Valuation of Compensation for Land Use Restriction

The Spatial Planning Act of Taiwan was implemented on May 1, 2016. To protect the legal rights of landholders, the Ministry of the Interior stipulated Measures for Compensating Loss Incurred during The Implementation of Spatial Planning in accordance with Article 32, Paragraph 3 of the Spatial Planning Act. Compensation is available for relocation or for alteration, where alteration refers to compensation for losses incurred when constructible land is made non-constructible by a special municipality or county (city) and the land cannot be built on. It therefore includes compensation for the value of the right to develop the land.

Real estate is immobile and inflexible, which reduces uncertainty in its use. Studies have generally used net present value to analyze investment in and development of land. The conventional passive net present value method is employed to appraise land value, usually assuming that the investment plan must be developed immediately and is reversible. This is contrary to the characteristics of real estate investment and development, where ignoring the opportunities and flexibility generated by asset value uncertainty can readily lead to misappraisal of the value of an investment plan. The inclusion of future uncertainty in the valuation is the main difference between the option valuation model and the conventional valuation model.

Because correctly calculating the compensation for alteration is crucial to whether landowners successfully obtain appropriate compensation when applying for compensation, this study proposed a real option valuation model to appraise compensation for the alteration of privately-owned constructible land. In the model, landowners possessed complete ownership of and decision-making power regarding the land before compensation. Subsequently, the study adopted real options theories to assist private landowners in determining real options at the decision-making stage. The study also took the case of constructible land in Taichung City that was made non-constructible in accordance with the spatial planning of Taichung City as an example to apply the model.