OSU economist reviews compensation under measure 37

January 11, 2005

CORVALLIS - Since the passage of Measure 37 in November, government officials have been grappling with its implementation in cities and counties throughout the state. The ballot measure enables landowners to seek compensation when their property values are reduced by land-use regulations.

But how should that compensation be calculated?

"The text of the measure says that compensation should equal the reduction in the fair market value of the property," said Andrew Plantinga, an economist at Oregon State University. "This sounds simple enough. It isn't."

Plantinga is a professor in OSU's Department of Agricultural and Resource Economics and a researcher with Oregon's Agricultural Experiment Station. He has just completed a study examining ways to calculate compensation for landowners affected by Oregon's historic land-use laws.

The measure requires that city, county and state governments either compensate landowners if land-use regulations lowered their property values, or waive the regulations. Gov. Ted Kulongoski has said he prefers to pay compensation rather than waive regulations.

But Measure 37 does not precisely define how compensation will be calculated, leaving government officials with many possible ways to interpret the measure, according to Plantinga.

Under the measure, landowners can claim compensation for the reduction in fair market value, which equals the difference between the property's value with and without the land-use regulation.

"We know the value with the regulation in place, because that's the current market value," Plantinga said. "But the value without regulation is hypothetical."

Estimating such hypothetical values poses many challenges, according to Plantinga.

First, a "fair market value" is obtained in a competitive market with many sellers. An exclusive market with a single seller is not competitive, it's monopolistic, according to Plantinga.

"Suppose we were to calculate the fair-market value for a parcel of land assuming it has no development restrictions," Plantinga said. "Do we assume restrictions still apply to all other parcels? This treats one landowner like a monopolist with exclusive development rights and allows that landowner to receive higher compensation because the restriction is still imposed on others.

"We should, instead, treat the landowner like a participant in a competitive market," Plantinga said. "In this case, we would calculate the value of the parcel assuming the land-use regulations do not apply anywhere."

In the hypothetical world without regulations, that single parcel would be one of many that could be developed, according to Plantinga. Competition would drive down its value for development, and only unique advantages such as location would increase its value compared to many others on the market.

"But developing compensation schedules for such hypothetical markets would be a challenging and time-consuming undertaking," he added.

As an alternative, Plantinga notes that the original purchase price, adjusted to current dollar value, indicates the actual competitive market value of the parcel of land before the regulation went into effect.

Because Measure 37 provides compensation only to individuals who acquired their property before the land-use laws were enacted, the price they paid reflects a competitive market without regulations. The difference between the original price and the current market value with the regulation in place equals the reduction in fair market value. The consumer price index can be used to convert the dollar price paid to current dollar value.

The advantage of this approach is that it relies on observable, rather than hypothetical, values. However, Plantinga points out that in some cases the original purchase price of the land would need to be separated from other assets, such as farm equipment, that may have been included in the original transaction.

In whatever way compensation will be eventually calculated under Measure 37, Plantinga points out that this process is fundamentally different from a taking, where compensation equals the full current fair-market value of the land.

"In a taking, the land is no longer owned by the landowner," Plantinga said. "Under Measure 37, landowners still own their land and have full entitlement to earn income from all permitted uses," he said.

The study, "Measuring Compensation under Measure 37: An Economist's Perspective" by Andrew J. Plantinga, can be viewed in its entirety at http://arec.oregonstate.edu/faculty2/plantinga.htm

Author: Peg Herring
Source: Andrew Plantinga