Many urban redevelopment projects include expensive infrastructural works. In order to find funds for such infrastructure development, city planners are increasingly looking for opportunities for 'value capturing' from related property development. The argument is: investment in new infrastructure improves the accessibility of the locations connected to this infrastructure, with the result that property values in those locations increase. Based on this supposed relation, municipalities negotiate with property owners and developers to get them to finance part of the infrastructure costs. This may take place, for instance, in redevelopment projects around stations, thus linking public development of infrastructure to private development of property. However, the available legal instruments are not effective. This article explores a new legal instrument, namely urban land readjustment. The argument is supported by estimates of the potential extra property value in station areas resulting from public infrastructure investment. We argue that such a legal instrument, which is already in use in some countries, may be a valuable new planning tool in the Netherlands and elsewhere.
In many countries, urban planning increasingly involves redeveloping existing urban areas. Often, the redevelopment process is difficult, since it can take a long time to assemble all the plots and there are great financial complications. Three characteristics of urban redevelopment projects are held responsible. First, these areas often have fragmented land and property ownership (Buitelaar et al., 2008), or private developers already have strategically acquired land, speculating on future profitable redevelopment opportunities. Secondly, redevelopment projects usually include the provision of different kinds of services for public use - such as playgrounds, parks, and road and public transport infrastructure - which can be expensive. Such public works usually increase the value of the real estate in and around the development area, but it is difficult to capture that value increase. Thirdly, an area in need of redevelopment has many existing relationships with adjacent areas, which makes it difficult to draw the boundaries of the redevelopment area. This article addresses those typical urban redevelopment obstacles in more detail and searches for a new planning tool to deal with them.
We concentrate on the redevelopment of railway station areas, because this kind of project is common in many European cities and redevelopment there often encounters the above-mentioned problems of long duration and financial complications. In many cities, railway station areas were not part of their economic centres. Urban development often 'turned its back' on the station area. People arriving by train left the station area immediately, people did not want to live there, and station areas did not attract companies to locate in the vicinity. However, in the last decade this situation has changed completely. Partly as a result of the high-speed train network, local governments and private developers have initiated plans for redeveloping station areas, in order to make them economic centres and/or attractive living areas (Bertolini and Spit, 1998). According to Pels and Rietveld (2007, 2044):
Railway-related issues, be it the development of terminals for high-speed rail, the construction of high-quality office areas near railway stations, or the introduction of light rail, have become important themes in policies to revitalize these cities
Famous examples include (plans for) station area redevelopment in Lille, Stuttgart, Lyon, Berlin, Amsterdam and London (Van der Krabben and Van Dinteren, 2000). In the Netherlands, many smaller towns as well, such as 's-Hertogenbosch, Arnhem, Breda, Eindhoven, Schiedam and Amersfoort, have initiated station area redevelopment plans. The plans offer interesting opportunities for the related development of shops, apartments, etc.
The public land development model, which is commonly used by Dutch municipalities (and see below on 'Urban redevelopment by the public development of land'), is not necessarily the best way of tackling complex redevelopment in such areas (see also Needham, 2005). A particular method of land readjustment might do this better. The possibilities for introducing urban land readjustment in the Netherlands have recently been the subject of a study commissioned by the Dutch Ministry of Spatial Planning (De Wolff, 2002; 2004). In this article, we make use of that study, and we concentrate on a situation that is characterised not only by fragmented ownership (the concern of the study just mentioned), but also by (rail) infrastructure development and related increases in property values. If those increases could be 'captured', it would be easier to finance the redevelopment. To show the importance of value-capturing instruments, this article uses empirical research into the expected increase in property values caused by improved accessibility.
The rationale for value capturing
In a redevelopment scheme, the property values in the area might increase for two reasons. One is the change in the land-use plan, which permits land uses with a higher value: this is betterment or development gain. Internationally, there is much discussion on the legitimacy and the feasibility of 'creaming off' the development gain caused by changes in the land-use plan (in the sense of the 1942 Uthwatt Report on compensation and betterment for the UK). The other reason why property values might increase is public works - in particular, transport infrastructure, but new open spaces also might have a similar effect - which enhance the value of properties near to them. There is a considerable international literature on value capturing (for instance Church, 1990; Bowers, 1992; Batt, 2001; Gihring, 2001; Riley, 2001; Nash et al., 2001; Enoch, 2002; Rybeck, 2004, Smith, 2001). It should be noticed that value capturing is not the same as taxing development gains: there can be development gains without any public works, and there can be value increase from public works without any change in the land-use plan. However, when a project includes both changing the land-use plan and improving infrastructure, it can be difficult to distinguish between the value increase caused by betterment and that caused by improved services. A third concept is 'cost recovery': this is where the costs of public works in a plan area are recovered from the property owners in that area. There is no reason to expect that the costs of such public works are the same as the value increase which those works cause: capturing value increase might be sufficient to cover the costs, or might produce more or less than the costs.
