American Law Institute Endorses Land Banking

Introduction: Land Banking

For decades local governments have guided land development in the United States with antiquated techniques like zoning and a general lack of expertise. Growing public concern over this situation prompted the American Law Institute (ALI) to investigate the possibility of model legislation aimed at providing comprehensive land use planning at the state as well as municipal level. This spring, after more than a decade of research and drafting, ALI adopted its Model Land Development Code.¹ Viewed by some observers as a major breakthrough, criticized by others for its failure to eliminate the dominance of local government in land use decisions, the code has already succeeded in spurring discussion of various innovative techniques for the regulation of land development. One such technique, embodied in the code, is land banking, the practice of public acquisition of developable land. Perhaps the most radical of the code's suggested planning methods, land banking raises a host of unresolved legal, economic, political and environmental issues.

As a concept, land banking is relatively simple. Large scale public purchase of the fee or less than fee interest in lands on the urban fringe replaces the traditional system of attempting to impose development controls on privately owned land. This "bank" of land is then gradually released to private parties.

Through this process public land bankers seek to accomplish two main goals. First, by controlling the sale price of publicly owned land, the bank can reduce inflationary pressure on the land sales market. If this maneuver is successful, the result should be a reduction in costs for housing purchasers and other land consumers. Second, if bank officials use skillful planning in the process of witholding land from the market and releasing it subject to restrictions, they can promote orderly growth patterns that preserve adequate amounts of open space and greatly reduce the potential for inefficient and costly urban sprawl.

A possible side benefit worth noting is the public recapture of land value increases that stem from government action. However, if such recapture is made [5 ELR 10153] an explicit aim of the land banking process it can create legal problems and result in policies that are inconsistent with the two major goals noted above.² For example, it is not hard to envisage conflicts between the separate aims of revenue production through land sales and orderly urban growth.

Examples of working land banking programs abound. In Europe, the city of Stockholm, for instance, has a long and successful tradition of municipal ownership and management of land both within and without its borders. Closer to home, the western Canadian city of Saskatoon has operated a land bank with quite positive results since the depression of the 1930's when it found itself in receipt of large tracts of land through tax defaults. In the United States, private developers have engaged in a form of land banking by acquiring huge rural land holdings such as the site of Columbia, Maryland, and then controlling the pace and form of the development according to financial and planning constraints. However, while academics and federal commissions in this country have long called for true, public land banking,³ the technique remains largely untried outside the private sector.

ALI Code Endorsement

Two recent developments will rapidly change that situation. The Community Development Act of 1974 authorizes the use of federal funds for the purchase of land by local governments for "the conservation of open spaces . .. the guidance of urban development … or … other public purposes."⁴ With this federal endorsement and financial backing of land banking, state and local governments lack only the institutional mechanism that can create and sustain a program of extensive public land ownership. The ALI code provides that mechanism. The prestige of the Institute, which sponsored the near-ubiquitous Uniform Commercial Code and publishes the well-used restatements of various areas of the law, virtually ensures that its land banking proposals will receive serious consideration by state legislators. Indeed, previous draft versions of the ALI land development code, which did not contain land banking provisions, have already served as the basis for major land use legislation in Florida.⁵

In order to fully understand the ALI land banking scheme one must consider it in the context of the model land development code as a whole. Briefly, the code attempts to strike a balance in land use regulation between total localism and extensive state control. At the local level, authorities continue to make actual land use decisions within the borders of their jurisdictions. The code urges, but does not require, the adoption of local land development plans which can serve as a guide for evaluating proposed developments in light of environmental, social and economic effects.⁶ In specific instances, local decisions must be based on an extensive written record that provides a basis for administrative and judicial review.⁷

State agencies enter the planning and regulatory picture in three distinct situations. First, if an area is designated as one of "critical state concern," any local decision on a proposed development within that area must conform to standards specified by a state land planning agency.⁸ Second, that agency is to determine categories of development which because of their nature or magnitude will have state-wide or regional impacts. Decisions regarding these developments can only be made by local governments that have produced a development ordinance conforming to the provisions of the code or by some state-appointed land development agency.⁹ Third, the code authorizes the formulation of a state land development plan that is binding on local authorities to the extent that any provisions contained in local plans that are inconsistent with the state plan are to be given no weight on appeal.¹⁰ The enforcement of these standards is the responsibility of the state land adjudicatory board.¹¹ All local decisions concerning developments in critical areas or of regional impact can be appealed directly to this tribunal.

