This column has argued on several occasions that the Government's unique system of raising land revenues from lease modification premiums does not work well. Among its failings, it gives the developers the priceless advantage of choosing periods of low prices to negotiate premiums, it actually slows down residential construction and it is fraught with the danger of corruption. So here is an alternative idea. Instead of charging developers big lump sums up front to convert old industrial leases into high density residential developments, impose a development land tax on them. Take a big slice of their profits or revenues on any project which involves lease conversion. Here are seven good reasons to do it. The public purse will get more revenue this way. There is no scorecard of how often developers have walked away with mammoth profits and the Government with a relative pittance under the current practice and the Government will never publish such a score. It would be embarrassing. But with a development tax the developers no longer will have that crucial timing advantage in negotiating premiums. They will be working with, instead of against, the Government. If they win big so will we. Their craftiness and patience will be on our side. The pace of development will pick up rapidly. The developers may say they are building as much as they can but a simple statistic says otherwise. In 1985 they completed 23.9 square feet of residential floor area for every million dollars of gross domestic product at constant 1997 prices. In 1997, during a big property boom the figure was only 5.7 sq ft. You can do your own arithmetic. One reason for it is that they sit on idle land for years and years until just the right time to negotiate lease premiums. With a development tax they will have no reason to wait. Build now or build later, the Government's percentage will remain the same. In fact their incentive will be to build now, whatever the state of the market. That way they will more quickly turn their land into money and be able to put the money back to work again. There will be more developers. Pull out one hand and count them at the moment. Three big developers dominate the market. That's all. It's no surprise. When you have to put billions of dollars up front for a lease conversion premium and you get your return only three years later, you cannot compete unless you are worth billions. With a development tax this entry hurdle vanishes. You pay only when you are paid yourself and you don't take that three-year risk. This game will open up wide. We will get rapid urban renewal. Swathes of decrepit old buildings now clutter the inner city but it doesn't pay the owners to redevelop them. All the potential rewards are taken up by the conversion premiums. With a development tax they will share the rewards. Those hard-to-find owners will start showing up mighty quickly when the money is there at last. The banking system will be freed up. Loans for property development and investment amount to $391 billion at the moment and a very big slice of it represents borrowing to pay conversion premiums. Meanwhile, other borrowers complain there is not enough left for them. Get rid of the premium system and it won't happen. Government will have a steadier flow of revenue. In 1982 the government budgeted $12 billion from land revenue and got less than $2 billion. Last year we had only three premium deals of more than $100 million. This year the tap is full on again. A development tax will produce up and down revenues too, but nowhere on this scale. The precedent is already set. The Government is granting the Cyberport residential project on a form of development tax. If there are doubts about this idea, write in and tell us why.
