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Nama: A Chance to Prepare for the Future

By Emer O’Siochru

One aspect of the Nama debate has not been discussed so far to any significant extent. This is question of what should happen to the distressed unfinished property developments and land that underpin bank loans to be taken over by Nama?

For all the flaws contained in the current Nama proposal, the Government is correct in assuming that the fire sale of a large number of properties and development land assets offers a deeply disturbing prospect. It is akin to the rapid and wholesale privatisation of national assets of the Soviet Union in the 1992-94 that led to the creation of the oligarch class that still infects the Russian economy and politics today.

Years if not decades of chaos that would ensue as Irish banks rebuild reserves would end with some very unwelcome outcomes. As John Moore explained in his 2001 Clarendon lecture at the London School of Economics, in a distressed sale scenario the developer with an insider knowledge and ability to hide value “often with the collusion of the initial creditor” will be able to pay more for the assets in a liquidation than anybody else. Inevitably, some of the very developers that got us into mess will be able to regain their property assets in a fire sale.

As Eoin McDermott of the Society of Chartered Surveyors eloquently explained in his article of the 1st September, there is a body of practice to establish the value of distressed property that does not require fire sales. This process accounts for market value within the current regulatory and fiscal environment of the development projects. However, estimating ‘long term economic value’ as stated by the government under its Nama plan threatens to harden the present development model in Ireland into the future in ways that remove democratic and market discretion. That would not be a good thing for the Irish people.

Everyone understands the idea of ‘hope’ value of land which is a portion of future profit from a change in zoning or planning permission. Expectation of the granting more valuable uses has a strong value-adding effect on urban and farm land. If planning policies were to change significantly; for instance, if strong and convincing planning policies were introduced to preserve farmland, much if not all that hope value surplus on agricultural land would disappear with a consequent improvement in farming sector competitiveness. Valuation of Nama properties that seeks to justify a high price for the property transferred presupposes the continuance of past planning policies.

There are many reason to revisit our planning strategies and controls, the most important are climate change, fossil fuel scarcity and national competitiveness. Either or all will profoundly challenge our life styles and settlement patterns. A high value on Nama properties will create pressure to maintain existing deadbeat zoning and planning permissions that are designed for a future that will never exist and if built, would not be fit for purpose. Meanwhile, land that ought to be made available for development because of excellent connectivity to services and transport links may be held back for fear of devaluating adjacent, perhaps less optimally situated Nama development land.

The taxation environment also impacts on the value of land and property. The current bubble grew from the low property tax regime. Studies have consistently shown that well-designed tax regimes help to regulate or dampen booms and busts and the best kind of the tax for this purpose is an annual land value tax, as outlined in Smart Taxes Network submission supported by detail research to the Commission on Taxation.

Unfortunately, the Taxation Commission has advised retaining some stamp duty, a residential tax, a windfall tax and a holding tax on rezoned land instead of a simple comprehensive annual land value tax. But I do not want to argue the case for land value tax here, just to make the point that If the sum of these taxes raises more revenue than under the current system it will reduce the value of property. In the case of the residential tax, valuers will deduct the expected annual tax from the expected rental return from the property and apply the appropriate multiplier to give a reduced capital value compared to a non-taxed property. A high price paid for Nama property is in a direct conflict with a functional property tax. The Fianna Fails rejection of any kind of the property tax can be seen as what it is, a desperate attempt to maintain inflated Nama property values.

The decision on the type and extent of property taxes should be made after very careful consideration and debate in the Dail and should not be constrained by the unintended consequences of the banking rescue. Government decisions about property taxes and the adoption of a National Sustainable Development Strategy to guide planning policy should be made before the valuation of Nama non-performing loans.

