Land Resource EconomicsCharacteristics of LandPrivate land market:Why rent varies:Why is it important to know rent earning potential?Slide 6Slide 7Slide 8Capitalization of rents into value:Slide 10Slide 11Contract rental paymentRights of property in landPrivate property in landMost common type of private ownership is fee simple.Slide 16Rights reserved for government:TaxationFair market vs. use value taxationEminent domainPolice PowerSlide 22Slide 23The “Takings” IssueRights of property in land have been redefined:Land Resource EconomicsWednesday, Feb. 16Characteristics of Land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 ownedPrivate land market:Land allocated among alternative uses based on demand for those uses and cost of providing those uses (supply)Opportunity costRent–Different parcels earn different amounts of rent in different usesWhy rent varies:Fertility/productivityTopography/hydrologyLocationInstitutionsWhy is it important to know rent earning potential?Allocation among competing uses–Consider uses A and BTrees vs. CropsCrops vs. office park–Margin of transferenceThat point at which rents from use B become just as attractive as rents from use A–Bid/rent function (rent gradient)Rent $Distance from population centerRent to Developed UseRent to Undeveloped Use (Agriculture)Margin of TransferenceBasis for development decisions–NPV for existing use–NPV for alternative useAccount for costs of changing the use, e.g. costs of construction, etc. for developmentWhy is it important to know rent earning potential?Why is it important to know rent earning potential?Calculate land values–Capitalization of future rents–PV = present value–FV = future value–r = discount rate–n = number of years until future value is realizednrFVPV)1( Capitalization of rents into value: Agricultural use, average $200 rent/acre per yearAfter 10 years, sell for $10,000/acre10)06.1(000,109)06.1(200...2)06.1(200)06.1(200200VV=$7143.75Agricultural use, average $200 rent/acre per yearV=a/r–a = annual rent–r = discount rateCapitalization of rents into value: V = 200/.06 = $3333.33Determine contract rental paymentImportant for selecting among alternative leasesActual payments may depend upon other opportunity costs – e.g. wages for non-farm workWhy is it important to know rent earning potential?Contract rental paymentLease land for agricultureIf annual rent is $200, would not pay more than $200/month for lease–else cutting into returns to labor and capital costsLessor/Lessee consider other opportunities–Off farm jobsRights of property in land 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Rights and limits to rights are clearRights are enforcedRights are transferableRights are exclusiveMost common type of private ownership is fee simple.Right to possess and useRight to sellRight to leaseRight to mortgageRight to subdivideRight to grant easementsRight to deviseProperty in land is exclusive but it is not absolute.Rights reserved for government:Right to taxRight to take for public use (eminent domain)Right to control the use of (police power)Right of escheatTaxationProperty tax–Based upon value of real propertyMay have a personal property taxRevenues generated to serve enforcement role and provide public servicesTaxation may impact use–e.g. use value taxation in agricultureTaxation may impact valueFair market vs. use value taxationAgricultural use, average $200 rent/acre per yearIf, after 10 years, could sell for $10,000/acre–V = $7144If development is not an option, remain in farming–V = $3333If taxes are assessed at $.02 per dollar of value–Property taxes are $142.88 at fair market value–Property taxes are $66.66 at ag. use valueLower taxes, eventually land values climbEminent domainTo take for public use–to generate a goodRequires compensationPolice PowerControl of land use to protect public health, safety, morals and general welfare–to prevent a badBased on common law doctrine of nuisanceNo compensation requiredThe “Takings” IssueEminent domain requires compensation.–Taking land to generate a good without compensation is a “taking”Police power does not require compensation.–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:Deed restrictions or covenantsFee TailLife estatesEasementsWetland regulationsMI Land Division Act–Subdivision controlZoningWhen sticks are shortened or removed from the