An important question, and one whose significance relatively few of us understand. Many are not even familiar with the term "land rent." Land rent is the annual value of a particular piece of land. Quick and dirty, it can be estimated at about 5% of the selling value of the land part of the property. It is a value created not by the individual or corporate titleholder, but by the community. Land has no value until more than one party wants to use it (or wants to speculate in it).
Who should get the land rent? Most people's knee-jerk reaction is that, of course, the titleholder is entitled to the rent on the land he owns. And indeed, that is roughly the way it is generally approached. The local municipality generally places an annual property tax on land, buildings, sometimes cars and machinery, typically 1% of the market value of the property. So 1% of the ~5% gets collected for the local commons, and 4% of the ~5% stays in the pocket of the title holder.
This has all sorts of ramifications, and I'm certain that the subject will come up regularly on this blog. What prompted it today was several recent articles in The Edinburgh Evening News. One is titled OIL barons from the Middle East are in talks over an ambitious bid to buy the whole of Princes Street (2/23/08). It begins,
City leaders say they have been approached by some of the world's wealthiest "sovereign funds", over moves to buy every building on the street.
They say there is interest from state-owned funds headed by individuals of the stature of the Sultan of Brunei, one of the world's richest men with a net worth estimated to be in excess of £10 billion. Talks are continuing with the funds, which the council sees as an ideal means of carrying through its vision for the rejuvenation of the street.
And investment experts admit it is "plausible" for one of the funds to buy the whole of the street.
Nations with the biggest investment funds include United Arab Emirates, with more than £445bn, and Singapore, with more than £218bn. It's thought Edinburgh boasts around 60 buildings which are of interest to sovereign funds, with a combined value of hundreds of millions of pounds.
The next, Princes ransom as oil-rich Arabs target iconic street for £1.35bn (2/24/08) begins
IT MAY not mean the first Scottish souk or camel racing in the gardens, but oil-rich Arab investment funds are in talks about buying up the whole of Princes Street.
City councillors who want a world-class redevelopment of Scotland's most famous shopping thoroughfare have been in contact with "sovereign" funds from countries such as Qatar, the United Arab Emirates and Kuwait, which have billions of pounds of surplus oil revenues to invest.
Iconic global locations such as Edinburgh's Princes Street, already a magnet for well-heeled tourists from around the world for its mix of big-brand department stores and unrivalled views, are high on their shopping list.
A takeover of the whole street would reduce the number of owners and help the City of Edinburgh Council towards its goal of turning it into a world-class attraction. Properties with some of the best views in the capital are used as store-rooms when they could be shops, restaurants and cafés.
The street is home to famous names such as Jenners, Marks & Spencer, and a host of other high-street chains, as well as smaller shops and offices. It also hosts the New Club, the city's most prestigious private members' club.
Estimates of the value of the street range up to £1.35bn, effectively small change for the funds. Tom Buchanan, the council's economic development leader, said: "There are people talking to us with access to sovereign funds. They have large amounts of wealth.
"We've had people from those types of funds express an interest, as well as a number of comparatively smaller developers. They would come to us to develop our masterplan."
Asked whether there were funds interested in buying the whole street, he replied: "Yes, that's something we are in talks about."
That same article ends,
Many of the buildings on Princes Street are owned by external investment companies, the most prominent of which include
- The Equitable Life Assurance Society,
- Prudential Investment Managers Ltd and
- F&C Commercial Property Trust Limited.
Altogether, these organisations own approximately 85% of the buildings on Princes Street.
The Equitable Trust leases its properties to organisations as diverse as the Scottish Conservative Party and Superdrug, Prudential leases to clients such as Starbucks and Clinton Cards, while F&C mainly owns office blocks. Companies such as Marks & Spencer, Boots and fast-food giant McDonald's own their own premises.
I assume that these are insurance companies and perhaps a real estate investment trust, which benefit policy holders and shareholders all over the world; relatively few of them live in Edinburgh or its metropolitan area. So the land rent from Prince Street is already leaving the area, and would not simply be sent in a more concentrated lump to a single part of the world, rather than to insurance company shareholders and REIT shareholders worldwide.
Wouldn't it be better for Edinburgh to change its tax structure, and instead of taxing both Edinburgh's buildings and Edinburgh's land at, say, 1% of market value per year (I'm guessing at the rates based on what occurs in the US, and would welcome correction if things are very different there), stop taxing the buildings at all, and raise the tax rate on the land value, to 2% (keeping ~40% of the land rent in town and leaving ~60% of it to the landlord, wherever and whoever he is), or 3% (keeping ~60% for the commons, ~40% for the landholder), 4% (keeping ~80% for local purposes and leaving 20% of it as a gift to the landlord from the commons), or 4.5% 9 (still making a handsome annual gift to the landlord, who, after all, didn't create the land value, and bought the right to privatize it from someone else who didn't created it either).
I'm certainly not opposed to the fellow who develops a choice bit of land reaping a fair rent on the improvement he builds and the services he provides to tenants or customers. Nothing wrong with that. But why should he get to collect the land rent, too?
In today's "Scotland on Sunday", there was this letter to the editor, which got the headline "Tax Solution for Princes Street":
HAVING been brought up in Edinburgh, I find it hard to decide which generates more despair, the disappointing appearance of once-great Princes Street or the misguided thinking of the civic leadership in their hope to revitalise it ('Princes ransom as oil-rich Arabs target iconic street for £1.35bn', February 24).
The problem has nothing to do with any supposed lack of money in Scotland or because Princes Street "has developed in a haphazard nature" or because of "multiple ownership". The cause of the street's deterioration is due to the unfortunate property tax structure. Property values have escalated over many years so fast that the owners have had no incentive to use the land or buildings efficiently. They just pocket the property value increases and put their discretionary financial resources to work elsewhere.
The answer is to have the property tax structure modified, not to sell out the street. Firstly, reduce or, better still, eliminate the tax on building values, since that tax acts entirely counter to entrepreneurial efforts to maintain and enhance buildings and as such is clearly contrary to long-term city interests.
Secondly, significantly increase the tax on land values. An increased tax is justified because it returns land value to the community that created it and because it is the key missing catalyst in motivating owners to achieve the highest and best use of their land.
Given the appalling alternative, consideration should be given to demarcation of a special property tax zone around Princes Street.
Roger Wilson, Ottawa, Canada
I don't know why it should be limited to "a special property tax
zone around Princes Street." It sounds like an eminently fair approach
for all of us.
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Posted by: Donte | November 11, 2013 at 06:08 PM