Insights

Development contributions, value capture and voluntary planning agreements

Posted March 22, 2017

Author(s):

Patrick Fensham

Sectors:

Government

SGS Economics and planning development contributions article

_{This article was first published in New Planner, Planning Institute of Australia 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 contribution

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 predetermined. They must be worked out on a case by case basis.

Development contributions as inclusionary requirements

Inclusionary 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 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 landowner is effectively granted additional development rights which are not available to all landowners. 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 landowners. The value of these special opportunities - so-called ‘monopoly rents' - is reflected in 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

SGS Economics and Planning DCP infographic

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 landowner 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.

Footnotes

[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

Author(s):

Patrick Fensham

Sectors: