The Arden Land Trust

by Mike Curtis
Arden, Delaware
July, 1999

Today there are hundreds of land trusts in the United States; dozens of them are community land trusts which collect land rent and keep their land out of the speculative market. Between 1894 and 1950 there were 17 land trusts started by Georgists and referred to as Enclaves of Economic Rent. Fairhope, Alabama was the first, Arden, Delaware was second (Ardencroft was number 17). What is true of Arden also true, for the most part, of Ardentown and Ardencroft.

The Potential of a Georgist Land Trust

Before it is possible to judge the success or failure of Arden as a Georgist land trust, it is necessary to understand the limitations of such a trust.

Unless you have an enormous amount of land and can limit population, you can not create a frontier. If you can not offer free land, you can't alter the distribution of wealth -- raise wages and interest and lower rent. However, there are two primary things a land trust can do that can not otherwise be done through the democratic process. The first is to remove the need to invest in the speculative price of land, which is based on expectations of greater profits in the future. The second is to transform a tax system based on the confiscation of private property into a payment for the exclusive possession of land, which is common property.

The Speculative Price of Land

In the simplest terms, the difference in payments between leasing and buying a building, is how quickly you want to pay off the debt. If you don't pay off the principal, all other things being equal, the payments are about the same.

But that process does not work with land. In most cases its profitability increases much faster than inflation. Its price, therefore, is always based on a projection of its future return. A building lot with a present potential profit of $3,500 per year might well sell for $50,000. If you borrow the money to pay for the land at 10 percent, you'll have to pay $5,000 per year to the bank in interest. That's $1,500 more per year than you would have had to pay its owner in rent. However, If you borrow the money and buy the land, no one can ever raise your rent again. Those who can't afford to invest in the speculative price of land are destined to be renters.

No Need to Buy a Piece of Land

A land trust can buy land at the speculative price and lease it out at its (much lower) current market value. During the early years of a lease, the trust absorbs the loss. Each year the rental value is reassessed and the rent is adjusted commensurately. In time, most land will yield more than enough to make payments on the purchase price. As the surplus accrues, the trust can purchase additional land and extend to others the same opportunity to use land without investing in the speculative price.

Wealth and Income Taxes Converted into a Potential Rent Tax

Only through the lease agreement can the land holders be shielded from the government theft of their private property, and forced to contribute to the community in reference to the value of the benefits they receive through the exclusive possession of land. The trust simply pays all the confiscatory taxes levied upon the wealth or income generated within the trust and pays them out of the rents levied upon the annual value of the leased land.

Arden and the full rental value

Arden, the Georgist Land Trust, has evolved over the years, but the documents upon which it was founded are still in effect. The land is owned in common. The streets and park lands, which make up about half the area of the village are owned by the political entity, "The Village of Arden". The other half of the land which is leased in varying sizes for houses etc., is owned by the trust. Instead of a Deed, the people who own houses and other improvements have a lease.

The Deed of Trust and the lease agreements require that the land be leased at its full rental value. Out of the rent so collected all state and local taxes are to be paid so far as the rent is sufficient. Any remaining balance may be spent for such common purposes as desired by a majority of the residents, so long as those disbursements are properly public.

The Annual Board of Assessors

The assessors are sworn to assess as nearly as possible the full rental value of each of Arden's leaseholds. However, a provision of the charter allows an alternative assessment submitted by any leaseholder and approved by two thirds of the Town Assembly and again by referendum, to become law. The alternative assessment is not required to be the full rental value. Ironically an alternative assessment has never been adopted.

In the early years there was a mortgage to pay on the purchase price of the land, streets and public improvements to build, and a reluctance on the part of many prospective residents to build a house on a piece of land you couldn't own. It is likely during those early years that the full rental value of the leaseholds totaled just enough to pay the taxes levied by the county on the buildings and land, make the payments on the mortgage, and provide a reasonable level of revenue for the maintenance and improvement of Arden's infrastructure. In other words, the full rental value of the land was being collected and spent for the needs of the community. (When the state began to levy income and other taxes, they were disregarded by the trust.)

As time went on, the mortgage was paid, the roads were complete, water, gas, electric and, much later, sewers became available, the rest of the county increased in population and development, and the value of Arden's land increased. The value of Arden's land increased at a much faster rate than its expenses, a trend that continues today. Unfortunately, no provision was made for buying more land or any other external expenditure.

Arden could issue a cash dividend, encouraging a denser population, or it could still further improve its public spaces. However, not only would the right of a cash dividend increase the rental value of land, but so would the improved streets and park land. There is not only no need to collect the full rental value of the land, but if it were, there would be no reasonable way to spend it.

As it is, the elected Assessors have simply redefined the words "full rental value" when used in regard to assessments, to mean an amount equal to the needs and wants of the Village. There is testimony as early as 1912 that this practice had already begun. Because all the rent is not collected, the leaseholders enjoy what Georgists call an Unearned Income (Money collected or saved). This Unearned Income is calculated in a speculative projection and capitalized into a selling price. The net result is that land in Arden sells for just as much, given its advantages and disadvantages, as land sells for anywhere else in the county. The leaseholders enjoy the Unearned Income and the Unearned Increment (the increase in the selling price), and those who want to live in Arden have to pay the speculative selling price of the land, in spite of the fact that they only get a lease.

