Large-scale land development in Finland and in the

Netherlands – comparative case study

M. Sc. (Tech.) Eero Valtonen, Aalto UniversityProf. Erwin van der Krabben, Radboud University Nijmegen

Prof. Heidi Falkenbach, Aalto UniversityProf. Kauko Viitanen, Aalto University

Motivation

• Different land development models (van der Krabben & Jacobs 2013) Public comprehensive top-down model

Public sector acquires raw land plans and services the land disposes the serviced building plots to cover the land development costs and to capture unearned land value increment

Main method in Finland, the Netherlands and Sweden More common elsewhere: models relying on private land development

• Aim of the study: to compare public land development in Finland and in the Netherlands ”Devil is in the details” comparison of large-scale land development projects Effectiveness of the model varies among countries and through time Combination of institutional context, planning culture and (ability to adjust to) changes in the market

conditions large impact on outcome

• International relevance: public land development under discussion in some other countries

Potential problems with public land development• Path dependency in the background

• Financially risky model – does not always guarantee better outcome, while huge risks for local government

• Issues related to institutional framework and operational problemsLegal system not completely appropriate to support the modelLegal system not optimally used – risks taken into account insufficientlyFinancial outcome sensitive to changes in market conditions

Framework

• Four key succes factors of land development (van der Krabben & Jacobs 2013)1. Land assembly efficiency2. How to recover public infrastructure costs3. Value capturing4. Ambitions to achieve social development objectives

Planning & Development Practice

Planning & Development Legislation

Market conditions

Land Development Project

Methodology

• Institutional aspects – analysis of legislation• Planning practice – case studies• Flexibility to mitigate the risks related to changes in market conditions

– analysis of legislation and case studies combined

Risks caused by changing market conditions 1. Financial risk - building plot demand too low

Development delayed and/or plots disposed with lower price than required to recover the costs Time lag between investments (buying and servicing the land) and income from land sale: additional interest costs

2. Implementation delay risk - property developers decide to postpone development on their building plots Lost tax incomes from postponed growth, at least real estate tax from buildings If postponing speculative, insufficient supply to meet new demand

3. Planning risks Relates to achievement of social development objectives If plans become too flexible, possibly objectives not achieved

• Public land development makes the municipality to directly confront risk 1 two motivations to carry out public land development

Profit from building plot sales Ability to mitigate risks 2 and 3

Case Vuores Case Waalsprong

1996

Legislation: security of implementationFinland The Netherlands

• Municipality “planning monopoly” Almost unlimited power to include regulations (e.g.

social housing)

• Raw land can be expropriated if necessary Requires a permit from the state “Hope value” can be efficiently cut

• Municipality responsible to service the building plots both in public and private land development

Landowners obliged to participate in covering “community building costs”

• Long term incomes from real estate tax

• Order to build with a threat of expropriation – after local detailed plan valid 2 years

• Municipality “planning monopoly”, but no monopoly on land market

Land acquisition: based on market transaction If no market transaction takes place, expropriation

may follow

• Expropriation law leads to high land acquisition costs for municipalities

Valuation of land in case of expropriation: full compensation includes both ‘assembly value’ and ‘hope value’

Presumably municipality generally pays a higher price to land owners (hope value)

No expropriation when owner can develop himself

• Developer contributions to infrastructure costs Before 2008: only voluntary basis After 2008: if no voluntary agreement possible,

mandatory contribution

Municipality incomes

Finland the Netherlands

40%

3%

4%

17%

36%

Municipality incomes

Municipal income tax

Corporate tax

Real estate tax

State money

Other incomes (incl. PLD)

16%

65%

19%

Municipality incomes

Municipal income tax

Corporate tax

Real estate tax

State money

Other incomes (incl. PLD)

Planning & Development Practice

Finland The Netherlands• Long tradition of considerable public land

ownership in Finnish cities

• In the case project: clear majority of the area owned by the municipality before the project initiated

• Case project costs and incomes Total costs of streets and other public areas ~87 M€ Total costs of public service facilities ~125 M€ Total land lease incomes ~3 M€ in 2029

• Case project cost recovery by land lease incomes Streets and other public areas 2048 All costs 2090

• Land acquisition costs not included to the case project costs in city calculations!!!

• Public development of land: To develop the location according to a detailed

master plan To raise income to cover public infrastructure costs To capture the ‘unearned’ increment of value

• Private sector appreciates development model: High-quality locations Profits from housing construction, not land

development

• Municipalities’ risk-seeking attitude part of their discretionary capacity:

Case study: total investment of € 1.2 billion (!) Supported by national and regional government Supported by ‘Bank for Municipalities’

Market conditions: mitigation of risks

Finland The Netherlands

• Legislation provides equal tools to mitigate the implementation delay risk and planning risk in public and private land development

• In practice, the negotiation position of the municipality weaker in private land development

• In the case project Partnership planning used to guarantee demand for

the building plots – but not the actual construction Combination of partnership planning and public

land development: the risk of implementation delays not mitigated at all

Use of quality group procedure before building permit to have more flexible plans

Land leasing has actually made the time gap between cost occurrence and cost recovery considerably long

• Risk of high land acquisition costs To prevent paying hope values, municipality will

acquire land before decision on land use plan is taken

• Risk of lower than expected sales prices of building plots

Residual value: depends on house prices Municipality enters public private partnership with

private developers to mitigate risks

• To guarantee sufficient pace in house building construction

Private developer in ppp will have priority position to build houses (in turn for risk sharing)

Conclusions

• In Finland the extensive use of public land development seems to be caused by tradition in planning and development practice – not by real shortcomings of the legislation

Legislation does not limit the ability to mitigate implementation delay risk or planning risk in either public or private land development

Opportunity cost of tying the capital to raw land not really acknowledged

• In the Netherlands the earlier shortcomings in legislation seem to be an important factor explaining the use of public land development

Limitations to mitigate implementation delay risk and planning risksHowever legislation corrected – and private land development becoming more popular

• Finnish case suggests that to guarantee the appropriate acknowledgement of the financial risk in public land development requires change in legislation if the municipalities are not financially oriented in planning

• Useful lesson to every country considering of public land development