Posted on May 18, 2016 by Lindsay Taylor

Value Capture through Voluntary Planning Agreements Part 1

Section 93F of the Environmental Planning and Assessment Act 1979 (‘EPA Act‘) establishes a statutory system of bargaining for community benefits between planning authorities and persons interested in the use and development of land, such as landowners and developers (‘landowners‘). The bargain is contained in a voluntary planning agreement (‘VPA‘). The EPA Act affords VPAs a potentially broad field of operation, sufficient among other things to accommodate the practice of ‘value capture‘. This is similar to what occurs in connection with ‘incentive zoning‘ in the United States of America and ‘s106 Agreements‘ in the United Kingdom, where increased development potential relating to land is in effect exchanged for community benefits which are funded by the increased land value. This post examines the concept of value capture, provides a basic land economics justification, identifies some key issues, and describes how it is typically accommodated through VPAs. A further post will examine in more detail some of the key issues and some current policies and practices of Sydney councils relating to the use of VPAs for value capture purposes, and the governance implications which arise.

Value capture defined

In the broadest terms, value capture in relation to urban land development involves a planning authority, such as a local council in New South Wales, capturing 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.

Value capture contributions are typically used to fund public infrastructure and other community benefits. However, value capture needs to be distinguished conceptually from the more traditional forms of development contributions under s94 and s94A of the EPA Act.

Value capture distinguished from other development contributions mechanisms

In New South Wales, development applications may be approved subject to conditions imposed under s94 or s94A of the EPA Act requiring development contributions to be made towards the cost of the provision of public amenities or public services.

Section 94 is an internalisation mechanism the purpose of which is to ensure that private development does not create public pecuniary costs arising because of the need for the planning authority to incur costs providing new or additional public infrastructure to meet demands created by new development. Another way of describing s94 is to say that it is a ‘user-pays‘ development contribution mechanism, similar, for example, to impact fees and exactions mechanisms applying in many parts of the United States of America.

Section 94A is more akin to a development tax, although its purpose, similar to s94, is to provide a pool of funds to the planning authority to ensure that private development does not create public pecuniary costs of the kind referred to above. The Community Infrastructure Levy, which has operated in the United Kingdom in recent years, has a similar basis.

In contrast, the fundamental purpose of value capture is not internalisation or taxation but rather ‘clawback‘, that is, to capture increased land value for the community on the basis of a legitimate claim by the planning authority to a share of what is commonly referred to as the ‘unearned increment‘ of land value uplift.

Justification for value capture

Under the general law, the bundle of land ownership rights includes the right to use and develop land (‘development rights‘) as the landowner desires. Economics assumes that landowners will seek to maximise their wealth by putting land to its highest and best use. However, the freedom to do so can lead to potentially conflicting land uses and potential adverse externality impacts and hence the imposition of costs on neighbours and the wider community such as ‘nuisance costs‘ caused by the adverse impacts and ‘transaction costs‘ incurred in mitigating the impacts. Thus arises the problem of ‘social cost‘ of private land development which planning legislation seeks to address.

Town planning legislation, such as the EPA Act, seeks to control the use and development of land to minimise as far as possible the undesirable effects of the private use of land and maximise community welfare. In Eaton & Sons Pty Ltd v Warringah Shire Council (1972) 129 CLR 270, Stephen J, at 294, explained the effect of the coming into force of the County of Cumberland Planning Scheme in the Sydney region as follows:

‘The Scheme took away the liberty at general law of occupiers of land to use their land as they saw fit but… enabled the renewed exercise of that liberty in a very qualified way if a consent from the responsible authority was first sought and obtained. To describe that situation as one in which a right or privilege had accrued to or been acquired… under the Scheme appears to me to be a misuse of language; the effect of the Scheme when a permit is issued under it is merely that users of relevant land are in part remitted to their former liberties at general law.’

Thus, legislation such as the EPA Act involves confiscation of the development rights of landowners under the general law and the reallocation of such rights, usually conditionally, under and in accordance with the applicable legislation (see, for example, the scheme for granting development consents under Part 4 of the EPA Act).

The concept of reallocation is important because planning legislation typically re-orders development rights to achieve maximum community welfare and, in so doing, produces distributional inequities by significantly increasing the value of some land and decreasing the value of other land. This, in turn, produces windfall profits and losses for different landowners within the land tenure system.

Where land values are increased through planning activities (as distinct from the enterprise of landowners), a land value subsidy in the form of the unearned increment can be said to exist and it is this which provides the focus for value capture.

