The Spanish Land Act 8/2007 of May 27 (replaced by the Consolidated Urban Land Act 2/2008 of June 20) introduced a number of relevant modifications to the basic regulation of land ownership rights in Spain. This new piece of legislation has introduced the possibility of autonomous regions (Comunidades Autónomas) increasing (in their respective planning regulations) the percentage of building rights of a specific development to be assigned by landowners to the municipality for no consideration (article 16.1.b) up to 20%. Former Spanish land regulations established a cap of 10%. Land suitable for development (suelo urbanizable) is no longer considered a residual category of land so its classification must be duly justified on the existence of specific needs to be satisfied (article 10.a). Moreover, the minimum percentage of affordable houses (30% of the residential buildability) has been rendered mandatory (article 10.b).
One of the most significant modifications is probably the new – and controversial – land valuation system. It is now linked to the two basic conditions in which land can be found: urban and rural land. This new legal system implies a drastic change since any expectation regarding building rights (even when expressly provided in the relevant planning regulation) is no longer taken into account in ascertaining the value of the land. This new regulation has a clear impact on the valuations to be made under this piece of legislation (eg: determination of consideration in compulsory purchases or sales) and also, as we will see below, on the valuation of land for certain financial purposes.
New categories
Valuation of land in Spain has traditionally been linked to the different classes of land as set out in the relevant State planning regulations: urban land (suelo urbano), land suitable for urban development (suelo urbanizable) and rural land or land not suitable for development (suelo no urbanizable).
The new Spanish Land Act defines two categories of land which correspond to the basic condition in which land can actually be found: (i) rural land or (ii) urban land. This is the first time, since 1956, that a Spanish Land Act has relinquished the possibility of defining different classes of land for land value appraisals. The Spanish legislator considered defining different classes of land to be a planning matter, the subject-matter competency of which has been vested exclusively by the Spanish Constitution in the autonomous regions. This is despite Judgment 61/1997 of March 20, in which the Spanish Constitutional Court confirmed the possibility of the national legislator defining different classes of land when used as a means of defining the basic contents of landowners' ownership rights. Experience has shown that the mere classification of land by the relevant zoning regulations gives rise to an increase in land value based on mere planning expectations.
Rural land
Spanish Land Act 2/2008 (article 12.2) provides that the following will be considered rural land:
(i) land which according to territorial and planning regulations is to be protected from transformation by urban development including, in any case, land excluded from urban transformation pursuant to regulations protecting public domain, nature or heritage;
(ii) land which must be protected according to territorial and planning regulations due to its existing values (such as environmental, agricultural, farming, forestry, and landscape values) and that are subject to natural and technological risks;
(iii) land which according to territorial or planning regulations can be transformed into urban land until the whole urbanisation process has been fully completed.
Therefore, land classified as land suitable for development (suelo urbanizable) will be rural land in the new legal framework.
Urban land
In an urban situation (article 12.3 of Spanish Land Act 2/2008) the land is legally and effectively integrated into the net of services and equipment in the different population areas. From a legal standpoint, this integration will be deemed to take place once the plots of land are serviced with the equipment and supplies required by the relevant planning regulations, or provided with those services with no other works than those required to connect the plots to the facilities already in operation.
New land valuation regime
Article 33 of the Spanish Constitution provides that nobody can be deprived of their assets or rights without a justified reason of public or social interest and appropriate consideration. According to the case-law of the Spanish Constitutional Court, compensation need not coincide with the market value. The legislator can consider other valuation methods provided that they result in fair and proportionate compensation (Judgment 166/1986 of the Spanish Constitutional Court).
When enacting the new Spanish Land Act, the Spanish legislator decided not to give -as a general rule- any value to planning expectations. Thus, those rights arising from the relevant planning provisions would only be valuated when duly appropriated (patrimonializado) by the landowner. Building rights would only be appropriated when they actually materialised, and provided that the obligations and charges imposed on the landowner by law and deriving from a specific land regulation have been fulfilled (article 7.2 of Spanish Land Act 2/2008). This new approach has a direct impact on the legal regulation of land valuation contained in the Act.
It is important, however, to take into account the specific and restricted scope of Spanish Land Act 2/2008 which does not comprise, for instance, the way that land should be valuated in transactions taking place in the private sector.
Thus, article 1 of the Spanish Land Act provides the features that the Act can deal with and includes, among others, setting out the basis for land value appraisals when carried out for the following purposes in the Spanish territory (article 21):
(i) the completion of cost and benefit sharing transactions or any others required for the execution of the territorial and planning regulations in respect of which land value determines the patrimonial content of the collection of rights and obligations inherent to land ownership.
(ii) determination of expropriation prices regardless of the specific expropriation purposes or the regulations on which it is based;
(iii) setting prices at which sellers are forced to sell;
(iv) determination of administrative liability.
