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1727RE: [LandCafe] No land price with full land tax - simply is not true

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  • Edward Dodson
    Nov 15, 2006
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      Ed Dodson with a comment...

      Without an active leasehold market for locations, determining the annual
      rental value of a parcel of land requires the assessor to use a
      capitalization rate common to other investment alternatives. In most markets
      where there are land sales, the average annual increase in capitalized land
      value can be calculated (selling price, less acquisition cost, less the
      taxes assessed on the gain).

      For the foreseeable future, it is unlikely that very many tax assessors will
      get better at adjusting assessment values to accurately reflect market
      values (Ted Gwartney excepted). Thus, the practical strategy is to get the
      various levels of government that tax real estate to get to a land-only tax
      base over some period of time. This will, in itself, squeeze out the
      speculative profits of investing in land and holding it for resale. When we
      begin to see fewer and fewer vacant parcel of land in an economically
      vibrant area, we know that speculative rent is disappearing and the
      community is approaching the point where the land market is responding to
      competitive signals. At that point, market rents are in play; every
      subsequent increase in the tax rate should see a subsequent decline in the
      selling price of land. Land value, meaning the potential annual rental value
      of a location, is likely to be rising as the potential for more revenue to
      be generated by businesses at desired locations increases.

      I also see a scenario where, even when the annual tax payment comes very
      close to the full potential rental value, the selling price for locations
      does not fall (or fall close to zero) in the near-term. The reason? Demand
      for some specific locations is so high that purchasers are willing to pay a
      premium to the seller above what the immediate return on investment
      calculations warrant. The investor in whatever business is to be engaged in
      is "speculating" that the volume of business will increase at an increasing
      rate.
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