It is clear that financing redevelopment schemes would be made easier if the government body responsible could cream off development gains, capture value increases, and recover its costs. In this article we concentrate on value capturing and its contribution to cost recovery, paying attention to betterment only when necessary.
What is the situation in the Netherlands? In large development processes, municipalities and private developers usually come to a voluntary agreement regarding the way public plan-related costs - such as for land servicing, local road infrastructure, providing open space - will be covered, but if an agreement is not possible, municipalities had, until recently, only limited legal powers to enforce cost recovery (Needham, 2007a, chapter 5). However, the municipalities' legal powers for the enforcement of cost recovery have improved considerably since July 2008 through the introduction of a new Land Development Act (TK, 2008).1 For value capturing there are no legal powers in the Netherlands, although in some cases the municipality and private developers make a voluntary agreement on (partial) value capturing (see below, 'Urban redevelopment by the public development of land'). New instruments for value capturing have been recommended in reports published recently by two different influential advisory boards to the national government (VROM Raad, 2004; Raad voor Verkeer en Waterstaat (RVW), 2004). Both the VROM Raad - the advisory board to the Minister for Spatial Planning - and the RVW - the advisory board to the Minister for Transport and Infrastructure Development - advised improving value capturing in order to (partly) finance infrastructure development (both line infrastructure and node development). The RVW defines value capturing as 'a group of instruments that enable the increased value of land and property as a result of public investments in transport infrastructure to be captured directly or indirectly, so that it can be used for financing the activities that are responsible for the increased values' (RVW, 2004, 47; translation in English by the authors). Based on a study by Offermans and Van der Velde (2004), the RVW concludes that efficient instruments in this respect are lacking: it proposes better instruments, but so far nothing formal has been decided.
Increased land and property values resulting from public works in the vicinity can be regarded as positive externalities. Based on the Coasian treatment of externalities (Coase, 1960), Webster and Lai (2003, 143) provide the following definition:
Externalities are resources for which markets, or more generally allocative institutions, are undeveloped, missing or artificially restrained (the latter possibly being a case of 'public failure'). Depending on one's position, they are resources with positive or negative value but ill-defined property rights.
The solution to any externality is, according to Webster and Lai (2003), to redelineate and/or reassign the property rights over the resource.
These authors (2003, 145-149) provide four reasons why externalities may be problematic. First, because externalities are unpriced, it is likely that there are unexploited gains to be made from trading in them, gains that might be realised if transaction costs could be lowered. Defining and allocating property rights over the increased property values which result from public infrastructure development would probably increase welfare for users of the new infrastructure (on the assumption that this would accelerate the development process), without lowering the welfare of others. Secondly, 'as (externalities) are resources that are unpriced but nevertheless valued, other resources will be employed by individuals in trying to capture that value' (Webster and Lai, 2003, 146). This gives rise to competition costs (that can be considered as 'rent-seeking' transaction costs). In the case of planned infrastructure developments, developers may speculatively acquire land in adjacent locations, because of expected increasing property values. Thirdly, 'the institutions that inevitably emerge to deal with the unpredictable costs of externalities (congestion, avoidance and capture) impose their own costs' (Webster and Lai, 2003, 147). In particular, in the case of brownfield development there are the costs of the municipal project team that usually supervises the project. Lastly, there is a moral case against externalities. Socially, it is not defensible that some land and property owners are able to benefit in an unlimited way from public investments in infrastructure development.
Regarding the positive externalities in station area redevelopment projects, we can (following Webster and Lai, 2003) distinguish different approaches to value capturing: do nothing; voluntary solutions (negotiation, mediation, litigation and unitisation); information and persuasion; direct government investment; subsidise transaction costs; fiscal intervention; regulation. The approach we investigate here is regulation combined with a form of unitisation (part of the 'voluntary solutions') that we call scoping. By regulation we mean new legislation, namely for urban land readjustment. By scoping we refer to the action to internalise the external effects by deliberately choosing the boundaries of the plan as to include them: 'This allows the person causing the effect to reap all of the benefits, because they fall within his land' (Needham, 2006, 75).
