Land Resource Economics Wednesday Feb 15 Characteristics of

Land Resource Economics Wednesday, Feb. 15

Characteristics of Land l l l Unique – fixed in location Heterogeneous in topography, geology, hydrology, fertility Room and Situation (Hite) U. S. ~2. 3 billion acres, 37% publicly owned MI ~ 37 million acres, 21% publicly owned

Private land market: l l l Land allocated among alternative uses based on demand for those uses and cost of providing those uses (supply) Opportunity cost is the cost of a use (value of alternative use that is being given up) Rent is the benefit of a use (returns to land after all other inputs have been paid for) – Different parcels earn different amounts of rent in different uses

Graph shows MB (price) and individual land owner’s costs of production. $ RENT MC P = MB Q* Q of commodity

Why rent varies: l l Fertility/productivity Topography/hydrology Location Institutions

Why is it important to know rent earning potential? l Allocation among competing uses – Consider uses A and B l l – Margin of transference l – Trees vs. crops Crops vs. office park That point at which rents from use B become just as attractive as rents from use A Bid/rent function (rent gradient)

Rent $ Rent to Developed Use Rent to Undeveloped Use (Agriculture) Margin of Transference Distance from population center

Why is it important to know rent earning potential? l Basis for development decisions – – NPV for existing use NPV for alternative use l Account for costs of changing the use, e. g. costs of construction, etc. for development

Why is it important to know rent earning potential? l Calculate land values – Capitalization of future rents – PV = present value FV = future value r = discount rate n = number of years until future value is realized – – –

Capitalization of rents into value: l l Agricultural use, average $200 rent/acre per year After 10 years, sell for $10, 000/acre V=$7143. 75

Capitalization of rents into value: l l Agricultural use, average $200 rent/acre per year V=a/r – – a = annual rent r = discount rate V = 200/. 06 = $3333. 33

Why is it important to know rent earning potential? Determine contract rental payment l Important for selecting among alternative leases l Actual payments may depend upon other opportunity costs – e. g. wages for non-farm work l

Contract rental payment l l Lease land for agriculture If annual rent is $200, would not pay more than $200/month for lease – l else cutting into returns to labor and capital costs Lessor/Lessee consider other opportunities – Off farm jobs

Rights of property in land l Envision property rights in land as a bundle of sticks. – – Each stick represents a right. Different forms of ownership are different collections of sticks.

Private property in land l l Rights and limits to rights are clear Rights are enforced Rights are transferable Rights are exclusive

Most common type of private ownership is fee simple. l l l l Right to possess and use Right to sell Right to lease Right to mortgage Right to subdivide Right to grant easements Right to devise

Property in land is exclusive but it is not absolute.

Rights reserved for government: l l Right to tax Right to take for public use (eminent domain) Right to control the use of (police power) Right of escheat

Taxation l Property tax – Based upon value of real property l l l Revenues generated to serve enforcement role and provide public services Taxation may impact use – l May have a personal property tax e. g. use value taxation in agriculture Taxation may impact value

Fair market vs. use value taxation l l Agricultural use, average $200 rent/acre per year If, after 10 years, could sell for $10, 000/acre – l If development is not an option, remain in farming – l V = $3333 If taxes are assessed at $. 02 per dollar of value – – l V = $7144 Property taxes are $142. 88 at fair market value Property taxes are $66. 66 at ag. use value Lower taxes, eventually land values climb

Eminent domain l To take for public use – l to generate a good Requires compensation

Police Power l Control of land use to protect public health, safety, morals and general welfare – l l to prevent a bad Based on common law doctrine of nuisance No compensation required

The “Takings” Issue l Eminent domain requires compensation. – l Police power does not require compensation. – l Taking land to generate a good without compensation is a “taking” Do not have to pay people to prevent a bad Are there “regulatory takings”? – – when use is restricted? when all economic use is prevented?

Rights of property in land have been redefined: l l l Deed restrictions or covenants Fee Tail Life estates Easements Wetland regulations MI Land Division Act – Subdivision control Zoning When sticks are shortened or removed from the bundle l