The impact of down-zoning on land values: A theoretical approach

Purpose – This paper aims to build a mathematical model to determine the price of an acre of developable land, whether it is part of a large open tract (farm) or a smaller residential parcel that can legally be subdivided. The primary purpose of the model is to explore the effect of various minimum lot-size regulations on the price of these two types of vacant land. The study also attempts to explain apparently conflicting findings that have recently appeared in empirical studies of “down-zoning” in the states of Maryland and New Jersey. Design/methodology/approach – The mathematical model of land value is based on principles of asset valuation under uncertainty at various locations within a metropolitan area. The price of an acre of land is modeled as the present value of a stream of indirect utility to homeowners, and economic rents to farmers, developers or landlords, depending on an endogenous date of development. The cases of New Jersey and Maryland are compared using parameterized simulations, with minimum lot size allowed to vary. Findings – The simulations reconcile earlier empirical studies on Maryland and New Jersey. The observed absence of any price effect of down-zoning in rural Maryland appears to be caused by the fact that development is not imminent there. In New Jersey, development is imminent virtually everywhere, and a high proportion of today's vacant land value is due to its development potential. This means that down-zoning will typically lead to dramatic declines in vacant land value in New Jersey. Research limitations/implications – The study relies on state averages, so its results should not be applied to particular parcels in Maryland or New Jersey. The study incorporates uncertainty in expected developer profits, but not in future political decisions. Practical implications – By clarifying the context in which zoning changes will or will not lead to decline in a landowner's asset value, the study can inform legal and political debates over re-zonings in the USA. Included in these debates is the claim that some re-zonings violate the “takings” clause of the USA constitution. Originality/value – The majority of papers on this subject are empirical, using a hedonic or an appraisal methodology. This paper provides a coherent theoretical model of per-acre land prices under different levels of zoning restriction. It can be used for simulation or prediction with relatively few input parameters.