The importance for value capturing of scoping can be seen as follows. It is to be expected that new, large-scale, transport infrastructure such as a railway station will increase property values most for properties near to the station, and less and less the further away from the station one gets. In principle, it is possible to designate as the plan area the whole area where values increase. Scoping is then optimal and value capturing can be complete. In a smaller plan area, there is less value increase to be captured. Practically, however, it will be most efficient to include only those properties where value increases are significant - including properties where the increase is marginal will cause so much resistance that the extra returns are not worthwhile.
Scoping can be politically sensitive. Suppose, for example, that the scoping is less than complete, because those properties with only marginal value increase are excluded. Then the boundaries might be disputed by the property owners at the edge of (but still inside) the redevelopment area: their neighbours at the other side of the border do not have to contribute to the costs of the public services, while they might benefit (see also Hong, 2007, 185).
How much value increase can be captured?
To illustrate the potential for value capturing in Dutch station areas, we present here the results of a study of three locations: Breda, Arnhem and Schiedam. Table 1 provides information about the infrastructure developments and building programme for each of the station areas in those towns. Rail services in Breda and Arnhem will be upgraded to high speed train (HST) rail services; rail services in Schiedam remain on 'intercity level' but improved.
For each of the areas, it was estimated how high the office rents would be in the vicinity of the station both without the new transport infrastructure and with the new infrastructure. The difference (euros per square metre per year) can be attributed to the investment in transport infrastructure. These estimates were made using a property value model developed by De Graaff et al. (2006; and see also Debrezion, 2006).2 This model is based on a hedonic price analysis of office rents, using a data set of more than 11,000 transactions in the Dutch office market between 1983 and 2004. The office rents were related in a multiple regression model to four groups of characteristics (De Graaff et al., 2006, 2): building type and user characteristics, locational characteristics, regional characteristics, and accessibility characteristics (both by car and by public transport). The results of the hedonic price analysis show that 'accessibility' has a positive impact on property values.3 Appendix A describes the hedonic price analysis model.
The proposed public transport improvements were analysed in terms of frequencies and connections, then expressed in terms of changes to the variable 'railway station quality index' (see Table 2). Subsequently, the property value model was used to forecast office rents in the station area with and without improved public transport accessibility. The effect of the improved public transport accessibility on office rents was estimated by comparing those two different rent levels (Table 2).
It is to be expected that the value increase caused by the improved rail accessibility will decline with distance from the station. We have no information about that gradient. Therefore, we assume that the value effect estimated by the model will be the same for all new offices to be developed in the redevelopment area. So the estimated rental increase was applied to the whole office building programme for that area. Finally, with help of a standard valuation technique (see Table 3), the increase in the capital value of the office developments as a direct consequence of the public investments in rail infrastructure (including the rail terminal) was estimated (Table 3).
However, apart from the increase in the value of new office developments in the plan area, the improvements in rail accessibility will also increase the value of other property. There will be positive effects on the value of the new apartments and retail space that are part of the plan. Moreover, existing offices, apartments and shops within the plan area will also benefit, as will properties adjacent to the development area. (The size of that increase will depend on the extent of the effect and on how the boundaries of the plan area are drawn - the scoping.) We have estimated only the positive effects of the increased accessibility by rail and have not included the positive effects of other public sector investments in the plan area (i.e. improved road accessibility and improved quality of public space). Important for the argument in this article is that the calculations show the positive relation between public-sector investments and real estate values and how that relation can be quantified. It must be clear that we are not able to relate the increase of real estate values directly to the costs of the public transport infrastructure developments. Those costs are substantially higher than the extra income from real estate values. Our intention with the calculations in this article has been to demonstrate the existence of positive externalities from public sector investments, not to make a cost-benefit analysis from public transport infrastructure development (see Van der Krabben et al., 2008)
Urban redevelopment by the public development of land
The method commonly used by Dutch municipalities, both for greenfield and brownfield developments, we call the public development of land. A public developer (the municipality) buys all the land to be developed, readjusts the parcels into forms suitable for the desired development, and sells those parcels (Needham, 2007b; and see also Van der Krabben and Lambooy, 1993; Needham, 1997; Needham and Verhage, 1998; Groetelaers, 2004; Van Dijk et al., 2007). We take the station area redevelopment process in Breda to illustrate how the public authorities would like this to work and how it so often works out in practice (Van Bendegem and Van der Krabben, 2006).
