Land Value Capture
- Rebecca Hair
- Aug 27, 2024
- 11 min read
Updated: Oct 4, 2024
Different techniques and routes for undertaking Land Value Capture
This guideline provides an overview on Land Value Capture (LVC) including definitions, arguments for support, and examples of the mechanisms across development which can be used for LVC.
The purpose of this document is to provide Local Authorities with prompts and ideas for considering the use of Land Value Capture techniques within their own projects and to provide some guidance on the different routes that they could follow.
What is Land Value Capture (LVC)?
Let’s look at two definitions for Land Value Capture - the Organisation for Economic Development’s (OECD) definition, and the Transport for London (TfL) definition.
According to the OECD, LVC is a policy approach that enables communities to recover and reinvest land value increases as a result from public investment and government actions[1]. In terms of the purpose and benefits from LVC, the OECD states that LVC is rooted in the notion that public action should generate public benefit. As challenges mount from rapid urbanisation, deteriorating infrastructure, climate change, and more, this funding source has never been more important to the future of municipalities. When used in conjunction with Good Governance and Urban Planning Principles, LVC can be an integral tool to help national and local governments advance positive fiscal, social and environmental outcomes.
TfL also defines LVC as a set of mechanisms used to monetise increases in land values that arise in the catchment areas of development projects[2]. In the case of TfL, that land value uplift[3] has occurred either when the market price of existing properties within the zone of influence[4] goes up faster than that of properties outside it or when new properties can be developed on land within the zone of influence through a change in use or densities by virtue of the scheme.
The two definitions are not contradictory, yet reflect varying perspectives on LVC. Notably, the TfL ‘zone of influence’ is important to the way in which the authority calculates LVC above ‘public interest’ in the OECD definition.
What is land value uplift?
Land value uplift is central to the definitions of LVC presented in the previous section. To fully understand LVC, it is helpful to also understand what causes Land Value to change e.g. Value Uplift (or betterment). Factors that can increase Land Value include:
1. The impact of public investment. An example of this is transport investments that increase accessibility to transport links. This raises demand for land parcels in the zone of influence, increasing their market value too;
2. The impact of granting planning permission for development, including change of use, which in itself increases market value by allocating development rights; and
3. The impact of overall economic performance of the nation and of specific locations, which is reflected in higher land values.
Considerations on the definition of LVC
When discussing LVC and considering its use within projects, the following should be considered:
LVC is a ‘generic term with a variety of meanings and the definitions of terms relating to LVC are often used interchangeably.
Definitions can feel contradictory. This is because LVC ‘is a concept’ rather than a specific policy proposal. It can therefore ‘mean different things to different people’
Use of the term LVC may, therefore, include many mechanisms with varying impacts on the housing development industry and the scale of the land value captured.
LVC in the UK is mostly prominent across Greater London, with several case studies here to demonstrate success.
Key instruments that are often considered for LVC can include:
Land banking
Land readjustment
Land leasing
Inclusionary housing
Transfer of development rights
Special assessments
Land value taxes
Charges on building rights
Impact Fees
Exactions
Is LVC the right approach?
There are several arguments to support the use of LVC in development programmes, including:
1. The Equity Argument. Expanding transport connectivity or improving local services associated with regeneration such as improved education facilities, public realm etc. raises the viability of development in such locations
2. The Fairness Argument. The fairness argument is premised on the fact that land and property owners receive windfall gains through land value uplifts from transport projects, while the general taxpayer pays for them
3. The Efficiency Argument. LVC mechanisms aim to secure value uplift from all beneficiaries, both existing and new, and target the most appropriate point in time for this capture to occur.
4. The Project Selection & Delivery Argument. Funding projects by monetising their benefits through land value capture creates strong incentives for scheme promoters to ensure that these benefits are actually realised in practice.
5. The Devolution Argument. Funding mechanisms based on land value capture can allow greater devolution to occur.
6. The Economic Argument. Well designed public investment projects should produce significant direct and indirect benefits that are capitalised into land value. Has to potential to reduce reliance on Treasury.
There have been numerous calls to amend the current structure of developer contributions, from minor alterations to wholesale reform, such as property taxation and LVC. The main argument for reform in this area is that ‘the profit of developers proves that it is possible to tax them more’.
This raises several key questions, outlined in a recent paper by the Royal Institute of Charted Surveyors (RICS) in response to the Planning White Paper 2020:
How should developers be taxed?
Is LVC the right option?
Which type of LVC would be most effective?
What would be the implications for the delivery of new housing if LVC changes?
These questions are imperative to how the concept of LVC operates and may evolve.
Any uplift in underlying land values is typically calculated from the ‘Market Value’ versus the ‘Current Use Value/Existing Use Value’ prior to any involvement.
