AN APPRAISAL METHOD TO ESTIMATE THE COMPENSATORY COSTS FOR PUBLIC SERVICES

REQUIREMENTS IN THE CITY OF TURIN

Authors:arch. Luisa INGARAMO

arch. Stefania SABATINO

116 June 2011

ObjectThe paper presents the evolving methodology developed by the Polytechnic of Turin to support the Municipal Authority of the City in defining the criteria

to determine the compensatory costs demanded from private developers when the general developers contribution rule is not applicable.

Main Questions

1. Is the tool a proper and cost-effective mechanism to determine the compensatory costs for public services requirements?

2. Which are the advantages brought by the tool for both private and public operators?

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Structure• Developers contributions within the Italian context • Some recent changes in the national and local legislation• Public services: revision of the delivery mechanism• The solutions proposed by the City of Turin and the Polytechnic • The operational contribution:

an automatic tool to estimate the compensatory costs (when the general rule is not applicable)

1. Simulating expected revenues2. Modelling costs3. Implementing the DCF model

• Conclusions and final remarks

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Developers contribution in Italy : the rationale

A direct relationship between the private surplus value and the benefit received by the community

In other words, if the public authority detains a key role in delivering collective services to the urban community, then private developers are requested to contribute to balance and rationalize the delivery of public services and relative externalities.

Public economic theory justifies the need for public regulation arguing that if the allocation of public services is left unregulated then the market for such services would fail.

Public economic theory justifies the need for public regulation arguing that if the allocation of public services is left unregulated then the market for such services would fail.

The new urban economics recognises the presence, in the private land, of a surplus value – the economic rent – that represents an advantage gained by the developer and depending on the specific location: the surplus value is the result of positive externalities which should be shared by the wider community.

The new urban economics recognises the presence, in the private land, of a surplus value – the economic rent – that represents an advantage gained by the developer and depending on the specific location: the surplus value is the result of positive externalities which should be shared by the wider community.

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Public services requirements: the Italian delivery mechanism

• According to the Italian law n. 1444/68 and the Piedmont Regional law (n.56/77) the developer is compelled to contribute to urban services.

• The land for the physical delivery of urban services is generally obtained trough a double contribution:

2. In-kind contribution (portion of private land): depending on the number of inhabitants to be settled 25 sqm per inhabitant

1. Strictly monetary contribution: depending on the specific buildable index of the area for each residential cubic meter to be built

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But, whenever the City refuses to receive the in-kind contribution, the developer is requested to pay a “compensatory cost” (residual plots, areas smaller than 4.000 sqm, etc.)

The Developer retains the entire plot of land but the buildable index is unchangedwhile the City obtains the monetary contribution plus a monetary compensatory amount to deliver services off-site.

Based on local legislation the compensatory quantum is in line with the national expropriation allowance:• 50% of market value until 2008

Public services requirements: the Italian delivery mechanism

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Public services requirements: the Italian delivery mechanism

Thanks to the compensatory costs the City delivers the public services off-site

Strictly monetary contribution + further monetary compensation (expropriation allowance)

This rule, for nearly 10 years, matched the mutual interest of public and private operators as it offered a fair balance between the public interests and private expectations.

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Legislation and recent changes in the public policies of the City of Turin

However, since the National Act n.244/2007 has changed the expropriation allowance is set at 100% of market value.

The new law, doubling the compensatory costs (from 50% to 100% of marked value) puts the private operator in a disadvantaged position.

Outcome: slowed-down development processes and fewer urban transformations

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The need for a new approach?

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Redefining the valuation criteria for the compensatory costs

Private DeveloperPrivate Developer The CityThe City

Capitalized Surplus Value Lost utility

Investment ValueInvestment Value

Special ValueSpecial Value

1. Which type of value is gained or lost for the two parties?

(Famularo, 1947)(Forte and Camagni, 1999)

Usage Land ValueUsage Land Value (IVS 2 3.1)

Settlement OptionSettlement Option (Simonotti, 2006)

(IVS 2 3.2)

(IVS 2 3.11)

2. Which appraisal approach?

Discounted Cash Flow Analysis Expropriation Allowance

3. Any adjustment?Market valueMarket value Market valueMarket value

The value of the portion of land is residual, while thedevelopers is charged whit additional costs without any direct benefit

The settlement option can be optimised off-site at a larger available area, where unitary costs are

reduced

A discount is needed and sustainableA discount is needed and sustainable

Ingaramo L.,Sabatino S. – Compensatory costs – ERES Conference 2011

The solutions proposed by the City of Turin and the Polytechnic

Case-by-case DCF analysis• supported by Polythecnic of Turin• individual negotiation for each transformations• Compensatory costs directely put in the DCF model (relative inner variable)

• -20/-30% average discount on the 100% market value• results of this early step have been presented last year at the Eres Conference in Milan

2008-2011

• set by the City

EXPENSIVEEXPENSIVE

SLOWSLOW

QUITE EFFECTIVEQUITE EFFECTIVE

CHEAPCHEAP

QUICKQUICK

ARBITRARYARBITRARY

Forthcoming strategy QUITE CHEAPQUITE CHEAP

QUITE QUICKQUITE QUICK

EFFECTIVE?EFFECTIVE?