The planning for the redevelopment of the station area in Breda started in 1998 with the selection of the location by the national government as one of the national key development projects, thanks to the proposed rail connection to the international highspeed rail services between Amsterdam and Brussels. To implement the HST connection, a new rail terminal, extra platforms and additional tracks had to be developed. The municipality immediately took the opportunity to present plans for the redevelopment of the station area. Table 4 compares the agreed development programme (as also shown in Table 1) with the existing situation.
If the municipality were to apply the usual method, it would first acquire all the land, preferably at existing use value. Then it would demolish buildings as necessary, reparcel the plan area, put in the new services, and sell the building plots. There would be costs - in this case not just of land acquisition and servicing, but also of improving the transport infrastructure. Additionally, there would be returns from selling the building plots. The building plots could be sold at full development value. It is the net income from buying and selling land which can be used for cost recovery: whether it is sufficient to cover all the costs depends on the size of the costs.
In the Breda station area redevelopment, NS Vastgoed, a development company owned by the Dutch national railway company, owns 90 per cent of the land in the plan area. The remaining 10 per cent is owned by the municipality and a local private developer. The municipality would have liked to acquire all the land, if necessary using compulsory purchase. However, under Dutch law, landowners who can prove that they have the skills to carry out the planned development have the legal right to do this and cannot be expropriated. So, to realise the planned developments in this case, the municipality had to cooperate with both landowners (NS Vastgoed and the private company). The agreement reached with them was the following. Both agreed to sell their (unserviced) land to the municipality. The municipality agreed to put in the services and (road) infrastructure and then dispose of (some of) the serviced building land back to the same developers. The developers, before they sold their land to the municipality, agreed on the sale price and on the amount, price and location of building land that they would acquire after the municipality had serviced the land and readjusted the boundaries of the parcels.
The details have not been made public: neither the price at which the two landowners sold their land, nor of the price at which they bought it - serviced - back again. So it is not possible to say to what extent the value increase due to the improvements to the rail infrastructure has been captured in the prices. However, the developers had a strong negotiating position, because they owned more than 90 per cent of the land and did not have to compete with other developers. It is known that the developers agreed on cost recovery of certain plan-related costs, namely the costs of servicing the land and the local road infrastructure. The municipality is going to pay those costs out of the income from land sales. However, that income is not sufficient for the municipality to cover all its plan-related costs. Nevertheless, the municipality wants the project to go ahead because of the significance for the local economy, and so is contributing ?50 million from its own funds. Moreover, the developers did not contribute to the costs of improving the rail infrastructure (i.e. rail terminal, additional platforms and extension of rail services): those costs will be financed with national government money.
After eight years of negotiations, in 2006 the municipality and the developers finally reached an agreement. However, for the municipality the outcome is not satisfactory in all respects. The reasons for this can be expressed in general terms in the form of the following inter-related problems.
(a) The value at which the existing properties are brought into the redevelopment
For maximum cost recovery - and for the best possibilities of value capturing - the properties should be brought in at existing use value. However, under Dutch law, public authorities are not empowered to acquire land (not even compulsorily) at existing use value. So the proportion of the value increase (whether caused by public works or by changing permitted land uses) which the municipality can gather depends on its bargaining strength when buying the land. This was low in Breda.
(b) Properties which are not included in the financial accounting (because ownership is unchanged) and which nevertheless benefit financially from the redevelopment
If a property owner can benefit from the redevelopment without having to contribute financially, he will try to remain outside the process (a freerider). This is possible under Dutch law if the property owner can show that he himself can realise the redevelopment plan, for then compulsory purchase is not allowed. The landowners in Breda made good use of this possibility. This right of the property owner can limit the possibilities of scoping so as to include all properties which benefit.
(c) The duration of the project
If there is fragmented ownership, it can take a long time to acquire all the properties (in some of the larger redevelopment projects the land is owned by more than 300 different companies and individuals; see Van Dinteren et al., 2008). If there are just a few powerful owners, they have a strong bargaining position. In Breda, the planning process took much longer than had been expected, causing serious delays in the redevelopment (and also substantial but undefined transaction costs for the municipality, because a municipal project team has been working on the project all those years).
