Sale or Long-Term Lease through a Strategic Negotiated Transaction

The government can carry out negotiations directly with developers in a nontransparent form. This prevalent form of public land disposition is often used when the government wants to attract real estate investment for a specific venture. As such, it negotiates directly with large-scale, prominent developers. This type of approach involves mobilizing private capital to help finance urban regeneration through a strategic, negotiated land disposition deal structure that aligns public and private interests.

There are a variety of ways to implement this approach. For instance, a municipality might issue a competitive solicitation inviting developer interest in renovating publicly owned parcels within a specific development program that would advance the city’s urban regeneration vision. This might apply, for example, if a city owned a large site, such as a now-defunct rail yard or decommissioned airport. In this case, the public sector might be seeking to maximize the fair market value of the site as well as other policy goals, such as stimulating production of new low-income housing units or construction of a new public park. Through the process of negotiating a disposition and development agreement with a qualified private developer, a city can leverage the value of the public site. It can do so by requiring that the developer take on certain costs and risks that might otherwise fall to the public sector.

A city might have a policy goal of promoting greater density in the form of additional housing units at various price points in an area targeted for urban regeneration. Through a negotiated disposition and development agreement, a city might require a developer to include units of very low-income housing (that would otherwise require a development cost subsidy) along with the market-rate units that the developer would build. By lowering a project’s cost basis, discounting land value (if necessary to US$0) can help make an otherwise infeasible project financially viable.

Sometimes such an approach is used in settings with poor governance or one that is prone to corruption both in the identification of the developer(s) in question and in the setting of land prices. Because of the nontransparent approach utilized and the high potential for corruption, such contracts are usually difficult to enforce and often fail to achieve the intended purposes. One of the big rallying cries of the Arab Spring in countries such as Egypt and Tunisia has been corrupt public land management. Indeed, most of the arrests that have taken place in the aftermath of the overturning of the old regimes in 2011 have been of investors who were involved in nontransparent public land deals.

Most land leases are structured based on the concept that a charge is needed for the use of the government’s assets (property). Such charges would occur on a pay-as-you-go basis. Usually, the government charges a stream of regular payments (monthly, quarterly, semiannual, or annual) during the entire lease period. Some of the more common lease structures include:

• Equal periodic installments during the entire lease period
• Equal periodic installments, adjusted from time-to-time for inflation
• A low base rate plus some percentage of a tenant’s income generated by the leased property (though this form is usually utilized only in the private sector for commercial leases or in unique PPPs)
• A total sum paid up front (Kaganova 2014)

The last case is used mostly in China and Hong Kong SAR, China. In China, this method has created fiscal problems due to an over reliance of the local governments on these one-time revenues. It has also created a false incentive for governments to classify and convert rural land to urban land to be auctioned to developers. Obviously, this situation cannot go on indefinitely as the land supply is limited. See box below for an example of a direct land deal between the government and the private developers in Shanghai, China.