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The logic of public and private profits

22 of September '23

The conversation is from A&B issue 7-8|23

We talk about planning and urban renewal. Janusz Sepiol, Architect of the City of Rzeszow, argues that the crux of the inefficient system of flow between public investments and private profits lies in mentality. It is this that blocks necessary legislative changes.

Janusz Sepioł

Janusz Sepioł - Architect and art historian, politician, 2002-2006 marshal of the Małopolska province, senator of the seventh and eighth terms. Graduate of the Faculty of Architecture at the Cracow University of Technology and art history at the Faculty of Philosophy and History of the Jagiellonian University. From 1998 he was director of the Department of Spatial Planning at the Office of Housing and Urban Development. Winner of awards for urban planning works, including 1st place in the International Competition of Young Architects in Veliko Tyrnovo (in a team), 1st Degree Award of the Ministry of Construction and Spatial Planning for the General Plan of Krakow in1995 (in a team), 1st prize in the SARP competition for the center of the city of Tychy (in a team with Marcin and Malgorzata Wlodarczyk), and 1st prize in the SARP competition for a fragment of the center of the city of Tarnów (in a team of the aforementioned).). In 1999-2002 he served as deputy marshal of the Małopolska province, and was marshal of the province until 2006. In 2021 he took the position of Architect of the City of Rzeszow.

Ania Diduch: What is the planning annuity and why is it important in the context of the conversation about family homes in Poland?

Janusz Sepiol: Let us first emphasize that the concept of planning annuity is strictly defined in the Law on Spatial Planning. On the other hand, it is also possible to speak, more figuratively, no longer as a strictly legal concept - of an urban planning annuity. It consists in the increase in the value of real estate as a result of various public activities and investments. When we talk about planning and urban renewal, we are revolving around changes in the value of real estate. It is public investment that changes this value the most. If a new zoning plan is drawn up, it most often involves agricultural land and its reclassification to construction land.

In an ideal scenario, this involves surveying work, dividing the land into new parcels, and new parceling. Added to this are infrastructure measures, namely the planning and construction of roads and other networks. Within such a framework, private investment occurs, so that eventually the land radically gains in value. But public investments such as the erection of cultural facilities, schools, parks, avenues or public transportation networks in the neighborhood are also not insignificant. All of these expenditures preceding private investment are public expenditures. A natural sense of fairness dictates that someone who gains from public activities should either bear part of the costs or share the profits. After all, it can be said that it is all the city' s residents who contribute to the fact that the owners of certain land gain, and sometimes huge amounts are involved. A meaningful distribution of these profits is only automatic if the tax system - the property fee system - is based on the valuation of property. If this is not the case, other solutions must be sought.

zmiany wokół tematu renty planistycznej są uwikłane w interesy zbyt wielu osób, żeby mogły być przeprowadzone szybko i sprawnie

The changes around the subject of planning annuities are entangled with the interests of too many people to be carried out quickly and efficiently

Photo: © Mostafa Meraji Pixabay

Ania: A tax calculated as a percentage, on value?

Janusz: Yes, the fee is derived from the value of the property. It's an "ad valorem" or cadastral tax. Its base is the value of the property, not its area or potential. All that matters is how much a piece of land is worth commercially.

Ania: But it's also not always easy to calculate the market value.

Janusz: Yes, sometimes it is a problem. Napoleon solved it quite simply: each owner had to value his property himself, but then this price became the basis for pre-emption (another aspect of the issue was the question of whether the property could be insured above its reported taxable value). This was enough for any property owner to solicit that the valuation be fair, but not inflated. Leaving that Napoleonic anecdote aside: everyone recognizes that real estate gains greatly as a result of public planning activities. The question is whether to treat this as a godsend, or whether this surplus should simply be shared somehow. This is why the so-called planning annuity was established in the Polish planning system. It consists in the fact that if a plan has been enacted, at the same time the municipality sets a percentage rate, that is, it determines what percentage of the increase in the value of the property will be taxed if someone sells the property in question. So if the owner of a given property sells a plot of land, then the authority steps in and examines how much the value of the property has increased. This only applies for a period of five years from the enactment of the plan. This solution was supposed to counteract real estate speculation, but the reality is that these fees are almost non-existent, no one pays them, everyone waits those five years before selling, unless forced to do so by extraordinary circumstances. In addition, the law stipulates that the fee for the increase in value of the property cannot exceed 30 or 50 percent of the total value. That is, it does not necessarily reflect the real value.

The Real Estate Law describes another fee - an adiacencka - another taxation of the increase in value of a property, this time for its development. The legislator decided that if the city builds a road and develops the area with networks, the owners of the plots thus served should cover part of these costs. This system also works very poorly in Poland, because, for example, a rather short time is specified in which this fee applies. Again, the fee cannot be higher than a percentage of the increase in the value of the property due to development, that is, the real expenditures the city has made are not taken into account, only the increase in the price of the property. Thus, this whole system of planning annuity and the betterment fee is inefficient and does not reflect the public costs of urbanization.

Miasta, które się urbanizują, dają szansę zarobku właścicielom nieruchomości i to oni przechwytują praktycznie całą rentę urbanistyczną. Niemal cały wzrost wartości nieruchomości trafia w ręce prywatne.”