(d) Financial risks for the municipality
Acquiring land for future development is risky, particularly when the development process takes a long time (see also Van Dijk et al., 2007). Usually, the municipality must carry out the works for servicing the land for the whole location at once. This means that it has to finance both the purchase of the land and the servicing costs, without being sure about the returns on the investment. Municipalities have to earn back their investment by selling serviced plots of land to the developers, but - depending on the outcome of the negotiations - they do not have full certainty about the demand for land by developers nor about the price developers are willing to pay. In Breda, if there is a drop in the demand for office and/or retail space and/or apartments, this will cost the municipality money. The reason is that the developers have negotiated that they will buy the serviced land only after a certain percentage of the office and retail space and apartments has been pre-let or pre-sold.
(e) The municipality is in a weak bargaining position
This will be the case if there are just a few landowners involved, as was the case in Breda.
(f) There are legal powers for cost recovery, but not for value capturing
If the value increase is greater than the costs made by the municipality (or other public agency), this is a possible income that the municipality cannot enjoy. In Breda, there is no clarity about whether value capturing could have been more complete and whether the national government could have paid fewer of the rail-related costs. Moreover, certain costs which cause value increases (i.e. costs of infrastructure development) might be made, without it being possible to recover them under existing legislation.
(g) Lack of transparency
This is because all the parties, whether public or private, demand confidentiality as a condition for the bargaining. This is not good for the accountability which a public agency should be able to demonstrate. In Breda, many of the financial details were not made public.
Urban redevelopment by land readjustment
The problems described above with the public land development model are sufficient reason for looking for an alternative model for station area redevelopment projects, and one that successfully copes with problems (a)-(g) described above. We argue in this section that a legal instrument for urban land readjustment does this.
What would such a legal instrument for urban land readjustment look like? De Wolff (2002, 2004) has described the possible features. The owners of land and property in a designated area transfer voluntarily and at existing use value the property rights over land and property temporarily to the municipality (or an urban redevelopment company), to facilitate the implementation of the redevelopment of this area.4 If a minority of the landowners refuse to participate, they can be obliged to do so (bought out compulsorily). Or, if one of the original owners does not want to take part in the redevelopment, he can require the redevelopment company to buy his property. The redevelopment company then takes responsibility for the implementation of the project. The pool of land is reparcelled, based on the agreement of (the majority of) the owners. After completion of the redevelopment, the original owners are again assigned property rights over land and property in the development area, equal to their original share, either in value or in size (if not, compensation takes place). The municipality obtains the ownership over land that is allocated for public use. All original owners benefit from the value increases proportionally. Based on the additional value as a result of the redevelopment, all original owners contribute to the costs of the public services. For the Netherlands, this type of land readjustment is new in urban areas, but there is a long tradition with respect to this type of land readjustment in rural areas5 (Needham, 2007b, 116).
In Hong and Needham (2007), worldwide experiences with land readjustment models - covering the United States, China, Japan, Germany, Israel and The Netherlands - are analysed and evaluated (and see also Doebele, 1982). Based on these experiences, Hong (2007) describes the outline of the ideal type of land readjustment, concerning (1) the prospects of land readjustment, (2) private property protection, (3) the necessity of legislation, (4) the meaning of trust and reciprocity, and (5) the need for economic incentives.
(1) To increase the prospects of land readjustment, Hong recommends three conditions. First, he argues that 'having a consensus on the exchange value of property before assembling land could avert holdouts'6 (Hong, 2007, 184). The land readjustment agency should avoid making the exchange value (the value at which the property is taken into the pool) negotiable. The second condition refers to the opportunity for property owners to share the redevelopment gains:
unlike compulsory purchase, in land readjustment property owners are allowed to share the assembly and redevelopment values of land with the private developer and the government. By contributing a portion of their landholdings to the project and bearing the risks, owners should be entitled to a reasonable return on the investment (Hong, 2007, 184).
Hong states that a land readjustment model that gives the original owners good opportunities to share in the project returns will give better results - i.e. less obstructions to cooperation - than a compulsory purchase model that excludes the property owners from participation and (if they are expropriated at existing use value) from sharing in the development gains. Third,
instigated property change through land readjustment may reduce, though not totally mediate, the problem of compensating owners for the loss of sentimental value of the property. Because land readjustment enables owners to return to land parcels located as close to the original sites as possible, they can build new houses that resemble the old ones (Hong, 2007, 186).
