Posted on June 1, 2016 by Lindsay Taylor 2

Value Capture through Voluntary Planning Agreements Part 2 – Key Issues & Examples of Some Local Council Practices

My previous article examined the concept of value capture, provided a basic land economics justification, and described how it is typically implemented through voluntary planning agreements (‘VPAs‘) under s93F of the Environmental Planning and Assessment Act 1979 (‘EPA Act‘) in connection with planning proposals in an urban renewal context. A number of Sydney councils have recently introduced value capture policies in one form or another. These councils  are typically located in regional and sub-regional centres within the metropolitan area. The policies typically apply to the central business district and surrounding land where land values and development pressures are high and changes to the applicable planning controls to accommodate higher density development would significantly increase land values.  This article examines some current policies and practices of selected Sydney councils relating to the use of VPAs for value capture purposes and how they measure-up in light of some key value capture issues.

Justification

The basic justification for value capture is that a planning authority, such as a local council, is entitled to capture for the community benefit some of the land value increase accruing to a parcel of land from planning activities of the authority which increase the development potential of the land and hence its value.

This is recognised by the ‘Practice Note on Planning Agreements‘ published by the Department of Infrastructure Planning and Natural Resources (as it then was) in July 2005 as follows:

‘The provision of planning benefits for the wider community through planning agreements necessarily involves capturing part of development profit for that purpose. The value of planning benefits should always be restricted to a reasonable share of development profit. Planning benefits should never be obtained through planning agreements as a form of taxation on development.’

Some key issues

Entitlement

The most fundamental value capture issue is the justification and extent of the planning authority’s value capture entitlement in any particular case. This is dependent on factors such as, but not limited to, property market conditions, land values, site characteristics, the existing and proposed future planning controls, and the redevelopment scheme proposed. This being so, it goes without saying that the value capture potential for any redevelopment scheme must be assessed in relation to the particular scheme and not according to a predetermined blanket formula or rate of charge.

Arguably, the proper objective is to identify the unearned increment in land value uplift resulting from any planning proposal and to decide the community’s legitimate claim to a share of it.

Calculation

This raises the issue of how the land value increase should be calculated for value capture purposes. An understanding of the basics of redevelopment economics suggests that a residual land value analysis should generally apply. Such an approach estimates the value of land by subtracting development costs from market value. It can be done after a development has been built, but is usually done before a development takes place. Such an analysis is sometimes performed prior to a rezoning (ie. at planning proposal stage) or a commitment to redevelopment to understand the implications of land use regulation, development potential or both.

Generally a site can be redeveloped when the value of the site under a redevelopment scheme from a developer’s perspective on a residual land value analysis is greater than the site’s value in its existing condition. Thus, a developer will ordinarily be the highest bidder for a site where its residual land value under a redevelopment scheme is higher than the market value of the land in its current state.

Development feasibility

The implementation of value capture in any case should not adversely impact on development feasibility by denying the developer a reasonable share of development profit. This is not to say that there is no room for the planning authority to have a value capture policy, but rather, as stated, that the policy should respond to individual circumstances and be fair and reasonable.

Any value capture policy should make provision for testing development feasibility. There is a well-developed policy framework in this regard among a number of London Borough Councils intended to ensure the reasonableness of ‘planning gain‘ obtained through agreements under s106 of the Town and Country Planning Act 1990. The policies are mostly contained in  local planning authority SPDs (supplementary planning documents) on s106 agreements. Some features of the policy responses to development feasibility testing contained in the SPDs include in specific cases reduction or deferral of planning gain where property market conditions are difficult and feasibility is marginal, and ‘claw-back‘ when property market conditions improve.

Timing

Timing is a key factor relating to the implementation of value capture. Developers typically factor redevelopment costs, including development contributions and other payments likely to be required by the planning authority, into the the purchase price of land. Therefore, it is generally unfair for the planning authority to impose a value capture requirement on those who redevelop existing landholdings which were purchased for redevelopment at a time when the value capture policy did not exist or was not articulated. Arguably, a better policy approach is for the value capture requirement to apply to land acquired for redevelopment after a nominated date related to the implementation of the policy.