Land banking under this two-tiered scheme is primarily a state endeavor.¹² Under the code, a state land reserve agency would be established to develop banking policies and acquire land according to the constraints of those policies and the limitations contained in the state land development plan. This is in keeping with the code's general theme, since full scale land banking would certainly take on metropolitan or regional aspects. Local government becomes involved in the land banking process through contractual arrangements whereby the state land reserve agency agrees to act as a purchasing agent for the municipality.These agreements can contain conditions pertinent to the ultimate disposition of the land involved. Partial or complete local funding of acquisitions made pursuant to such agreements is authorized. This channelling mechanism serves the dual role of allowing cities and towns to receive federal funds for land banking under the abovementioned Community Development Act of 1974 and of preserving the state's basic control over the banking process. Furthermore, cities attempting to buy land in outlying areas are afforded a certain amount of political protection, since it is the state rather than a municipality that must ultimately defend and purchase.

The code's draftsmen have given the state land [5 ELR 10154] reserve agency broad powers in terms of acquiring land.¹³ Land banking is declared to be a valid public purpose, paving the way for agency use of the states' power of eminent domain as a supplement to negotiated purchases. In order to make the availability of this option more explicit, the code specifically grants the power of condemnation to the state land reserve agency. If the agency desires to purchase land through negotiation, it is authorized to bid anonymously through private brokers. It can assemble, then, several contiguous parcels at their individual prices rather than at an inflated figure based on the value of the assemblage as a whole.

The state land reserve agency or land bank can also acquire less than fee interests in the land it buys, such as development rights or scenic easements. This flexibility enables the bank to effectively freeze property in its existing state at a cost to the public far below the full market value of the land. For example, the National Park Service recently preserved a vista by purchasing a scenic easement for only one third the cost of the full fee interest of the land involved.¹⁴ Similarly, if farmers are willing to trade the chance for potentially lucrative future offers from developers for the prospect of immediate cash and lower tax assessments in the future, a land bank can protect farmland from development by purchasing only the relatively inexpensive development rights. Suffolk County, New York, is reportedly enjoying a degree of success in the initial stages of its attempt to employ this technique.¹⁵

Once the state land reserve agency has purchased land, the code offers it a wide range of management options.¹⁶ The land bank may construct or demolish structures on its properties, but the code's authors indicate that any construction undertaken should be aimed at land preservation rather than full scale development. Of course, any development undertaken by the state land reserve agency must not only be consistent with that agency's policies but those of the state land planning agency and the appropriate local jurisdiction as well.

When the land bank chooses to sell some of its property it may do so in any manner except by means of a lottery or a sale at less than use value. The code reserves these methods of disposition to local governments. Furthermore, the state land planning agency can disallow any land bank sale. A code provision authorizing local governments to petition the land bank to sell certain holdings within their boundaries offers a form of mortmain control. Any appeal of a negative decision by the land bank goes directly to the state land planning agency, which must give particular scrutiny to cases involving land held in reserve for more than twenty years. However, the twenty year limit is not an absolute deadline for sale, perhaps reflecting the Swedish land banking experience that the time lag between acquisition and development has often been thirty years or more.¹⁷

Clearly, the code has gone to great lengths in attempting to forge an institutional framework in which land banking in the United States can enjoy the same success that it has had in Europe and Canada. Yet, the official commentary of the ALI stresses the experimental nature of the technique and cautions against wholesale reliance on a land banking program.¹⁸ This is hardly surprising, since the viability of concentrated, large scale, public land acquisition in America has been seriously questioned by a small, but influential group of scholars and politicians. They point out that while in the abstract or in a compatible institutional setting a land bank appears to be an eminently reasonable solution to inflated land prices and urban sprawl, several factors indicate that its performance in many concrete situations may prove less than satisfactory.

Real Cost Savings?

The theory that land banking can eventually result in lower housing and real estate costs as well as orderly urban growth has been quite forcefully challenged by Sylvan Kamm, formerly of the Urban Institute.¹⁹ He notes that even the most ambitious American land banking schemes are not designed to eliminate private land ownership totally either in a city or at the urban fringe. Given this situation, a bank's withdrawl of land from the market in order to promote sound growth policies tends to inflate the cost of land remaining in private hands. If one envisions a continuation of the current tight housing market, it is not hard to conceive of enormous development pressure being placed on land not held in reserve by the bank. Faced with this situation, a land bank can either sit idly by and watch local jurisdictions succumb to such pressure or become drawn into its own inflationary spiral by trying to corner the whole market at great expense. Neither alternative would contribute to the land reserve agency's dual goal of cheap land and ordered growth.