(2) Regarding private property protection, Hong states that 'land readjustment will most likely be adopted in a property rights regime in which protection of private property is strong' and, although transformation of property relations always conflicts, to a certain extent, with private property protection: 'compared to eminent domain, land readjustment may be considered a more friendly approach to adjusting property relations in land assembly' (Hong, 2007, 186-187).
(3) With respect to the necessity of legislation, the country studies in Hong and Needham (2007) show that land readjustment requires special laws. However, Hong argues, 'it is ... crucial to remember that law is important for land readjustment only to the extent that it assists the negotiation between involved parties' (Hong, 2007, 188-189).
(4) Trust, and related to that, reciprocity, is another condition for successful land readjustment. The readjustment agency and the property owners need each other in order to be successful. This may be particularly difficult to achieve on locations with small and large landowners, because it may be expected that power relations will play a signifi- cant role. Hong argues therefore that institutional rules could be designed to prevent asymmetrical power relations in land readjustment organising.
(5) Finally, Hong makes clear that economic incentives are also critical for land readjustment to be successful: '[t]here must be a positive financial return for property owners, the municipality and private developers in order to solicit their participation' (Hong, 2007, 191). Hong suggests two ways to increase the possibility of positive financial returns: organise land readjustment when real estate markets are in an upswing and/ or change the zoning plan (upzoning; higher densities).
The conditions for successful land readjustment, as argued by Hong, are applicable to the introduction of this instrument in the Netherlands. We will demonstrate how land readjustment, under those conditions, is able to deal with the problems municipalities face in public land development processes, which are listed (a)-(g) in the previous section.
(a) The value at which the existing properties are brought into the redevelopment
We argued that for maximum cost recovery the properties should be brought in at existing use value. With land readjustment, a land readjustment scheme can be determined whereby all properties are brought in at existing use value. In the public land development model this would be possible by changing the law to empower municipalities to purchase land compulsorily at existing use value. However, land readjustment would be more acceptable for the property owners, because in turn they would share in the returns on the investments in the redevelopment project (which would not be the case with compulsory purchase). Moreover, the procedures in the land readjustment scheme are easier. We only need a decision on the land readjustment scheme, while compulsory purchase would imply long negotiations or legal proceedings with every individual owner.
(b) Properties which are not included in the financial accounting and which nevertheless benefit financially from the redevelopment.
The threat of freeriders in the public land development model can be countered in land readjustment: all property owners in a redevelopment area must participate in the land readjustment scheme (if they do not want to, they can be bought out), including the owners of properties that will benefit from the redevelopment, but are not part of it. Economic incentives - a positive financial return for property owners - should make this more acceptable for those owners.
(c) The duration of the project
This refers to the possible delays in the planning process, because of fragmented ownership of land and/or strategic landownership by private developers. If the use of the land readjustment instrument is announced at the beginning of the planning process, existing property owners know where they stand and speculative land acquisitions can be prevented.7 In the case of reluctant land and property owners in the area, municipalities do not have to make use of compulsory purchase (which may be a time-consuming instrument), if they are able to make use of a mandatory land readjustment strategy.8 Urban land readjustment might also help to overcome the hesitation of private developers to invest in financially risky obsolete urban areas with fragmented landownership. In this respect, Hong (2007, 15) argues that:
the profitability and risks associated with neighbourhood redevelopment depend on whether the whole area can be comprehensively rebuilt. Private developers, therefore, like to obtain guarantees that the majority of property owners will agree to participate in the proposed scheme. Because consent of the majority of property owners is sometimes required to approve land readjustment initiatives, this method (a legal instrument; added by the authors) is one way to provide developers with such assurance.
(d) Financial risks for the municipality
Urban land readjustment reduces the risks of municipalities compared to public land development, because municipalities do not have to acquire land. Instead, the risks of the redevelopment project are shared with all property owners.
(e) The municipality is in a weak bargaining position
Regarding the bargaining position of the municipality (in cases where just a few landowners are involved), Hong's suggestion of designing institutional rules to prevent asymmetrical power relations should be followed. This means that a special law is needed to ensure the participation of all owners.
(f) There are legal powers for cost recovery, but not for value capturing
The principle of 'properties brought in at existing value' also guarantees maximum cost recovery and value capturing, as long as the total costs do not exceed the total value increase. All costs will be covered by the value increase (as a result of the redevelopment). If the value increase exceeds the development costs that must be covered, the profit will be divided between the property owners, according to their original share in the development area.