This failure, perhaps an oversight of the founders, was caused by not having an outside entity entitled to the surplus rent. There is no doubt it was a monumental undertaking to establish the trust and the village, and it may well have been impossible to find lessees under provisions that part of the rent would be spent for the purchase of more land or education. However, the absence of an outside entity entitled to the surplus rent, ensured this ultimate failure.

Development Restrictions

Arden's founder, Frank Stephens, had in his house a hand-carved quotation of Themistocles. It read "I cannot play upon any stringed instrument; but I can tell you how of a little village to make a great and glorious city". Today, Arden's residents have another idea. Arden's land continues to increase in value, but the town restricts additional dwelling units and therefore a greater density of population. This restriction lowers land values and often requires people to hold more land then they want to, the antithesis of the Single Tax incentive.

Arden Transforms the Real Estate Tax

If nothing else, Arden, as a Georgist land trust, has accomplished one thing perfectly. It has transformed the county and school real estate taxes into a land value tax. The Real estate tax bills go to the legal owner of the land, the Arden Trust, and the money to pay the taxes is raised from leaseholders in proportion to the value of their land only. We are told that Arden gets its name from a forest in a Shakespearean play. "Now am I in Arden?" says the character, "The more Fool I." In Arden, If you own a $250,000 house, you pay no more in taxes or land rent than your neighbor does if she owns a $50,000 house on a similar piece of land. However, the more your house is worth, the more everyone's land rent increases.

That's why people say: "in Arden, they take from the poor and pay for the rich." "Now am I in Arden? the more Fool I." The truth is, however, within the leaseholds of Arden, the value of houses and other improvements belong unconditionally to their producers or their assignees, not in any degree to the government or the community. Conversely, each leaseholder within the community is required to contribute to the community in direct proportion to the benefits she receives from the community; a small, but very real step toward the Georgist goal of justice.

Appendix: How Can We Determine the Full Rental Value of Land?

Residential land cannot yield its maximum satisfaction without a house on it. Because of the expence of moving houses, no one would lease a plot of residential land for one year only and pay the full rental value. Therefore, we cannot determine the annual rental value of residential land by offering to lease it for one year to the highest bidder.

However, one way to determine the rental value of residential land is to see how much someone would pay for its use with a house on it, and then subtract what we could reasonably expect a third person to charge for providing the house during the same period of time.

In Arden, a 10,000 Sq. Ft. lot will not reach its economic potential with a one room bungalow or an over-developed 27 room mansion. A 10,000 Sq. Ft. lot, in Arden, reaches its full potential with a house that costs about $70,000 to build. The lot and the house together rent for about $950 per month or $11,400 per year.

Out of the $11,400 per year that a tenant would be willing to pay for the use of a lot and house, we must be willing to pay the owner of the house enough for maintenance and incremental replacement, so at any time in the future the building will be worth as much as it was in the past. Three and a half percent of the building value, or $2,450 per year will suffice.

Management and insurance are also required to maintain the cash flow, preserve the building and eliminate some of the risks. In this case 2% of the building value or $1,400 is a fee that must also be deducted from the $10,200 paid for the use of the lot and house.

The owner of a house would only agree to lend the building, if it would be returned in equal condition, and they would receive as much in profit from the loan of the building as if they would have received, if they had sold the building and loaned out the money. The current rate of interest (in 1999) for an adjustable rate mortgage is about 6%. About 1.5% of that represents inflation. Because the value of buildings increase at about the rate of inflation, the owner of a building gains in the increased value of their building, an amount nearly equal the current rate of inflation. Therefore, with 1.5% inflation, a 4.5% return on the loan of a building is equal to a 6% return on the loan of money. $70,000 x 4.5% = $3,150 This too must be deducted from the $10,200 paid for the use of the lot and house.

Out of the $10,200 that people would be willing to pay for the use of the land and the building, $7,000 would go to the owner and manager of the building, leaving the full rental value of the land at $4,400.

To recapitulate: In order to maximize the potential of residential land, it must be combined with a house. The rental value of land is equal to the amount offered for the house and the land, minus the cost of providing the house.

Now: how do we figure out the "highest and best use" of a given parcel? By using this method to compare alternative levels of investment, until the level of diminishing returns is reached, as follows:

Building
value
$50,000 $70,000 $90,000
Monthly charge
for land & bldg.
$750 $950 $1,100
Annual charge
for land & bldg.
$9000 $11,400 $13,200
Interest for loan
of bldg. @ 4.5%
$2,250 $3,150 $4,050
Management &
replacement @ 3.5%
$1,750 $2,450 $3,150
Management &
insurance @ 2%
$1,000 $1,400 $1,800
Rental income from the land:
$4,000 $4,400 $4,200

A final note: As interest rates go down, land rent goes up, and visa versa Be sure to subtract the current rate of inflation from the current rate of interest on the building, because its owner still has the building which increases in value at about the rate of inflation --- a little less with new technologies


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