructure. For example, in Bogota, Colombia, betterment levies charged over 2008-2015 collected $1.1 billion, which financed half of the projects improving streets and bridges.
TDR and building rights
Local government may introduce a scheme of utilizing Transferable Development Rights, or buying fungible FSI from the government by paying extra fees, which can also be a method of capturing land value. These methods are in practice in Greater Mumbai under the jurisdiction of MCGM, where plots under height or development restrictions are allowed to sell their leftover FSI, which can then be bought from the government at a premium by builders. Similarly, up to 30% extra fungible FSI can be bought for providing balconies in residential projects in Greater Mumbai.
Town Planning Schemes/Land Readjustment schemes
In a TPS or land readjustment scheme, land owned by different individual owners is pooled. One part is kept by the government in lieu of providing basic amenities of infrastructure, parks, schools etc. The returned land sizes are smaller, but the value increases due to better services, and the government stands to gain land parcels in return, which can then be leased or sold as discussed above.
Lease
Public lands that are leased to private parties tend to be undervalued. This may be due to poor land and market valuations by the government, but it also allows for corruption and political misuse of public properties as these lands are undervalued in exchange for mutual benefit.
However, when done intentionally to fund infrastructure, it may be success, as seen with Sabarmati Riverfront in Ahmedabad. Land created by river training was plotted and highly regulated, but sold at high premium, and realty was leased years in advance to completion of the project. The incoming revenue has allowed for the infrastructure project, managed by the SPV Sabarmati Riverfront Development Corporation Ltd, to be self-financed, with no dependence on municipal funding and has created a city level infrastructure by leveraging locational benefit. A similar mix of leasing and sale is being used for the Mumbai Port Trust Eastern Waterfront project.
Buy and Lease
Yet another method is land acquisition and pooling for the intention of long-term leasing at higher prices. Seen in China, municipalities had sole authority in acquiring land at urban fringes from agriculturists at values far below market prices, using eminent domain. These lands were pooled and leased for a period of 30-70 years with upfront payment as in a sale, bringing in high cash flow that was redirected for financing infrastructure.
Much of land is India is owned by the government, and poses an excellent opportunity to be utilized to finance urban development projects. Considering the lack of public utilities in many cities – slums, poor housing quality, no water connection or sanitation, improper drainage and urban flooding etc. – land is a powerful instrument to generate revenue. However, land is a sensitive issue as well, with much resistance by land owners to unsympathetic planning schemes that involve acquisition of land. While higher compensation benefits the stakeholder, it reduces the net monetary gain from the transaction.
Thus, there should be a strategy to unlock land value in multiple stages. Initially, land inventory should be done to identify surplus land and find its market valuation. Targeting vacant and unused lands first would infuse in money without much legal hassles. Disposal of public-owned land is always under scrutiny as it is susceptible to be undervalued for political gains. Therefore, taxation instead of change of land titles cuts much of the bureaucracy involving identification and sale of land. Bringing in strategic taxation and allowing private developers to pool land by personal acquisition is an intermediate step. Only after this stage should more complicated transactions, which involve resettlement by government, be done.
While many Indian cities have started value capturing of lands, much work remains to be done in Tier II and III cities regarding land inventory, valuation, and creating a desirable market for investment, for this method to work effectively.
References
1. Ahluwalia, I. J., & Mohanty, P. (2013). Unlocking Land Value for Financing Urban Development in India. Retrieved from ICRIER Working Paper: https://icrier.org/Urbanisation/pdf/Ahluwalia%20and%20Mohanty_Unlocking_Land_%20Value.pdf
2. Express News Service. (2021, February 23). Centre’s nod to Hyderabad's Regional Ring Road. Retrieved from New Indian Express: https://www.newindianexpress.com/cities/hyderabad/2021/feb/23/centres-nod-to-hyderabads-regional-ring-road-2267528.html
3. Hart, M. (2020, December 18). Developing Cities Need Cash. Land Value Capture Can Help. Retrieved from World Resources Institute wesbite: https://www.wri.org/blog/2020/12/how-land-value-capture-can-help-developing-cities
4. Juneja, P. (2021). Strategic Use of Land in Infrastructure Financing. Retrieved from Management Study Guide: https://www.managementstudyguide.com/strategic-use-of-land-in-infrastructure-financing.htm
5. Peterson, G. E. (2008, August). Unlocking land values to finance Urban Infrastructure. GridLines, pp. 1-4.
6. Peterson, G. E. (2013). Unlocking Land Values for Urban Infrastructure Finance: International Experience - Considerations for Indian Policy. Urban and Disaster Risk Management Department, Sustainable Development Network - The World Bank.
7. Romanik, C. (2017, May 17). The Role of Land in Financing Infrastructure in Cities. Retrieved from LandLinks.org, USAID: https://www.land-links.org/2017/05/role-land-financing-infrastructure-cities/
8. Shah, D. (2013). Fungible FSI and Cessed Buildings in India. Retrieved from Redevelipment of Housing Society Main website: https://www.redevelopmentofhousingsociety.com/article-showcase/society-matters/fungible-fsi-and-cessed-buildings-in-mumbai
9. Shiromany, A. (2012). Financing Urban Infrastructure for Implementing Urban Resilience. Retrieved from TERI.org: https://www.teriin.org/projects/apn/pdf/day2/Financing_of_Infrastructure_Development_TERIGoa.pdf
10. SRFDCL. (2021). Business with SRFDCL. Retrieved from SRFDCL: Main Website: https://sabarmatiriverfront.com/business-with-srfdcl/
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