Since June 2010 -25% discount across the board

Transformation value of each plot based on a set of standard values developed for homogeneous urban sub-areas

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Arrangement of an automatic tool to rationalise the compensatory costs

Operational steps:

1. Simulating expected revenuescollecting and analysing average real estate prices for an optimal number of urban sub-areas covering the entire City of Turin.

2. Modelling Costsdepending on urban location, typology, technological and finishing level.

2. Implementing the DCF analysissimulating the transformation process for each plot by performing a DCF analysis only for the pre-defined homogeneous urban location).

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1. Simulating expected revenues

Collection of real estate values from 3 main institutional sources (publicly available, free, with yearly up-grades and with a same information-detail, based on “urban zones”)

a) Agenzia del Territorio (40 micro zones)b) FIAIP -Professional Valuers Federation (34 subdivions)c) FIMAA -Real Estate Business Federation (23 perimeters)

Dated 1998 to represent the city by homogeneous areas (location, historic and environmental qualities, socio-economics and urbanistic varaibles, etc). The subdivision ratio was a + or – 10% between continuum plots.

They define the real estate values within macro quartiers. The “backround grid” is based on the central, midcentral and peripheral areas, further analysed and subdivided by means of current evolving prices.

As a recent study (Ingaramo and Prizzon, 2006) revealed, real estate prices have increased by up to 20% in the underground surroundings.

Any revision?

City Centre renewal (since 1998)

Undeground line (since 2006)

Burial of railway line

Many regenerated areas and quarters

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Average real estate prices (e.g. residential units) of new or renovated dwellings. Values mapped against 1,803 census cells (each cell perimeter is defined by the center lines of the streets)

Source 1: Agenzia del Territorio

Source 2: FIAIP

Source 3: FIMAA

Max : 4,400 €/sqmMin 1,850 €/sqm

Max : 7,500 €/sqmMin 1,900 €/sqm

Max : 4,500 €/sqm

Min 1,750 €/sqm

Data have been overlapped aginst the 40 Agenzia del Territorio micro zones

Average values (3 sources)destinazione residenziale1.908 - 5.200 €/sqm

1. Simulating expected revenues

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E.g. Residential prices, 3 potential thresholds to define homogeneous urban sub-areas

60 sub-areas 75 sub-areas 94 sub-areas

The chosen option

1. Simulating expected revenues

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Depending on urban location, building typology, technological and finishing levels it is possible to estimate different construction costs based on unitary costs.

2. Modelling cost

Urban PositionUnitary Construction Costs (€/sqm)

Housing Private ServicesCentral 1,450 €/sqm 1,400 €/sqmMidcentral 1,150 €/sqm 1,050 €/sqmSuburban 1,050 €/sqm 900 €/sqm

• 4,000 sqm of Buildable Gross Area: maximum development size• each typology considers different costs distributions during the development process

Other cost inputs in the DCF model:• project design• monetary development contribution• demolition costs• marketing costs• financial fees

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3. Discounted Cash Flow Analysis

3. Discounted Cah Flow Analysis (DCF based on 75 pre-defined homogeneous urban sub-areas)

For each of the sub-areas a different market value has been found (transformation value of the plot, expressed in €/smq Buildable Gross Area)

The Internal Rate of Return has been fixed at 7% (5% over the inflation rate)

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Results

Each DCF output value expresses the market value of the land to be transformed.

Being geo-referenced, the data can be fed through in an on-line tool.

The developers can directly and clearly gaugethe current market value of each transformation plot as a pre-feasibility meta-information support.

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Conclusions1. Is the tool a proper and cost-effective mechanism to

determine the compensatory costs for public services requirements?

Yes, it is:• it is based on cash flow analysis (the same as in the case-by-case approach used by the City between 2008 and 2010 to negotiate the value with the private developers).

• the results are, however, less arbitrary and should better suit a fair and equitable treatment of different developers acting in contiguous plots.

• what’s more the tool expresses the specific land revenue of each plot, and it could be useful in monitoring the land values alongside the transformation processes

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QUITE CHEAPQUITE CHEAP

QUITE QUICKQUITE QUICK

EFFECTIVE!EFFECTIVE!

1. Which are the advantages brought by the tool for both private and public operators?

Conclusions

• the tool is relatively cheap for the City, as it is automatic, quick, and transparent.

• Once completed it will provide private developers with an on-line public tool useful to gauge and monitor the compensatory cost requested for each transformation, when the entire plot has been retained by the developer.

• the tool can be periodically refreshed and updated, not only in terms of input values, but also of number and boundaries of the sub-areas in line with the evolving City structure.

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Final remarks

• The tool has been fully tested for residential values the tool requests a very careful calibration in order to consider a more flexible mix of uses (e.g. residential, retail,..), at the moment the research is in progress.

• Once the tool is ready the City could deliver a public on-line service, through wich private developers will be able to gauge and monitor the added charge of compensatory costs by means of automatic DCF analysis working with a set of pre-defined unitary values (construction costs, sale prices, etc.)

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Thank you for your kind attention

Luisa Ingaramoluisa.ingaramo@polito.it

Stefania Sabatinostefania.sabatino@polito.it

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