(g) Lack of transparency
Finally, urban land readjustment may contribute to the transparency of the redevelopment process. Instead of confidential bargaining between the municipality and each individual property owner, land readjustment requires defining the existing values of all properties at the start of the project. All property owners participating in the land readjustment scheme will receive this information.
Concluding remarks: public land development versus land readjustment
The fact that investments in urban transport infrastructure usually cause the value of adjacent properties to increase is well known. Those who finance the new infrastructure want - understandably and justifiably - to capture at least some of this value in order to cover the investment costs. This is particularly topical in the Netherlands, where huge amounts of money are being invested publicly in some cities to improve the rail services. The areas around rail stations are being redeveloped and the property owners are benefiting from the public investment to improve rail accessibility. Yet with the current approach - the municipality attempts to acquire all land in the redevelopment area - value capturing is not always effective. A new legal instrument for urban land readjustment offers a promising solution.
For maximum effectiveness, land readjustment should be applied to an area which includes all the properties benefiting from the investment - the issue of scoping. The key to the potential success of land readjustment lies in the condition that properties will be brought in at existing values. In turn, all property owners will have their share in the returns from the redevelopment project. (Adjusted) compulsory purchase powers can be used as well to acquire land at existing values, but this is less acceptable to property owners, because they would not be able to benefit from the returns of the project.
Should we prefer this new urban land readjustment instrument for every redevelopment scheme instead of the presently used public land development model? The answer to this question must be negative. Figure 1 illustrates in which situations public land development is expected to offer better results and in which situations land readjustment should be preferred. Generally speaking, public land development works well when all the original buildings are to be demolished, the original owners do not wish to participate in the redevelopment and all plan-related costs can be recovered. Land readjustment is to be preferred when:
* (some of) the original buildings will not be demolished but renovated and the owners of these buildings are expected to benefit from the redevelopment of the location;
* (some of) the original owners are interested in participating in the development; and
* 'extra' infrastructure costs cannot be recovered with the regular cost recovery instruments and it is difficult or extremely risky for the municipality to acquire all properties.
We do not expect, however, that a new legal instrument for urban land readjustment would solve all problems of redevelopment projects. Certain issues need more attention. For instance, this instrument might make it less attractive for private developers to invest in the area (although, as explained above, it would also reduce their risks). Moreover, the original owners of land and property cannot be forced to participate in a risky redevelopment process. If they do not want to participate, they must have the possibility of being bought out (see also Adams et al., 2001). The financial consequences of such a compensation rule for the urban development company - if many owners prefer compensation, the development company might face unacceptable financial risks - are unclear (see also Alterman, 2007).
The focus of this article has been on the Netherlands, where there is a long tradition of state intervention in the land market. However, Hong and Needham (2007) show that urban land readjustment is used as a planning tool in many countries all over the world. The actual application of such a tool is always controversial, because it interferes substantially in the property rights of individual land and property owners. Nevertheless, we can expect that - particularly in European cities - the need for such planning tools is increasing. Aiming to control urban sprawl on the one hand and to revitalise existing urban areas on the other hand, many countries are increasingly shifting new developments from (financially attractive) greenfield to (financially unattractive) brownfield developments. The consequence is that new instruments must be considered, to deal with the increased complexity, and to improve the financial basis, of brownfield projects. Urban land readjustment can be one of those new planning tools.
1 A short introduction in English to the Land Development Act can be found at www.vrom.nl/pagina. html?id=2706&sp=2&dn=7198. The ex-ante evaluation of this Land Development Act concludes that the Act is expected to guarantee full cost recovery in those projects that are profitable. In loss-making projects (e.g. urban renewal projects), however, full cost recovery remains problematic (Van Dinteren et al., 2008). The Land Development Act does not give municipalities legal powers for value capturing.
2 As part of a TRANSUMO-funded project, in which the authors of this article also participated. The TRANSUMO Programme is a Dutch national research programme on infrastructure. The authors are grateful to Thomas de Graaff and Piet Rietveld for their help in applying the property value model to the case studies described in this article.
3 See also many international studies about this subject, including Damm et al. (1980), Weinstein and Clower (1999), Weinberger (2001) and Cervero and Duncan (2001).
