Land Resource Economics Wednesday, Feb. 15
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
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
Graph shows MB (price) and individual land owner’s costs of production. $ RENT MC P = MB Q* Q of commodity
Why rent varies: • Fertility/productivity • Topography/hydrology • Location • Institutions
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)
Rent to Undeveloped Use (Agriculture) Margin of Transference Rent $ Rent to Developed Use Distance from population center
Why is it important to know rent earning potential? • 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? • 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
Capitalization of rents into value: • Agricultural use, average $200 rent/acre per year • After 10 years, sell for $10,000/acre V=$7143.75
Capitalization of rents into value: • Agricultural use, average $200 rent/acre per year • V=a/r • a = annual rent • r = discount rate V = 200/.06 = $3333.33
Why is it important to know rent earning potential? • Determine contract rental payment • Important for selecting among alternative leases • Actual payments may depend upon other opportunity costs – e.g. wages for non-farm work
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
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.
Private property in land • Rights and limits to rights are clear • Rights are enforced • Rights are transferable • Rights are exclusive
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
Property in land is exclusive but it is not absolute.
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
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
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
Eminent domain • To take for public use • to generate a good • Requires compensation
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
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?
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