As mentioned above, land valuation in Spain, since the Land Act of 1956, has been taking land classification into account and thus also, to a certain extent, the use to be made of the land, rather than its actual condition. This means that mere expectations at the time of the valuation were being considered to carry out the valuation.
Under the new Spanish Land Act, land valuation (for the purposes described above) will no longer take the classification of land into consideration; only the actual condition of the land will be relevant. In short, what is valuated is what actually exists and not what the relevant planning regulation states may exist in an uncertain future. Land is thus valuated according to its nature. Accordingly, the idea of giving a value as close as possible to the market value (the principle under which the valuation system of the previous Spanish Land Act was based) has been discarded, particularly when dealing with land suitable for development (suelo urbanizable).
Valuation of basic rural land
The value of basic rural land will be determined by means of a capitalisation accounting method (article 23 of Spanish Land Act 2/2008). The law no longer proposes the sales comparison approach (the price at which real sales have been completed for assets of similar nature, quality, and quantity in a particular market at the time of the valuation). This is because the circumstances required to guarantee objectivity and the avoidance of speculation in this value appraisal method do not often occur.
Pursuant to this method, the value of the land is determined by means of discounting the stream of actual or potential benefits that the land may have (considering its highest and most profitable use possible in accordance with the relevant regulations) at a rate equivalent to the last reference published by the Bank of Spain as to the internal contribution into the secondary stock exchange market for public debt within a period of between two and six years (article 23.a in connection with the seventh additional provision of Spanish Land Act 2/2008). Corrections can be introduced through the State General Budget Act in order to guarantee the adequate valuation of the land according to market prices without taking planning expectations into account.
This way of valuating rural land has resulted in a very significant drop, as compared to the previous valuation system, in the legal value that land suitable for development (suelo urbanizable) would have in the event of expropriation. Land suitable for development will be valuated regardless of the building rights established in the relevant planning regulations.
Some modifications have been introduced in the law which could lead to higher values in comparison to those resulting from the strict application of the abovementioned valuation method:
(i) The appraisal carried out using a capitalisation accounting method can be up to twice as high by taking location factors, such as accessibility to population areas or economic activity centres, or proximity to areas with special environmental values into account.
(ii) The consideration that a landowner could receive may escalate by the following compensations (articles 25 and 26 of Spanish Land Act 2/2008):
- Compensation for the landowner's loss of the right to participate in new urban development processes (which will occur, for instance, when the land is expropriated by the public authorities) or the modification of the conditions upon which this participation was to take place (modification of land uses and/or building potential). According to article 8.1.c) of Spanish Land Act 2/2008, landowners have the legal right to participate in the urban development process under an equal distribution of benefits and charges regime.
In this case, the compensation will be determined by applying a specific percentage (as set out in the relevant land acts of the corresponding autonomous regions to determine building rights to be assigned to city councils within a specific urban development for no consideration) to the difference between the value that the land would have once urbanised and the value given to the land according to its rural nature, or to the drop in the land value were the urbanisation to be carried out according to the conditions upon which the participation in the urban development was to take place initially.
- Compensation for initiative in and promotion of urbanisation and building actions. This compensation will amount to the expenses and costs no longer pertinent as a result of the approval of a new regulation, the enactment of an administrative act or the occurrence of a new fact. Compensation will include (i) the cost of producing the relevant planning and execution instruments as well as the relevant technical projects required to carry out the urban development or the construction; (ii) expenses incurred in the works carried out, and the financial, execution and development costs required to carry out the urban development or the construction, and (iii) any indemnities paid. The actual costs and expenses incurred will be increased by the rate and premium risk established in Order ECO/805/2003 (articles 32 and 38.3).
It should be noted that the Act provides the possibility of obtaining further compensation if urbanisation works have already started. Compensation will be calculated by applying a figure between zero and one (depending on the exact degree of execution of the urbanisation) to the difference between the value of land according to its rural nature and the value that the land would have once urbanised when the regulation, administrative act or fact leading to the valuation hinders the completion of the urbanisation; or to the drop in value had the urbanisation been completed when the conditions were altered but the urbanisation not hindered.
This new regulation has managed to do away with the contradiction existing in previous regulations. The contradiction derived from the fact that building rights determined by the relevant planning instrument were taken into account when determining the value of land in expropriation proceedings (whether or not actually appropriated by the landowner) but not when determining the administrative liability arising from the modification of planning instruments reducing building rights.
(iii) According to the third temporary provision of Spanish Land Act 2/2008, any land that on the date that the Spanish Land Act 8/2007 entered into force, was classified as land suitable for development in respect of which the planning instruments had established the conditions for its development (rural land according to Spanish Land Act 2/2008), will be valuated according to the rules contained in Spanish Land Act 6/1998. This established that the value of land was to be determined taking the building rights provided in the relevant planning instrument into account. Spanish Land Act 6/1998 would be applicable if, at the time the valuation is carried out, the deadlines set out in the planning instruments for urban development have not elapsed or, if so, the delay is attributable to the public authorities or third parties.
