Thursday, 8 May 2014

Killer Arguments Against LVT, Not (325)

Caroline Lucas was harangued by somebody from the Home Builders Federation (or similar) on the radio, who claimed that Land Value Tax would make building new homes unviable.

She didn't actually rebut this with the obvious point, so here it is:


Residual valuation is the process of valuing land with development potential.

The sum of money available for the purchase of land can be calculated from the value of the completed development minus the costs of development (including profit).

The complexity lies in the calculation of inflation, finance terms, interest and cash flow against a programme time frame.

Here's a real life example:

I helped a company which was selling an acre of semi-derelict land in north London, they were unsure how much they'd get for it. Somebody from a larger homebuilder told me - blurted out in a meeting, really - that when they were buying land in that area, they'd pay up to £50,000 for each flat that they could build on it (it would be double that now).

In round figures, each flat could be rented out for £7,000 a year, less costs = £6,000; they could be sold for £120,000; the pure build costs per flat were £50,000; and the developer expected a profit/contingency per flat of £20,000.

That leaves £50,000 which the landowner gets under the "residual valuation" method. The developer has to finance that purchase somehow, so he ends up paying £3,000 or £4,000 a year in interest to his own financiers (bank, bond holders etc) for the duration of the build
Now, what if the developer knows that for the duration of the build, he is going to have to pay full-on LVT for each flat/equivalent of £4,000 (net rent £6,000 less bricks and mortar allowance of 4% x £50,000)?

1. Let us assume that the shift to LVT pushes down the selling price of the flat to £80,000.

2. The builder will simply stick that into his calculations, deduct the £50,000 build costs, the £20,000 profit margin/contingency (the tax due on these elements would be much lower, so the £50,000 and required £20,000 would be lower, but by an unknown amount) and the £4,000 LVT he would have to pay (assuming project takes a year to complete) and offers (say) £6,000 per plot.

3. The developer's profits are entirely unaffected. And as it happens, the £4,000 LVT he has to pay is a straight swap for the £3,000 or £4,000 interest he would have had to pay to finance the purchase of the land under current rules.

4. The landowner has to accept the offer of £6,000 per flat; his alternative is paying [£4,000 x number of flats] each year for the privilege of owning a derelict site. In theory, there might be a flood of landowners literally giving away their brownfield sites.

5. Clearly, there will be marginal situations where the theoretical land value dips below zero (the finished selling price might be lower than £80,000 or the project might take much longer); so even if the developer is given the land for free, his profit margin of £20,000 will be so eroded that it's not worth the hassle.

6. Well, in that case, the council can simply waive the LVT for the duration of the build, or for the next one or two years or whatever, pushing our developer back into the black. That will just be part of the usual negotiations and haggling between the developer and the planning department/local council (the LVT exemption is like a Section 106 payment, but in the other direction).



Kj said...

The housbuilders whatever said that "the empty plots may lie empty because the developer is waiting for development finance". And frequently, I hear that LVT would be unviable because of the long time it gets to get planning permission.
In the first case, I´d say that your explanation applies there too. If the developer expects some delay in order to get things in order, to engineering, architecture, get planning permission and finance in order, he would pay less for the land. But it would also impact who will go into getting land, and maybe favour those who have financing and plans before they buy the land, or?

There are instances where developers are waiting very long times for redevelopment permission for existing built land (as opposed to greenfield land), and they´d have to pay full value for the duration of the wait. There I´d say that LVT is waived from delivery of a planning application for redevelopment to the council delivers an approval, as long as you can design such a rule that it´s not exploited with fake planning applications for speculative purposes.

Kj said...

As an addendum to the last point; the worst cases I´ve heard have been where planning has been in consideration by planning authorities for 8 years.

Lola said...

La Lucas seems to usually gets her arguments in a knicker twist as she has another agenda and is what I think is termed a 'watermelon'.

Reasonably fragrant though.

paulc156 said...

Lucas is busy. She was on Radio 4 this morning discussing fracking.

Mark Wadsworth said...


1. Getting "development finance" will be much easier - instead of raising £100,000 per flat for land + build, the developer now only has to raise £60,000.

2. For sure, people with plans and finance in place are at an advantage. That's called "running an efficient business". This whole developing thing is trickier than it looks and people who don't have plans and finance in place should go bankrupt anyway.

3. Nobody is forcing the developer to buy land without planning and spend eight years haggling. At present, the LVT is "somebody else's problem", the clever developer can co-operate with the current owner and get the planning first before he buys the land. And as part of that negotiation, the developer can say "I will only buy the land and build the new buildings if I get exempt from LVT for the first ... months".

4. Proper LVT is on "optimum permitted use". If there is no planning permission on land then there is no LVT either :-) So again, it's not an issue, it's not a KLN.

5. In a sane world, the LVT starts running when the planning is granted. If you want change of use (knock down a factory, build a block of flats in the example I gave), then the LVT at present will be whatever the LVT on the factory-use-permission is. That is a known figure and the current owner's problem, not the developer's.

L, Paul, in the small world of LVT, we try and keep friends with each other and agree to disagree on a lot of other things.

Lola said...

MW. Well, yes. But.....?