Value capture practices rest on several key concepts and understandings. The first is that the unearned increment is a form of ‘community property‘ in so far as it is wealth created by the activities of planning authorities and not by landowners. The second is that planning authorities, by virtue of planning legislation such as the EPA Act, are monopoly suppliers of development rights to the extent to which their approval is required to allocate rights, whether for a single parcel of land or more generally, through changes to planning controls (see for example, the scheme for making planning controls in relation to land contained in Part 3 of the EPA Act). The third is that where landowners seek variances to existing planning controls so as to increase development rights relating to land, planning authorities are entitled to claw-back any unearned increment arising from approving the variance.

Policy inconsistencies 

Policy needs to be consistent, however. The arguments used to justify value capture, of course, give rise to some obvious questions which are not generally covered by existing policy.

For example, if it is appropriate to apply value capture when land is rezoned or its development potential is otherwise increased, why is it not appropriate to compensate landowners when their land is down-zoned, that is, its development potential is reduced? Such compensation is referred to as being for ‘injurious affection‘ to land. Compensation for injurious affection is not available under the EPA Act when land is down-zoned. It is only available in the very limited circumstance where a development consent is revoked having regard to proposed new planning controls, and it compensates the landowner for the loss of the consent and not the change to the planning controls themselves.

A similar argument can be put forward relating to the confiscatory effect of planning legislation on the freedom of landowners under the general law to use and development land as they see fit. If it is appropriate to apply value capture when the rights of landowners to use and develop land are increased under the applicable planning legislation, why is it not appropriate to compensate all landowners for the momentary effect when all rights to use and develop land are confiscated by planning legislation only to be restored to them on a limited basis in accordance with the legislation?

Key value capture issues

Some key issues arising in connection with value capture practices include:

  • the justification and extent of the planning authority’s value capture entitlement in any particular case,
  • the valuation method used to calculate the amount of value capture,
  • how property market conditions and transactions affect value capture practices,
  • the impact of value capture on development viability and development viability testing,
  • distributional equity considerations among different landowners,
  • the importance of effective policies and communications strategies by planning authorities using value capture,
  • other governance considerations.

These will be examined in some detail in a further post by reference to current value capture policies and practices  being used by some Sydney councils.

Planning proposals, VPAs and value capture

In New South Wales, value capture typically occurs through VPAs entered into in connection with planning proposals under the EPA Act.

The statutory scheme under Part 3 of the EPA Act enables planning authorities to prepare and forward to the responsible Minister for ‘gateway review‘ proposals to vary the planning controls applying to land – ‘planning proposals‘ to use the nomenclature in the EPA Act.

It must be acknowledged that one of the key reasons why planning authorities can successfully implement value capture programs in connection with planning proposals is because of the absence in the EPA Act of any appeal rights to the courts by landowners who are aggrieved by requirements to enter into VPAs in connection with the approval of their planning proposals.

Under the New South Wales statutory scheme, a landowner will typically prepare and submit a planning proposal to the planning authority where the landowner seeks to vary the planning controls applying to particular land to increase its development potential. If the planning proposal is ultimately approved, typically after a period of community consultation, agency referrals, and departmental review, the responsible Minister will make a ‘local environmental plan‘ varying the planning controls, which takes effect when it is published on the NSW legislation website.

Section 93F of the EPA Act enables a planning authority and a landowner to enter into a VPA in connection with a planning proposal. The section is specific that no nexus need exist between a provision in a VPA in respect of development and the object of expenditure of any money required to be paid by the provision.

The public purposes to which development contributions under VPAs can be applied are broad and specifically cover capital and recurrent expenditure on public amenities and public services, affordable housing, transport and other infrastructure, and conservation and enhancement of the natural environment.

Section 93F of the EPA Act allows VPAs to provide for development contributions to be in the form of money, the dedication of land free of cost, or any other material public benefit, including works. A value capture contribution can therefore be converted from cash to in-kind. It is not unusual for VPAs entered into in connection with planning proposals to provide for the construction and delivery to the planning authority of roads and traffic management facilities, public transport services, community, sporting and recreational facilities, community open space and thoroughfares, public domain improvements, and the like, or to provide for affordable housing, bio-banking or other environmental initiatives, for which there is no strict nexus with development. Where value capture contributions are provided in-kind, the key issue is ordinarily valuing the public benefit provided and ongoing costs.

Finally, s93F allows a VPA to offset value capture contributions against s94 contributions or s94A levies that may be required in respect of development to which the VPA applies, although to the extent to which this is done, the value capture contribution is arguably not one in the true sense.

Further post

A further post on value capture will examine some current policies and practices of Sydney councils relating to the use of VPAs for value capture purposes and how they measure-up in light of the key value capture issues outlined above.

© Lindsay Taylor Lawyers May 2016