Parramatta City Council policy

Parramatta City Council has published a document titled ‘Parramatta CBD Planning Strategy’ (2015), which expresses the Council’s value capture policy in the following terms:

‘A4.2.1 Value Uplift Sharing – That additional higher FSR controls than those proposed in this Strategy can only be achieved by sharing the value of the uplift. That is any additional new FSR is to be purchased by landowners based on 50% of the nominated dollar value per sqm of GFA. The dollar value is to be scheduled to provide certainty and reviewed annually. Such a system would apply for residential uses only, not employment uses. Further, the system would operate in addition to any section 94A contributions payable.‘

It should be immediately evident that a fundamental difficulty with the strategy is that additional FSR is to be ‘purchased’ at the rate of ‘50% of the nominated dollar value per sqm of GFA.’ The strategy makes no attempt to address the unearned increment in land value increase but rather resembles a form of taxation by imposing value capture at a fixed rate of charge in all cases. There is no evidence whether the fixed rate of charge has any regard to residual land value. Furthermore, the strategy does not deal with the impact of the proposed fixed rate of charge on development viability. The strategy is likely to produce unfairness to those to whom it applies.

City of Ryde & North Sydney Council policies

The City of Ryde and North Sydney Council each have value capture policies which operate in connection with planning proposals.

The Ryde policy, which applies to the Macquarie Park corridor and is contained in Ryde Local Environmental Plan 2013 Draft (Amendment 1) Macquarie Park Corridor ‘defers an availability of additional FSR and height until the developer enters into an agreement with Council to deliver roads and/or parks or contribute towards these’.

The North Sydney policy, which is contained in the St Leonards/Crows Nest Planning Study Addendum (2012), applies to ‘development opportunities beyond those available under existing controls‘ which ‘should only be pursued if predetermined public benefits are provided [which] must be in addition to what would normally be required by a new development, such as design excellence and Section 94 developer contributions.‘

Both policies specify the kinds of public infrastructure which is intended to be funded through implementation of the policies. The policies contain no recognition of the proper basis and scope for value capture, no valuation method, no conception of the relevance and importance of development feasibility, and give the council unequal and unfair bargaining power in relation to the approval of planning proposals bearing in mind the absence of any right of appeal to the courts by developers if the planning proposal is refused.

Leichhardt Council policy

The former Leichhardt Council produced a Voluntary Planning Agreements Policy (2015) which contains an explicit value capture policy in the following terms:

‘36.10 Generally, in negotiating a voluntary planning agreement the Council will seek to value the uplift in value of the applicant’s land based upon a valuation of the land at the current zoning or pre VPA standard; and compare this with the valuation of the land in the event that the post VPA change in instrument or planning control is allowed, less any additional costs the applicant may incur in realising the increased value. This exercise will be carried out by a valuer who meets the criteria specified in clause 16 of this Policy.

36.11 The same before and after comparison will apply whether the applicant seeks a value uplift derived from a floor space increase; an increase in a height limitation; or a zoning change which increases the land’s value.

36.12 Council on behalf of the community will generally seek 50% of the uplift value derived in that manner.’

This policy is clearly an improvement on the Parramatta, Ryde and North Sydney policies in so far as it employs a residual land value valuation basis. However, it does not expressly acknowledge the unearned increment component in land value increase, which may not always equate to the whole of the land value increase derived through a residual land value analysis. Further, a fundamental difficulty with the policy, similar to Parramatta, is that the value capture contribution is uniformly 50% of the land value increase. Similar to Parramatta, this gives the policy a taxation flavour and the potential to work unfairness on developers in individual cases.

Conclusion

While there is a sound basis for value capture in planning and land economics, and general recognition of its potential as a source of public infrastructure finance, none of the policies referred to establish a fair or rigorous basis for value capture, and because of this they are likely to produce local property market distortions and unfairness in individual cases.

There is clearly room for broad-scale policy guidance, and where appropriate legislative intervention, to ensure that value capture practices are soundly-based, fair and consistent throughout the planning system.