This precedent order and the current pressure to resolve the liquidity crisis tends to favour the bank recapitalization option with senior bondholders compensated with a shares in a Nama Trust as per Dr Constantin Gurdgiev’s suggestion in the press and in a forthcoming submission for the next Programme for Government. The Trust model protects taxpayers explicitly and removes the fear of naitonalisation raised by Alan Ahearne in his September 5 article. It also gives people a new form of wealth – bank shares that can be sold- o compensate them for their loss of wealth in property as values drop.

Income producing properties should be sold over time starting with the overseas property. All development land zoning and planning permissions should be reviewed in light of a National Sustainable Development Strategy. Much development land on the margins of villages and towns would make excellent sites for organic waste processing for energy, soil fertility and carbon reduction plants because of their proximity to agriculture or forestry, municipal feedstock and 3-phase grid connection. Their co-products would benefit local residential and farming communities and attract other high energy-using businesses bringing much needed jobs. Other sites are only suitable for food production preferably allotments.

Empty housing estates should be transferred into equity partnerships and let under a flexible rent/buy, buy/rent arrangement in partnership with pension funds and other inflation-averse investors, as proposed by James Pike of OMP Architects at the Feasta New Emergency Conference in June. These assets can be securitised to generate as much liquidity in the system as would have property sales but without distorting the housing market.

We come finally to the problem of large prime development sites in urban areas. The current planning permissions on these sites are not economic given the high land costs assumed under Nama and low expected demand. A fire sale of these assets would almost certainly lead to the new owners adopting classic speculator tactics; invest no more than is necessary to preserve existing rental income and then wait for the eventual economic upturn to capture that gain.

As member of a profession that has seen 40% job losses in the last year that outcome would be catastrophic. As a Dubliner who witnessed the planning blight that lead to the first Dublin Crisis Conference in 1984, it would be heartbreaking.

Introducing a substantial annual land value tax can transform this outlook. The tax should be based on land values at the start of the property boom which are close to the current crisis ‘bottoming-out’ levels. The net effect would be to bring forward the correction of land values many believe is needed to regain competitiveness and re-energise the economy. LVT would have the secondary effect of clarifying the purchase price of the distressed development property portfolio transferred to the Nama Trust by removing the ‘hope value’ not created by the subsequent quality and efficiency of design, construction and servicing systems of the developed property.

Under LVT, actors in property development are released to compete on design quality and construction and servicing efficiencies. The Nama Trust presents a wonderful opportunity to develop valuable intellectual property and expertise by planning, designing and constructing the sites as carbon-negative, energy-exporting, nutrient and resource-recycling, socially-balanced urban neighbourhoods.

It might be countered by defenders of the status quo, that economic growth would be affected in an economy under credit market imperfection where land value is used not only as an input into production but also collateral for borrowing. Theoretical findings show that the effect of land tax on economic growth depends on how the tax revenue is distributed. Research based on the Japanese experience based on endogenous growth model, shows that
“an appropriately combined land tax-subsidy scheme, for example such as a reduction in the corporate tax rate combined with a rise in the tax rate of land, can lead to faster economic growth followed by an appreciation in land prices in an economy where land plays an important role as collateral.

I suggest that the tax raised should be used to support public and private investment in renewable energy, nutrient recycling, and reconfiguring settlement patterns to reduce private transport dependency and food importation as argued in research submitted by Smart Taxes and Urban Forum to the Taxation Commission in August.

The land value taxes would also serve as an automatic taxation mechanism when the economy picks up reducing the high government deficit that is unavoidable to protect the economy. It would reassure the ECB that Ireland is not taking advantage of the prudence of savers in other Member States as property taxes would be seen as severe punishment and effective restraint on a future property-based borrowing spree.

More information on how land value taxes can be designed to protect recent homebuyers, senior citizens, poorer households and farmers can be found at Smart

Emer O’Siochru RIAI, is an Architect and Planning and Development Surveyor, currently Director of Smart Taxes, a policy development network funded by the Department of the Environment. Emer is also principal of EOS Future Design, a sustainable systems and settlements developer.

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