Of course, if a land bank succeeded in accumulating a large enough inventory it could conceivably release its land at a rate sufficient to drive prices down. Kamm notes, however, that even with reduced land prices, the bank's success in the promotion of orderly growth would tend to drive up the "functional utility" and, therefore, the price of each parcel of land — in much the same way that urban land, by virtue of its high density potential and locational advantages, is often worth more to a developer than raw suburban properties.²⁰ This effect may, however, be tempered by America's apparent attachment to suburban sprawl and fear of the [5 ELR 10155] quality of any development substantially controlled by government. In other words, orderly and perhaps more dense development initiated by the land bank might be viewed as less attractive and less valuable.

Land banking may also prove to be a potentially expensive proposition. Kamm estimated in 1972 that the operation of a national land bank would require about $35 billion in capital outlay during the initial acquisition period.²¹ Little return could be realized on this investment for several years, if not decades. In addition, management costs might prove to be high. In many instances vacant land must be carefully maintained or it will rapidly deteriorate into a safety hazard or an area contributing to visual blight.²²

These costs could put pressure on bank authorities for premature resale. While in a land banking scheme that relied on debt financing such pressure would be substantial, the availability of state as well as federal funds for banking under the code should ameliorate this problem. Similarly, the purchase of less than fee interests could also drive the initial costs of acquisition down and virtually eliminate management costs while accomplishing many of the same goals as a complete purchase program.

The code's offering of these financial outlets will not, however, diminish a potential hidden cost involving the property tax. Generally, state owned land is exempt from local property taxes. The code, however, leaves open the question of whether local governments can tax in whole or in part the property owned by the state land reserve agency.²³ If the state decides that its agency can be taxed, the holding costs involved in land banking would suffer a sharp increase. If, on the other hand, the land reserve agency is made tax exempt, municipalities stand to lose a considerable amount of revenue. One possible result of this latter choice is the exertion of local pressure on the agency to sell its holdings prematurely in order to return property to the tax rolls. Another potential consequence of tax exemption is municipal tax "retaliation." Local authorities, eager to make up for lost revenues, could charge the eventual residents of land released by the bank for the increased capital as well as operating costs of municipal services. These user fees could add considerably to real estate costs and consequently help to defeat the land bank's attack on inflation.

These problems have not emerged in foreign examples of land banking because of fundamental differences in land use traditions. Neither Saskatoon nor any of the Swedish land banks was faced with the land acquisition problems outlined above. Sweden, for instance, has enjoyed government ownership of the land since the 16th century.²⁴ Similarly, Saskatoon was virtually given most of the initial land in its bank by virtue of tax defaults during the depression.

Legal Problems

Land banking also involves legal problems. The main difficulty in this regard centers on the taking issue. The code recognizes that condemnation of land is a necessary complement to negotiated purchase in any large scale land banking scheme. Yet, while the code proclaims land banking to be a public purpose, it is not clear that all state courts will find that the accumulation of land reserves can satisfy this prerequisite to the exercise of the condemnation power.Recently, courts have been quite liberal in their determinations as to what qualifies as a valid public purpose. Only one court however, has directly addressed itself to the issue of taking land for the rather nonspecific purposes of land banking. The court upheld that particular taking,²⁵ but the code's draftsmen note that the whole issue remains "very much alive."²⁶

Also troublesome are the legal problems in regard to the timing of condemnation and the use of land banking for recapture purposes. Courts have struck down takings for an "indefinite, remote or speculative future."²⁷ Since land banking often requires holding land for a decade or more, courts may well have to stretch their notion of what constitutes a valid time frame for condemnation. More serious difficulties may arise from situations involving takings aimed at reserving for the public gains in land values due to public expenditures, such as the provision of transportation facilities. Courts have had little patience with such revenue schemes.²⁸ Consequently, land bankers are well advised to avoid situations that appear to be designed primarily to augment the public fisc.

Prominent foreign land banks have not been forced to come to grips with these difficulties. Swedish authorities, for example, formulate urban plans in secrecy and carry them out with much less regard for notions of due process than their American counterparts.²⁹ Similarly, Saskatoon's bank had little, if any, need to exercise the power of eminent domain.