“The general premise that if the state creates value by declaring land developable, the state should be a beneficiary of that value, is unimpeachable. Knowing exactly what that value might be or when return of it to the state might take place is quite another matter… How to arrive at land values is a fundamental issue that appears to confound everyone from real estate experts to government officials” [5].
In summary, there are a number of options for capturing land value uplift where the public sector has created value through their own interventions (i.e., improved infrastructure, new station etc). The balancing act is to capture some of the land value uplift whilst still encouraging the private sector to invest in the area to delivery the desired outcomes (i.e., regeneration, increased housing supply etc.)
Contemporary LVC Mechanisms in the UK
There are 12 contemporary LVC mechanisms adopted in the UK. This section provides a definition as well as a list of benefits and challenges for each of these mechanisms.
1. Planning Obligations
Planning obligations are contributions tied to planning permissions, required to make development acceptable in planning terms, primarily under S106 of the TCPA 1990. For more information on planning obligations, re-watch the Local Growth Knowledge Hub’s Masterclass on Town Planning Strategy in this link.
Benefits:
√ Specifically related to development – meaning that the contributions should not be sought for improvements that will not benefit the development.
√ Can be flexible to allow negotiation with the Local Planning Authority.
√ Can prioritise local community infrastructure initiatives, whether that be Affordable Housing, education, transport, public realm or other policy objectives.
Challenges:
X Planning obligations must be fully justified and evidenced.
X Planning obligations may be reduced on viability grounds.
2. Community Infrastructure Levy (CIL)
CIL is a standardised method of collecting developer contributions to infrastructure investment allowing local authorities to charge a variable rate across the authority depending on geography and type of development.
Benefits:
√ Allows Local Authorities to charge a variable rate across their area depending on geography and type of development.
√ Fairer, faster and more certain and transparent than the system of planning obligations which causes delay as a result of lengthy negotiations.
Challenges:
ꓫ Where CIL has been adopted, a complex system can emerge and has led to allegations of Local Authorities “double charging” in s106 agreements for infrastructure that should be delivered by way of CIL.
ꓫ Authorities with operational CILS are concentrated in more affluent parts of the county
ꓫ Cannot be used to fund Affordable Housing
3. Compulsory Purchase (CPO)
Local Authorities have the ability to compulsorily purchase land, even if the owner does not want to sell, so that they can control development on it. For more information on CPO, visit our Local Growth Knowledge Hub’s article on Consideration & Use Of Compulsory Purchase Powers.
Benefits:
√ Can enable the development and provision of necessary infrastructure on large sites, particularly where ownership is fragmented.
Challenges:
ꓫ Even where CPO powers are available (for example, for land for stations and worksites that could then be turned into over-station development), land can be expensive to acquire under the current legislative framework since the principle in law is to pay market value.
4. Strategic Infrastructure Tariff
Strategic Infrastructure Tariff is a bespoke application of CIL to secure land value capture related to specific infrastructure improvements within a spatially defined area around them (only on new Development)
Benefit:
√ The size of the contribution can be based on the amount of floorspace created the location and how the development is to be used.
Challenges:
ꓫ This mechanism has been successful in London where the values from development are considerably higher than the rest of the UK, where values might not reflect such positive outcomes.
5. Roof Tax
‘Roof tax' is a fixed rate of planning gain payable per house[6]. E.g. Milton Keynes – similar to the proposal such as the Combined Infrastructure Tariff outlined in the Planning White Paper, allowing LA’s to borrow against future revenue outlined in Planning White Paper. Investment against future Planning Obligations payments, underpinned by policy defined S106 rate for specific infrastructure or other community benefit.
Benefit:
√ A flexible mechanism that can be applied proactively.
Challenges:
ꓫ Unlike a typical S106, Milton Keynes was able to borrow money from the Homes and Communities Agency (now Homes England) to forward-fund infrastructure against expected tariff receipts, as HM Treasury was confident about the long-term certainty of receipts. This might not be applicable or available on every project.
6. UK Tax Regime
e.g. VAT, corporation tax, stamp duty land tax (SDLT), Capital Gains etc.
Each stage of the development lifecycle is taxed via the wider UK tax regime.
Benefit:
√ Can allow the public sector to recover some of its cost by taxation of value gain.
√ SDLT (but only on sales) and Capital Gains (only on second + homes) can allow taxation on existing stock.
Challenges:
ꓫ Not designed to specifically capture development-induced uplift.
ꓫ Potential revisions to the UK tax regime may negatively impact upon how landowners will operate e.g. If there is a more punitive environment in terms of taxation of land sales or in what a developer can make as an appropriate return this influences the price that can achieved through the sale of land.
