Articles
Mar 22, 2017Development Contributions, Value Capture and Voluntary Planning Agreements
This article originally appeared in New Planner – the journal of the New South Wales planning profession – published by the Planning Institute of Australia. For more information, please visit: www.planning.org.au/news/new-planner-nsw
ln the recent flurry of reports on value capture (from
Infrastructure Victoria, the Commonwealth Government and Infrastructure
Australia [1], amongst others) there has been little attempt to distinguish
contributions for infrastructure based on value capture from other types of
development contributions. A greater understanding of the different ‘frames’ of
development contributions can also inform a more coherent approach to Voluntary
Planning Agreements, which are increasingly used in NSW as a means of capturing
the increase in land value created by the granting or promise of additional
development rights.
Types of Development
Contributions
It is important to distinguish between the different forms
of development contribution. This is of more than academic significance, as the
principles governing the fairness and applicability of any given type of
contribution can vary considerably, with major implications for how such levies
should be implemented (and their acceptability to those responsible for
payment).
There are essentially four types of development
contribution: user pays charges; impact mitigation levies; value capture or
value sharing arrangements; and inclusionary requirements.
Figure 1 highlights the conceptual distinction between the
types of development contributions and each is discussed in more detail below.
Figure 1: Types of development contributions
Source: SGS Economics and Planning
Development
contributions as user charges
These are payments required of developers to help fund
planned infrastructure which will be used by the development in question. The
main principle is that developers should contribute according to their expected
share of the benefits that come from using the items in question.
In Queensland, NSW and Victoria, approval authorities are
required to prepare a Contributions Plan which must identify the area subject
to the charges, the works that will be charged for and the amount that will be charged per dwelling
or equivalent demand unit. ln all these jurisdictions there has been some
slippage from this direct user pays rigour with the recent ‘capping’ of
charges.
Development contributions
as impact fees
Whereas user charges for infrastructure apply to planned
infrastructure, impact fees may apply when a development creates unanticipated
or unplanned demands on local infrastructure as a result of its particular
design or timing.
The ruling principle for splitting costs is the ‘polluter or
exacerbator pays’ principle, that is, those who cause the cost impact are 100
percent responsible for paying that cost. This would apply even if the
unplanned additional investments in local infrastructure subsequently provide
opportunities/ benefits for other developments. Unlike user charges, impact
fees cannot, by definition, be pre- determined. They must be worked out on a
case by case basis.
Development
contributions as inclusionary requirements
lnclusionary requirements are about ensuring that successive
developments meet community expectations in relation to liveability, efficiency
and sustainability. Parking and open space requirements, or their cash-in-lieu
equivalents for off-site provisions are examples.
Development contributions as value sharing or value capture arrangements
‘Value sharing’ or value capture contributions capture part
of the uplift in the unimproved land value that follows from an infrastructure
investment, site rezoning or development approval which allows for a higher
value or more intensive land use.
The idea of levying part of this so-called ‘betterment’ is a
well-established planning concept, though is not explicitly provided for in
Australian jurisdictions, apart from the ACT where the leasehold land system
includes a ‘lease variation charge’ for 75% of the value uplift following the
granting of additional development rights. Growth Area Infrastructure
Contributions in Victoria and Special Infrastructure Charges in NSW are both
quasi-value capture or betterment regimes, though neither is explicitly linked
to land value. In NSW, in the absence of formal mechanisms available to local
government, Voluntary Planning Agreements (VPAs) with development proponents
are increasingly used to make provision for development contributions based on
value capture.
Calculating value
uplift for voluntary planning agreements
When a particular parcel of land is rezoned or has its
development potential increased, the land owner is effectively granted
additional development rights which are not available to all land owners. This
represents a ‘rationing’ of development rights which the community allows or
understands because it is part of appropriate planning, rather than a ‘free for
all’ which would result if there were no restrictions on development rights.
However, the rationing of rights also creates special
development opportunities for particular land owners. The value of these
special opportunities - so-called ‘monopoly rents' - is reflected in an increased
land value. For example, other things equal, land approved for a multi-storey
apartment building will be worth more than otherwise equivalent land designated
for a low rise industrial building.
Figure 2 highlights some of these concepts. It shows the pre
and post zoning ‘development values’.
Figure 2: Value uplift created through rezoning for higher value uses
Source: SGS Economics and Planning, 2016
To be interested in developing the site the developer has to
be able to pay the base price for the land, and meet construction and
development costs including a margin for profit and risk, after accounting for
likely future sale or rent revenues.
After a change to the zone and development controls, all
costs, including any ‘user pays’, ‘impact mitigation’ and ‘inclusionary’
development contributions, as well as the profit expectation, will rise as a
higher value and denser development is constructed. All other things being
equal the value of the land can also be expected to rise, because of the
special development potential and prospective increase in access to amenities
and infrastructure being granted to future occupiers of that land by the
community through the development process. This increase in land value is
generated wholly independently of any investment by the land owner or developer
(and is separate from the profit received by the developer on construction and
other cost outlays). It is reasonable that a share of the uplift in value be
extracted to fund public benefits, including infrastructure.
VPAs are typically struck with the development proponent to
make provision for value sharing or value capture.
Conclusion
It would be preferable and provide more certainty if NSW
moved to an explicit and comprehensive system of value capture, somewhat akin
to the ACT approach. Recognising the monopoly privileges attaching to the
granting of additional development rights such a system might require
proponents to 'purchase' development licences for floorspace above that already
provided in planning instruments. The ‘licence fees’ would be based on
pre-scheduled unimproved land values for different floorspace types, perhaps
‘discounted’ to allow some betterment to be privately captured so that there is
a positive incentive for development.
However, so long as VPAs are used for value capture or sharing in NSW it is important such contributions are distinguished from the three other types of development contributions. Value capture based contributions in VPAs should be explicitly based on the anticipated change in land value (consistent with the above approach) arising from the provision of enhanced development rights.
Endnotes
[1] Infrastructure Australia (2016) Capturing Value: Advice on making value capture work in Australia, Infrastructure Victoria (2016) Value Capture – Options, Challenges and Opportunities for Victoria, Commonwealth of Australia (2016) Using Value Capture to Help Deliver Major Land Transport Infrastructure Roles for the Australian Government, Discussion Paper