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

$

Q of commodity

MC

P = MB

Q*

RENT

Graph shows MB (price) and individual land owner’s costs of production.

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 $

Distance from population center

Rent to Developed Use

Rent to Undeveloped Use (Agriculture)

Margin of Transference

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?

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

nr

FVPV

)1(

Capitalization of rents into value:

Agricultural use, average $200 rent/acre per year

After 10 years, sell for $10,000/acre

10)06.1(

000,109)06.1(

200...2)06.1(

200

)06.1(

200200

V

V=$7143.75

Agricultural use, average $200 rent/acre per year

V=a/r– a = annual rent– r = discount rate

Capitalization of rents into value:

V = 200/.06 = $3333.33

Determine contract rental payment Important for selecting among

alternative leasesActual payments may depend upon

other opportunity costs – e.g. wages for non-farm work

Why is it important to know rent earning potential?

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