On The Distinction Between
Land Value and Rent

Harry Pollard

[Reprinted from a Land-Theory online discussion, 11 February, 2002]

I announced to a startled 1970 Georgist National Conference in Miami that taxes came out of Rent. Wow! What a reaction! I found myself instantly beyond the Pale.

("You mean you no longer believe in LVT?")

I think [Mason] Gaffney said it before I came up with it, but he's about 2 months older than I am, so he had a start.

George Collins eventually changed "came out of" to "at the expense of" -- which of course I stole, but must now give him credit. Baah!

To illustrate, I used a county line. On one side there was every kind of tax -- sales, income, death duties, the lot. On the other side of the county line there were no taxes. No LVT on either side.

I suggested that on the no tax side, Rent would be higher than on the side which was taxed. That is, more would be paid for the "no tax" land than the taxed land (ceteris paribus). So the tax willy-nilly must come out of Rent.

I think most of the Georgist movement now goes along with this.

The only problem is -- I was wrong. There are different values that attach to land. We tend to use them indiscriminately.

There is Rent.

Then, there is Rack-Rent.

Next, there is an imaginary figure which is found by backward capitalization from a land price.

Finally there is Land Price.

We really have to be careful how we use these "values".

At the bottom there is Rent. This is the name I give to the "externally created community created value that attaches to a location". We can call it Location Rent, or Economic Rent, but that's the Rent that I write with a capital. When I write Rent, that's what I mean.

Rent tends to change in smooth curves rather than in jumps and "spikes". So adjacent lots are likely to have the same Rent. This is the basis of the Danish system of street valuation that Ted tells me is now used "everywhere". This characteristic of Rent also makes for easy change on the computer. If Rents increase, the assessor simply adds (say) $5 to every lot in an area.

When Ted took his first job as Assessor in Michigan, all the local communities were about 10 years behind with their assessments. So, Ted computerized and before too long his assessments were up-to-date. (The rest were still 10 years behind.)

Currently, nobody measures Rent. They measure land-value (see below). I don't think it would be easy to find Rent in today's conditions.

Let's say the Rent of a location is $1,000 a week. Someone is lucky to be there. If he pays Rent of $1,000 a week, he is in good shape. He pays a $1,000, he gets a $1,000.

(We have fallen into the habit of talking about Rent as if it is something one pays to a landholder, or a community, and therefore undesirable. Rent is a value that attaches to land. It's there whether or not it is collected in some way.

Rent is good.

This is so, whether or not the user of a site pays it to a landholder, or back to the community. Should the money go back to the community, it will pay for infrastructure. He will have to pay for infrastructure himself if the landholder collects the Rent.

But say the landholder ups his demand. We have all seen "End of lease, must sell everything". Say the Rent is still $1,000, but the landholder demands $2,000 and the tenant cannot go elsewhere. On this site he has built up tremendous goodwill (Wages). It would be lost if he went elsewhere.

In any event, when he checks around, he finds that every possible place is also charging more than Rent, so he signs on to pay $2,000 for the right to collect $1,000 Rent. This $2,000 a week is "rack-rent".

One might imagine that rack-rent would be the income that is capitalized into a sales price for land. However, that's not the case.

There is a kind of imaginary land income higher than rack-rent. I call it imaginary for it is a calculation downward from the sales price. Let's do a capitalization of that $2,000 a week rack-rent. It's a bit over $2 million. Let's say the landholder might well consider $2.2 million to be a price to think about. Then he hears a similar site went for $3 million.

Immediately, he raises his price to $3 million, but then thinks: "If these sites can rise from $2 million to $3 million, they could then rise to $4 million, or even $5 million!

In both Adult and High School courses we call this figure the "future anticipated price." It's a little tautological but emphasizes an important value. An imaginary price stimulated by the land's collectibility.

In the collectible market, people care nothing about income. Price is everything. Even if a "rent" could be obtained for the collectible, the collectible speculator won't go for it, for fear the collectible might be harmed in some way, thus diminishing its value as a collectible. Mint condition is everything in the collectible world.

This behavior is echoed with landholding, where a speculator will not invest much in a piece of vacant ripe land, for the investment would be lost if the land was sold at the high price. Rather, they put up a billboard, or a gas station, that provides a "taxpaying income" until the land is sold, whereupon they can be torn down at minimum cost. "Mint condition" is presumably vacant, cleared, land ripe and ready.

And why should a speculator with a blighted building invest anything but the barest minimum in a property when it is destined to be torn down? He doesn't, hence the downtown look of large empty buildings. But, we know all that. Collectors hang on, and hang on, and hang on, awaiting the ultimate price. I've heard people wonder why an empty building with broken boarded up windows isn't developed. I suggest it's the normal collector mentality, looking always toward the "future anticipated price".

So, the land "collector" sits on his collectible watching prices rise. Although in a price mechanism controlled free market the first to arrive in response to a price rise gets the highest price, in the collectible market the last to come to market gets the highest price.

A market where everyone is sitting around trying to be the last to sell is not a very good market. Indeed, it bears no resemblance to the price mechanism controlled free market we espouse.

As land prices soar, any attempt to capitalize down to an income produces the imaginary figure mentioned above.

Yet, from these collectible land prices, Georgists tend to measure "land value" (although we usually call it Rent). And boy! Don't we get some great figures to run the economy in place of existing taxes.

Or, perhaps we cut government and have a great Citizen's Dividend to give to people. Some of our friends say we wouldn't need to work. We could live on our Citizen's Dividend!

I suggest all this is illusory.

What our friends had forgotten was that although capitalization holds true in a free market, it doesn't in a collectible market. If you work with a capitalized price, it has a relationship to income. In the land market the price bears no meaningful relationship to income. Indeed there may be no income.

So, why was I wrong to help convert the Georgist movement to the idea that taxes were paid at the expense of Rent? Simply because they aren't. They are paid at the expense of land prices.

Perhaps this is why a heavy tax increase can severely harm an economy. Land prices are not exactly inelastic, but they are very reluctant to change.

So, producers and consumers have to pay the same land prices, but also the increased taxes. It will be a while before land prices adjust downward in response to the extra load - and many won't even if land is simply not selling.

This brings me to a final point. If land prices continually rise, why should a landholder sell? Particularly with the probability that capital gains will be repealed in the future?

Certainly the real estate professional wants to sell. That's how he makes his living. However, I do suspect that much of his time is spent trying to persuade collectors to part with their collectibles.

I've come to the conclusion that perhaps a majority of land changes hands for reasons other than the actual desire to sell land.

Perhaps someone dies and the disinterested inheritor wants to cash in assets. Or, a business reverse means cash is needed. The Wall Street Journal had a front page article on firms going through a hard recession some years ago.

The heading said something like: "Many firms find themselves making more money from their real estate departments than from their production lines."

And so it goes!