7. Vacant Land Levies
The implementation of a levy on sites that have planning permission but are not brought forward swiftly. This is often associated with perceived ‘land banking’ by developers.
Benefits:
√ Can discourage land banking by developers.
Challenges:
ꓫ A national, flat-rate LVC could be detrimental to the development industry, particularly in lower value areas.
ꓫ Likely administrative burden.
ꓫ Ignores regional variation.
8. Business Rates Retention
Pilot schemes allowing the retention of business rates by Local Authorities. Fiscally neutral.
Benefits:
√ Can allow for greater control at a local level as the funds raised replace previous centrally allocated grants.
√ Example - In 2018, Manchester City Council suggested that full business rate retention would provide local councils in England with control of around £12.5 billion of additional revenue.
Challenges:
ꓫ The primary challenges are the level of financial risk that councils can face due to appeals and dependence on a small number of large businesses for a significant proportion of business rate income.
9. Transport/Regeneration Premium Charge
Tax on all development with a red line, to capture uplift in value. Would not only take the uplift on the sale of properties, but also rented properties (applied to both residential and commercial premises). Capture Value of existing stock.
Benefit:
√ Could capture transport / regenerative -induced value uplift.
√ Could apply in defined zones of influence around new development sites.
Challenges:
ꓫ Would require a new collection and enforcement mechanism.
ꓫ Complex mechanism i.e. in order to calculate the charge, the charging authority needs to know four things about an individual property: whether it is rented/owner-occupied; when it is sold; whether it is in one of (say) three charging bands from the Train Station / Infrastructure in question the GIA of the property
10. Development Rights Auction Model (DRAM)
The DRAM involves the public sector facilitating the creation and capture of a portion of new development value uplift through – firstly – master-planning and assembling developable land, and – secondly – by selling the development rights of assembled lots through a series of auctions, with the proceeds shared with the participating landowners at the appropriate point.
Benefits:
√ Can maximise and capture a share of planning gain.
√ Potential to harnesses competition from the market to maximise revenues, while ensuring that existing landowners are fairly compensated.
√ Avoids, where possible, the expense and allocation of scarce financing capacity involved in direct public sector land acquisition.
Challenges:
ꓫ Can be successful in areas where the values from development are high.
11. Business Rates Supplement
Non-domestic rates, or business rates, are collected by billing authorities and are the way in which those that occupy a non-domestic property (or hereditament) contribute towards local services. Supplement introduced in April 2010 (BRS Act 2009). Applies to existing commercial developments with rateable value (annual rental charge) of originally more than £55,000, now £70,000.
Benefits:
√ Local authorities are allowed to retain a proportion of the revenue that is generated in their area.
√ These property sources are of most interest if they can be considered sufficiently certain as to their future streams to be a basis borrow (financing) against sufficiently early to provide a significant proportion of the funding for development schemes.
Challenges:
ꓫ Varies with number of eligible properties
12. Direct Development &Joint Venture
An arrangement between two or more partners to co-operate together in order to achieve a common set of goals, outcomes or objectives.
Benefits:
√ Potentially more likely to attract private finance (higher returns)
√ Increased housing delivered could better support Business Cases to Central Government
√ Could maximise value capture.
√ Could deliver a transformational level of development, involving expanded use of CPO around stations
Challenges:
ꓫ Requires significant upfront development finance due to costs of land acquisition.
ꓫ Politically challenging to implement
Conclusion
There are a number of different interventions, through taxation and other planning mechanisms, that local authorities can make to capture value uplift, especially where significant investments have been made to improve areas and promote land price growth.
Each development / project will have its own challenges in capturing land value and needs to be assessed on a case-by-case basis to balance the need for gaining returns from public investment and ensuring that private investment is not deterred.
If you consider that you could benefit from a conversation on how to better capture land value uplift, please do reach out to a member of the Delivery Associates Network and we will be happy to assist with any enquiries.
Rebecca is a Chartered Surveyor under the RICS with over eight years of real estate experience. Prior to joining Deloitte in London, Rebecca spent six years in the Middle East working on major mixed-use development projects across the UAE, KSA, Qatar, Oman and Bahrain. Over her career, Rebecca has advised on complex projects at all stages of the development lifecycle and has provided both creative advice at a strategic level and detailed financial and commercial advice on a finer scale.
If you have any questions on this topic, or would like support, please contact your Delivery Associate, or email DeliveryAssociatesNetwork@Arup.com
References and Footnotes:
[3] It is important to note that planning control over land use and densities produces a second kind of land value uplift, known as ‘planning gain’. Additionally, LVC is also different from ‘tax increment financing’ (TIF).
[4] TfL refers to the area over which such land value effects occur as the ‘zone of influence’ of the relevant project.