Cities that urbanize give property owners a chance to make money, and it is they who capture virtually all of the urbanization rent. Almost all of the increase in real estate value goes into private hands."

Photo: © Foundry Co Pixabay

Ania: It seems like a straight path to a budget hole.

Janusz: Yes. In practice, owners of properties that are subject to planning action and infrastructure measures benefit greatly. Cities that urbanize give property owners a chance to make money, and it is they who capture virtually all of the urbanization rent. Almost all of the increase in real estate value goes into private hands. I would put forward the thesis that, in essence, developers in Poland make money not so much from building apartments as from the urbanization rent. They sell apartments with land that is already much more expensive than when they were originally purchased. There have been attempts to improve this situation: instead of the planning rent and the adiacencka fee, the government has submitted a project to introduce an infrastructure fee, that is, when passing a local plan, a so-called improvement area is designated, that is, an area where public investments will be made. In such an improvement area, some portion of the cost of infrastructure and the increase in value of the property can be charged as a one-time fee. This is a much better solution than the status quo, but this project was withdrawn from.

Ania: Why?

Janusz: Because it was stated that while it would be a very good solution for municipalities , it would increase the burden on citizens, and the government does not want local governments to make so much money on people. This explanation doesn't exhaust the subject, it's baloney. If cities are urbanizing, developing, they should make money from it, and certainly not lose money. If people want to build houses, the city should not be at a loss. And if there isn't an efficient system for collecting the adiacent fees and urbanization rent, then the city is just putting up the money, and someone is capturing this rising land value. That is, on the city's part, investing in good planning is just an expense, a waste of money, not a profitable venture. This, of course, is a source of corruption. Let's follow this scenario: we have an agricultural area, plots of land under the city. A developer comes in and says to the landowner: "You won't build anything here, I'll buy the land from you." He buys at a low price and arranges with the mayor and his councilors that a development plan will be built in the area. The developer's conversation with the city authorities may sound like this: "Mr. Mayor, I realize an element of infrastructure here, you will finance the rest and we will succeed. There will be a lot of new apartments." Implicitly, "I will sell them well." As a rule, the city has too little money to invest in different directions in parallel. Therefore, decisions on which selected areas to invest in are not infrequently related to this type of corruption.

That's why there are a lot of people interested in seeing the current state of affairs continue. If we had a tax system in which taxes are not rather on consumption (like VAT), but are property taxes, that is, on the value of what one owns, for example, the value of real estate, if there were a cadastral tax, an "ad valorem" tax, some of these problems would solve themselves. The course of events would be as follows: the city invests in reinforcing land, its value increases, so the city has more taxes from it. Meanwhile, in Poland, there is a uniform property tax rate within the boundaries of the entire municipality: whether it is highly attractive areas of the city center or unimproved suburban areas. Only the number of square meters counts. This is a bizarre situation.

Ania: Why is it so difficult to introduce some mechanism to change this?

Janusz: It's about the maturity of the mentality and the relationship between what is public and what is private. In most countries, at least half of the urban rent becomes public income. Of course, there are always taxes on developed properties, from which the city profits for a long time. But the idea is that during the period when the plan is drawn up and the basic infrastructure is built, the city's income growth should be faster and more efficient, so that there is no loss of the city's investment capacity for long periods. This is the essence of the problem.

„Postawiłbym tezę, że deweloperzy w Polsce nie tyle zarabiają na budowaniu mieszkań, co na rencie urbanistycznej. Sprzedają mieszkania z gruntami, które są już znacznie droższe niż w chwili pierwotnego zakupu.”

"I would put forward the thesis that developers in Poland don't so much make money from building apartments as from urban rents. They sell apartments with land that is already much more expensive than it was at the time of the original purchase."

Photo: © Piotr Zakrzewski Pixabay

Ania: Is there any hope for this to change, and what would have to happen for that to happen?

Janusz: Yes, as I mentioned: there needs to be an increased awareness of where public money is running away. I think there also needs to be a little more discipline in building, that is, really building only where the plan allows, not anywhere. Then there would be more pressure to get it right and actually experience the benefits of urbanization action. I do not think that an "ad valorem" tax will be introduced in Poland in the near future. On the other hand, there is nothing to prevent the areas covered by the plans from being taxed a little differently (higher) than other undeveloped areas. We are slowly maturing that such a reform is necessary.

It is worth looking at the issue from yet another angle. Let's assume that the city develops land, prepares it for investment, but the owners do not develop or sell it. That is, the city has incurred expenses, but the return on investment is not there, nor is the housing problem solved, and there is no tax revenue from the buildings that were to be erected. What then? In some countries it is solved in such a way that if a plot of land is not developed in a certain period of time, there is a progression of property tax to the point that it eventually forces the sale of the property or the possibility arises for the city to take it over for public purposes.
These are very complex issues, with various aspects, both financial and social. The essence of the problem is that the inevitable increase in the value of the land from public outlays, observed by all, should not be purely private income. It often seems to us that Polish problems with spatial order have their roots in aesthetic views, building traditions or bad planning legislation. This is not quite the case. Of great importance are the links between the planning system and the system of local fees and taxes. The whole sphere of urban economics and financial engineering.

Ania: Thank you for the interview.

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