Political Hurdles

The foreign examples also fail to reflect the basic political realities of large American metropolitan areas. Swedish central cities typically exert a great deal of economic and political influence over their surrounding areas. Due to its small size and relatively isolated location, Saskatoon can also ignore the problems of disjointed and politically disparate metropolitan government so prevalent in the United States.³⁰

[5 ELR 10156]

While the ALI code's placement of land banking responsibility in state hands represents a step toward the solution of these problems, the growing political prominence of suburban areas could prove to be a substantial roadblock to the effective use of land banking in American metropolitan regions. It is hard to conceive of outlying suburbs passively accepting a land bank's decision to steer state-controlled urban growth, with its accompanying social and economic difficulties, in their direction. A concrete example of this problem is offered by the recent furor over Senator Kennedy's proposed implementation of federal land use controls, including condemnation, in the Nantucket Sound Area. Local officials, vigorously opposed to any infringement upon their power to regulate land use within their respective jurisdictions, were able to mobilize potent political forces, including the Governor of Massachusetts, in opposition to the federal action.³¹

Conclusion: Prudent Risk Taking

One is tempted to ask, then, whether land banking is worth the unwelcome baggage that it carries with it. More stringent and coordinated use of existing environmental and land use laws might well result in the same degree of control over urban growth. Indeed, in the long run economic forces related to the energy crisis might also provide hidden but effective regulatory mechanisms for urban sprawl. While the decision to buy rather than excessively regulate land that a government chooses to preserve temporarily or indefinitely in its present state appeals to notions of fairness, the costs of such an "equitable" approach might well prove prohibitive. Certainly, the money spent on the urban fringe for land banking might be employed effectively elsewhere, such as in the central city.

Since, however, the above-mentioned objections to land banking in the United States are as untested in practice as the concept itself, the best approach may be a cautious application of the technique to determine where and when it can prove useful. For example, land banks could be extremely effective in rural or exurban areas that have the foresight to anticipate development. Farmlands and other properties can be purchased at relatively low prices in these areas. And the rural location of the bank's purchases would tend to minimize the jurisdictional squabbles involved. Further, if the bank buys only development rights both acquisition and management costs become more palatable.

The activities of a state land reserve agency in existing metropolitan areas require a more sophisticated and selective approach. Land could be purchased for specific short term purposes such as the infusion of low and moderate income housing into suburban areas or the regulation of growth around new transportation centers. If these tactics prove successful, more ambitious undertakings could be attempted on the urban fringe. Admittedly, this piecemeal approach has the drawback of severely reducing the bank's ability to hold down land prices. Hopefully, though, the compilation of a good record in terms of the bank's other major goal — the provision of orderly urban growth — would reduce political hostility toward expanded operations.

The code encourages this cautious attitude both in its specific commentary on land banking and its general bias in favor of compromise rather than radical change. By endorsing land banking and suggesting a means for its implementation the ALI has taken a much needed step towards the infusion of fresh and exciting ideas into outmoded traditional land use regulation systems. By simultaneously counselling caution the ALI code reflects both the complexity of today's rapidly changing development scene and the need for a balanced approach to the regulation of land use, an approach in which land banking may well come to play an integral part.

1. American Law Institute, A Model Land Development Code, April 15, 1975 (official draft) (hereinafter ALI Code).

2. F. Bosselman, Alternatives to Urban Sprawl: Legal Guidelines for Governmental Action, National Commission on Urban Problems, Research Report No. 15, at 41 (1968).

3. ALI Code, at 260.

4. 42 U.S.C. § 5305(a)(1) (1974).

5. Florida Environmental Land and Water Management Act of 1972, Chap. 72-317, Laws of Fla., Amended 74-326 (1972).

6. ALI Code, §§ 2-201, 2-210, 3-101.

7. Id., §§ 2-304, 9-101.

8. Id., § 7-201.

9. Id., § 7-301.

10. Id., § 8-502.

11. Id., § 7-502(2).

12. Id., § 6-102.

13. Id., §§ 6-301-304.

14. Gifford, An Islands Trust: Leading Edges in Land Use Laws, 11 Harv. J. Leg. 439 (1974).

15. B. Gordon, Suffolk Times, June 19, 1975, p. 18.

16. ALI Code, §§ 6-401-403.

17. S. Kamm, Land Banking: Public Policy Alternatives and Dilemmas 16, Urban Institute Paper No. 112-28, (Dec. 31, 1970) (hereinafter Kamm).

18. ALI Code, at 263.

19. Kamm, supra, n. 17, at 11.

20. Id.

21. Id. at 28.

22. W. Whyte, The Last Landscape (1968).

23. ALI Code, § 6-203.

24. Kamm, supra, n. 17, at 16.

25. Commonwealth of Puerto Rico v. Rosso, 95 P.R.R. 488 (1967), appeal dismissed, 393 U.S. 14 (1968).

26. ALI Code, at 266.

27. Board of Education v. Baczewshi, 340 Mich. 265, 65 N.W.2d 810 (1954).

28. See n. 2, supra.

29. Kamm, supra, n. 17, at 17.

30. ALI Code, at 257.

31. Gifford, supra, n. 14, at 457.