Insights
Development contributions, value capture and voluntary planning agreements
Posted March 22, 2017
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
For further information contact:
Patrick Fensham
National Leader for Urban Policy & Governance | Principal & Partner