Therefore, in order to ascertain whether urban development deadlines have been complied with, the urban development calendar contained in the detailed planning instruments would be of the utmost importance.
When no specific deadlines are provided in the relevant planning regulations or in the territorial or planning instruments, the maximum deadline will be December 31 2011.
Valuation of basic urban land
The Act distinguishes, for valuation purposes, between urban land on which buildings have or have not been erected. Urban land without buildings (or when there are buildings but these are either illegitimate or about to collapse) is valuated by taking into account the market value of the potential constructions that can be erected on the land (considering the uses and building rights specified in the relevant planning instrument) and excluding the costs associated with the construction itself. The value of urban land with constructions will be either the value of the land and the relevant construction(s) using the comparison method or the residual value of the land excluding the existing construction(s), whichever is the higher.
According to the new legal regime in Spanish Land Act 2/2008, the building potential of land will only be relevant -in general terms- when valuating land that has already been urbanised. Prior to this stage, it will be valuated as rural land without taking into account (as a general rule) the building potential attributed to the land by the relevant planning instruments in force.
Therefore, whenever a public authority expropriates land which has not been fully urbanised, the price of expropriation will be calculated according to the valuation rules established for rural land (capitalisation of actual or potential rents).
This new valuation system has been very controversial because the value of land suitable for development will be significantly lower than the market value of the land.
Financial purposes
In some cases, which fall beyond the scope of the Spanish Land Act, the abovementioned valuation rules may be applicable.
We refer, in particular, to the possibility of appraisers being requested to valuate land for certain financial purposes according to the rules set out in Spanish Land Act.
Order ECO/805/2003 of March 27 sets out the valuation rules for real estate assets and rights for certain financial purposes.
Appraisers will be subject to the valuation methods contained in Order ECO/805/2003 of March 27 setting out the valuation rules for real estate assets and rights for certain financial purposes, whenever appraisals are carried out for one of the following reasons:
(i) to constitute mortgage loans to be assembled into pools backing mortgage securities issued by entities, developers and constructors referred to in article two of Royal Decree 716/2009 of April 24.
(ii) to give coverage to the technical provisions of the insurance companies pursuant to Royal Decree 2486/1998 of November 20.
(iii) assessing the assets of the real estate collective investment institutions governed by Royal Decree 1309/2005 of November 4; and
(iv) assessing the real estate assets of pension funds governed by Royal Decree 304/2004.
According to Order ECO/805/2003 (article 51.1) land suitable for development (suelo urbanizable) in respect of which the planning instruments have set out the relevant provisions for its development, will be valuated using the comparison method or, if not possible (for instance, because of the lack of sufficient information on at least six transactions or offers showing the current situation of the relevant market), using the residual valuation method. It is expressly stated that the value will be assessed taking into account the building rights subject to appropriation by the landowner on the date of the valuation (article 51.4).
Nevertheless, according to the seventh additional provision of Order ECO/805/2003, in certain cases, the value of land suitable for development will have to be assessed using the valuation method set out in Spanish Land Act for basic rural land.
That means that according to the principle of prudence governing appraisals carried out under Order ECO/805/2003 (except for appraisals to determine the value of the assets of real estate collective investment institutions) the possible scenario resulting in the lowest appraisal must be followed. Expropriation would be a possible scenario when the lowest appraisal would have to be used: (i) whenever expropriation proceedings have been initiated; (ii) the relevant planning instruments implying that the public interest requirement and the need to occupy have been met, have been approved and these instruments allow for their execution by means of expropriation; (iii) when a public authority has formally declared, after hearing the interested parties, a breach of the deadlines and other obligations inherent to the urban development process, the breach could lead to the expropriation of the land according to the relevant territorial and planning regulations; (iv) if at the time the valuation is to be carried out, the public authority has initiated administrative proceedings to declare the breach of the deadlines or other obligations inherent to the urban development process, it could lead to expropriation according to the relevant territorial and planning regulations.
This shows that valuations which are in principle carried out beyond the scope of Spanish Land Act 2/2008 are also affected by the application of the valuation methods contained in the Act, resulting in certain cases, in land suitable for development being valuated as ordinary rural land.
| Author biography |
Antonio Gómez Cid
Uría Menéndez
Antonio Gómez Cid joined Uría Menéndez in 2006 and was appointed counsel in 2010. He is based in the Madrid office and a member of the real estate, urban planning and environmental law practice area. Throughout his career Antonio has focused his practice on urban planning. He has extensive experience in the preparation and processing of urban planning and urban management instruments, due diligence processes, and provides advice on a wide range of issues related to planning offences and sanctions, closure orders and licence refusals.
Antonio is a regular speaker at seminars organised by leading urban planning publications and a commentator at legal seminars and conferences. Antonio is also an honorary lecturer at the Universidad Autónoma in Madrid.
In 2008 and 2009 Chambers Europe named Antonio a leading urban planning lawyer. |