4 In other words, the municipality temporarily transfers all individual property rights over goods (land and property) into shared property rights over a 'club good'. The phrase 'club good' has been introduced by Buchanan (1965). Buchanan defines a 'club' as a group of people or organisations that share a similar interest with respect to a certain good (a location or building) of which the number of members is small enough to take collective decisions with respect to this good.
5 Brinkman (1998) has calculated that more than two-thirds of the total agricultural land of the Netherlands has been consolidated, reallocated or readjusted and improved or reclaimed during the second half of the twentieth century.
6 'Holding out is a strategic behavior by which a property owner tries to be the last one to sell so as to increase bargaining power and negotiate a high price for the property' (Hong, 2007, 184).
7 In the 'traditional system' speculative land acquisitions can be prevented as well by municipalities, by making proper use of their preemption right. However, the use of the preemption right is not without problems.
8 This assumes that mandatory land readjustment is 'easier' for municipalities to implement than compulsory purchase. Note, however, Davy's critical view on this issue in Hong and Needham (2007, chapter 2).
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Both authors are at the Nijmegen School of Management, University of Nijmegen, P.O. Box 9108, 6500 HK Nijmegen, The Netherlands. For correspondence, email: firstname.lastname@example.org
Paper submitted February 2008; revised paper received and accepted November 2008
Appendix A. Hedonic price analysis of office rents
The formula that is used for the hedonic price analysis of office rents (De Graaff et al., 2006) is:
p = f (Xa, Xb, Xs, Xr), (1)
where p is the rental value of an office. This formula can have the form of a regression equation, where all attributes are used additively but with different weights. It is assumed that each office building in the Netherlands can be described by a certain number of attributes, named X. These attributes, X, have been divided in four different groups:
1. Accessibility factors (Xa) - e.g. how close the building is located to a railway station, highway or metro station, and whether the building is difficult to reach because of congestion.
2. Characteristics of the building/tenant (Xb) - e.g. are lifts available in the building, what is the age of the building, what kind of company is renting the building?
3. Characteristics of the surroundings (Xs) - e.g. where is the building located, what quality do the public facilities in the vicinity have and how is land in the direct vicinity further used?
4. Regional characteristics (Xr) - e.g. how open is the regional economy, and does the region have a particular image?
The value of an office building - according to hedonic pricing theory - is a function of these characteristics, and thus we may compare office rent values by using those characteristics. So, if everyone values accessibility by car highly, then those office buildings that are easily accessible by car will be more valued than office buildings which are not easily accessible, ceteris paribus.
The dependent variable for a hedonic pricing analysis is the rent price of an office building. Rent prices have been derived from transaction data collected by DTZ real estate for office buildings for the whole of the Netherlands and recorded for each new rental contract. The data set consists of 11,298 records of office rents, based on new rental contracts in the Netherlands, collected since 1983. Regarding these offices, their location (in terms of street address and 6- or 4-digit postal areas) is known, also the size in square meters of the office space, date of the transaction, and some additional data about the economic sector the new tenant is active in. The addresses and postal codes of the office buildings have been used as key variables to join other, external data sets with the office rent transaction data.
In order to assess the relation between accessibility and rent price, the following relation has been assumed (conform equation (1)):
1n p = Xaßa + Xbßb + Xsßs + Xrßr, (2)
where the set of ß's reflects the vector of coefficients belonging to the accessibility, building, surrounding, and regional characteristics. As common in the hedonic pricing literature, equation (2) is specified as a log linear relation.
The main purpose of the research described in this appendix was to assess the impact of the implementation of public transport accessibility measures. The accessibility granted by a railway station is measured by distance to the station and quality, measured in terms of frequencies and connections. Therefore, a 'rail station quality index' (RSQI), which measures for each station its quality, has been constructed. This RSQI is part of the accessibility characteristics.
The model has generated a set of results for each of the factors that are related to office rents. With regard to accessibility the analysis shows the following results. First, it does matter whether a firm is closely located to areas with the potential employees. Whether there is (road) congestion matters, but only marginally. More important seems to be whether a firm is closely located to a railway station. The calculations show that the value of an office increases by almost 14 per cent if it is located within 500 m of a railway station.
The hedonic price model can be used for forecasting the effects of improved accessibility (improved RSQI) on office rents. When we leave aside the variables related to the characteristics of the building/tenant ((Xb), we are able to forecast for each (four-digit) postal code location in the Netherlands changes in office rents caused by a particular change in the RSQI.…