Municipal Real Property Asset Management: An Overview of World Experience, Trends and Financial Implications

By Kaganova, Olga; Nayyar-Stone, Ritu | Journal of Real Estate Portfolio Management, October-December 2000 | Go to article overview

Municipal Real Property Asset Management: An Overview of World Experience, Trends and Financial Implications


Kaganova, Olga, Nayyar-Stone, Ritu, Journal of Real Estate Portfolio Management


Executive Summary. In nearly all countries, municipalities own or control substantial amounts of real estate, but few municipal governments think of their holdings as a "portfolio" whose composition might be modified to better serve public purposes. This study is based on research conducted for the World Bank, and discusses the conceptual evolution in this area during the last twenty to twenty-five years. It outlines a core set of features that are an integral part of an efficient and accountable asset management system, and also provides an in-dept analysis of asset management issues in countries in transition, where municipal governments often are the largest property owners.

Introduction

This study is about municipal governments as owners and managers of real property. In nearly all countries, municipalities own or control substantial amounts of real estate, including for example, public buildings, schools and hospitals, and housing for municipal residents. Some even own all land within municipal boundaries. Although municipal governments generally attend-with greater or less experience-to the day-to-day operational needs of their real estate holdings, few such governments think of their holdings as a "portfolio" whose composition might be modified to better serve public purposes. Nor does the typical municipality routinely review if the current use of individual properties is appropriate from the perspective of opportunity cost, mode of management and finance, or match its long-term needs for property for its own use and as investment.

Municipalities have also ignored the importance of the municipal balance sheet in making decisions about municipal assets. This is especially true in developing and re-structuring countries. The balance sheet identifies all of a municipality's assets and liabilities that have financial value. Municipalities have the same accounting equation as in the private sector:

Assets = Liabilities + Equity. (1)

The equation can be re-arranged to emphasize the idea that shareholder (citizen-taxpayer) equity is equal to the excess of assets over liabilities (Gauthier, 1997):

Citizen/Taxpayer Equity = Assets - Liabilities. (2)

Understanding the municipal balance sheet is important to municipal finance analysis because (Peterson, 1999):

The assets (and liabilities) of municipalities in developing and transitional countries often are very large compared to their annual budget revenues or expenditures. Often, a municipality may have only a vague idea of the economic value of some of the most important assets it owns, or may have no clear conception even of the "things" that it owns. Municipalities frequently are startled to find the magnitude of the cash holdings they possess, once a thorough accounting of the cash on hand is taken into account. Local governments often have even less awareness of their liabilities.

Municipalities usually have much more freedom of choice over their handling of municipal assets and liabilities than they do of municipal revenues. While central governments in developing countries often impose rigorous limitations on the right of local governments to establish their own taxes, set their own tax rates or borrow from the credit market, they rarely place any limitations on the rights of local governments to own, operate, acquire or dispose of discretionary assets not critical to public service delivery.

For many of the financial choices that municipalities must make in developing or transitional countries, a more useful instrument of analysis is the municipal balance sheet. A municipality that reconsiders its appropriate mix of asset ownership, in light of its service priorities and its mission, may decide to sell off some of the housing stock or municipal enterprises that it owns, in order to reinvest the sale proceeds in assets (like the public water or wastewater system) that are more critical to its mission.

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