Archive for October, 2015

Isolating ground rent

October 26, 2015

• Plots of land will be allotted into discrete locales within which ground rent per square foot is estimated as being approximately equal for a particular land-use with specific planning permission (eg on building height). All owners of real estate (ie improvements to the land) will be required to hold sufficient eligible land permits (LPs) for the current year. The public will maintain records of who owns real estate and who holds LPs.
• Ordinary land permits (OLPs) for every locale will be issued in standard denominations of square metres each year via public auction. Each Series of OLP is valid for a particular land-use/planning permission in the locale for one year commencing on the 15th anniversary of the auction. Single holdings in a Series will be limited to 10% in order to prevent market manipulation.
• On the date of the first issuance of OLPs (being post-dated), a batch of 15 Special Land Permits (SLPs), one for each of the first 15 years, will be registered with individual real estate lots in the name of their owners (disregarding the 10% limitation). This cushions incumbent real estate owners against the loss of residual value in the land. Any real estate sold within this initial 15-year period will be sold along with the remaining SLPs.
• Unlike SLPs, OLPs are alienable from particular real estate lots within the locale. This feature allows their auction to realise an approximation of ground rent as public revenue (more of which later). It also means that while being public instruments, OLPs are negotiable and can be privately traded on a (public) exchange.
• Real estate owners obtaining new planning permission would have their existing holdings of (up to 15) LPs upgraded to the new planning permission type, but additional OLPs would already have to be eligible on purchase. This avoids deterring development while also recognising the positive effect of upgraded planning permission on ground rent.
• As the combined area denoted by a Series of LPs is equal to the area of the land in the locale (with the given characteristics), at the start of each year any real estate owners without OLPs for that year will be granted an opportunity to purchase them. Necessarily, the only source of vesting OLPs comprises those who are holding them over without owning real estate in the locale. If the real estate owner makes the purchase, the price per square metre paid to the former holder of the OLPs would be set at the last open market transaction in that Series.
• Despite being able to top up their LPs each year on issuance, and therefore maintain 15 years’ security of tenure, giving real estate owners pre-emption purchase rights over OLPs exercisable when they vest prevents potential outbidders hoarding them in order subsequently to seize their real estate. At the same time this arrangement ensures anyone who acquires OLPs will receive fair value, whether as land-use or in exchange.
• If the real estate owner does not make the purchase, his real estate will be compulsorily auctioned along with the vesting OLP (whose previous holder would be free to bid). By setting aside the value of the OLPs (at their last market price) and paying this to their previous holder, the remainder of the combined proceeds of the auction represents the market value of the improvement to the land only. This amount will be returned to the former real estate owner as compensation for the sale of his real estate.
• As mentioned, the annual proceeds of the auctions of all the Series of OLPs will fetch a sum of ground rent for the public. This will be shared equally by the population, an annual citizen’s income described here as Ground Rental Entitlement (GRE).
• For an incumbent real estate owner, the effect of the policy is that (like the rest of the population) he immediately earns a new perpetual source of income (GRE); but set against this is his obligation to make ground rent payments after year 15 (noting that the value of remaining liability at any point in time is capped at the value of his real estate).
• What is notable with this policy is that GRE can be distributed to all from day one while protecting incumbent real estate owners’ tenure for 15 years. The universality and immediacy of GRE, along with the care taken not to penalise recent land buyers/upsizers, will both be essential in establishing general support for the policy.