Land Value Contributions

The Department of Planning, Industry and Environment (DPIE) is currently exhibiting its package of reforms for the local and state infrastructure contributions system in NSW. The exhibited package of reforms includes deviations from the recommendations provided by the Productivity Commission’s (PC) review of infrastructure contributions in NSW.
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One of the critical recommendations from the PC review was the introduction of a Land Value contribution (LVC) to the local contributions system. Details regarding the implementation of the system were not provided by the PC review as the idea was developed late in the review process. The amended regulations currently on exhibition and the LVC exhibition paper provide more details on the implementation of this new contribution. 

Key principles of the LVC, as currently exhibited, are:

• It will be a monetary contribution imposed on landowners in a rezoning area at sale or development of their land, whichever comes first.
• The decision to adopt a LVC regime for a rezoning area will be at the discretion of the Council.
• The monetary contribution will be a percentage of the subject land’s value proportionate to the percentage of public land in the Land Value Contributions Area (LVCA).
• The maximum LVC rate that can be collected is capped at 20% of land value.
• The LVCA is identified in a contributions plan for the area as land that is being zoned for more intensive development and contributes to an increase in demand for public purpose land.
• The value of land for the purposes of determining a LVC will be the most recent value published by Valuer-General in accordance with the Valuation of Land Act 1916, section 6A.

The LVC as it is set out in the exhibition package presents attractive benefits for Councils and developers alike. Briefly, they are:

• Opportunity for Councils to acquire land early, allowing them to make the purchase before all of the post rezoning price increase has kicked in.
• LVC being a charge based on a beneficiary pays principle is paid by the landowners. This results in a more equitable distribution of the windfall from land value escalation due to a rezoning. 
• A fixed rate charge, with a maximum cap, provides more certainty to the landowners and developers alike. 

That being said, there are two key issues with the proposed LVC that, in my opinion, would deter Councils from adopting a LVC for a future rezoning area. This article provides a discussion of these key issues. 

Key Issue 1: 20% Maximum Rate
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A cap on land contributions in addition to a cap on overall contributions could be considered an unnecessary restriction for most Councils. Where a Council can remove the cap on overall contributions after IPART’s review of the contributions plan, there should be no need for a cap on land contributions since IPART has determined that the plan follows efficient land use planning and infrastructure design.

Placing a cap on the LVC could be severely detrimental to Council’s ability to fund land acquisitions in greenfield areas. This point is illustrated by the following case study of a newly released greenfield area. 

Lowes Creek Marylands Case Study
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The Lowes Creek Marylands (LCM) rezoning was finalised by DPIE in July 2021, making it a relevant case study as a recently completed rezoning. The precinct was released under the Precinct Acceleration Protocol with collaborative planning between DPIE, Camden Council and developers of the precinct.
As shown by the Table below, public land which would be funded by a contributions plan for the area forms approximately 31% of the hypothetical LVCA that would apply. Estimation of public land acquisition costs using land values from surrounding release areas shows the land acquisition for public land is roughly 29% of the cost for the LVCA (land costs being a lower percentage can be attributed to discount factors for heritage curtilage and flood affected land). 

Therefore, in this hypothetical scenario, Camden Council would lose a third of the income it needs to acquire public land because of the maximum 20% LVC limit. 
DPIE’s rationale for suggesting a 20% maximum limit on the LVC rate is not without merit. More efficient use of public land by encouraging colocation and other efficient infrastructure design principles reduces the cost burden on both Councils and Developers. However, the 20% public land aim must be achieved through the planning process. Achieving the aim via limiting the contributions is akin to putting the cart before the horse. 

Key Issue 2: Valuer General’s land values for calculating LVC
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It is proposed that the LVC provided in a land value contribution certificate for the subject land is calculated by multiplying the percentage rate of the LVC and the most recent value of the land published by Valuer-General (VG) in accordance with the Valuation of Land Act 1916, section 6A. The VG assumes the land is vacant and values it on its highest and best permitted use, based on current zoning and planning restrictions determined by councils. 

Problem is that the VG is usually a way off. 
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The graph below contains an analysis of the difference between the sale prices and VG land values for publicly available residential land sales in Leppington this year. Since the VG has not released its July 2021 land values yet, July 2020 VG land values indexed using ABS’ Residential Property Price Index have been used for the comparison. 

The VG land values for analysed sales range between 20% and 41% below the sale price, with a median difference of 35%. This is a troubling disparity which could hamstring Council’s ability to acquire public land in time to build enabling infrastructure in release areas. 
The LVC exhibition paper notes that the VG values are not market values of the land [2], however, no explanation is provided as to why it is preferred over market values. The PC review suggests that the LVC was intended to be based on the sale price of the land [3]. This would be a more reliable way to collect land contributions that are reflective of Council’s land acquisition costs. LVC collected at the DA stage could be calculated using a Council’s land valuations for each precinct. Alternatively, land owners could be asked to provide a site-specific land valuation with their DA application. These would be more accurate than a Council’s precinct wide valuations, but the requirement may be too onerous for some land owners.
The loss of income due to lower than market rate valuations compounded with loss of income due to the maximum LVC cap has the potential to create significant funding shortfalls for Councils.  
Other issues

• Definition of LVCA – the LVC exhibition paper seems to only exclude developed land from being counted in the LVCA. It is important that any land (including heritage and/or constrained land) that will not be required to make a LVC is excluded from the LVCA as they will also not be rezoned for more intensive use of the land. 
• Just terms allowance – considering Council’s will likely look to acquire land at the below market VG land values, importance of a just terms allowance being collected under the CP is increased. It is not clear whether the LVC system will allow for this. 
• There is a risk that land values will adjust to include the new charge. This could result in the LVC being passed on to developers which goes against a key principle of the LVC. 

Concluding Thoughts
Managing the fundamentally conflicting interests of local governments, ratepayers and the development industry is a difficult task that has scuppered previous attempts at reforming the contributions system in NSW. Nevertheless, DPIE have shown they are willing to persevere and will adjust the final package based on feedback from governments and industry alike. If the LVC is intended to be provided to Councils as an alternative land contributions mechanism, we believe the key issues raised in this paper must be addressed by DPIE. 
NXS Planning specialises in planning advice regarding the infrastructure contributions system in New South Wales. Alex and I have experience in managing contributions planning projects with the development industry and working within contributions planning teams at local government and DPIE. As such, if you would like to further discuss the issues raised in this article, please feel free to reach out to me via LinkedIn or email ([email protected]). 
Suyash Pareek
[2] Land Value Contributions Exhibition Paper, Page 11
[3]  Review of Infrastructure Contributions in New South Wales – Final report, NSW Productivity Commission, Page 56