An “Alternative” Method of Valuation for State-Aid-Free Sale of Public Land

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The obligation of the state to act as a private vendor
 
When a public authority sells an asset to an undertaking, it must sell it at market price. The case law is clear on this point, especially with respect to the sale of public land or a building. Such a sale may constitute state aid “where it is not made at market value” or it is not sold at a price that is “acceptable to a private investor [or private vendor], operating in normal competitive conditions”. [1]This immediately raises the question: What would be an acceptable price to a private vendor? The answer is that it is the price that maximizes the potential revenue which is generated by the sale, or simply the highest possible price. But what is the highest possible price? To give an answer to this question, one needs to know the value of the land to all potential buyers. For sure, no rational investor would be willing to pay a price that would exceed the value of the land.

Assuming that the asset has no intrinsic value of its own [i.e. it is not a painting, a classic car or anything else than can be appreciated for its own sake], the value to the buyer is equal to the extra revenue that the asset can generate in the best use that it can be put by that buyer. The extra revenue that can be generated by the buyer should be equal to the increase in the value of the services or products that can be provided to others with the use of that asset and so on. These successive calculations can be reduced to a single number when there is a well-functioning market. That number is the price that clears the market for the land in question. This is because the market price incorporates all valuations by all potential buyers and users. Therefore, we can say that, in a well-functioning market, the value of an asset is the market price of that asset and should be acceptable to a private vendor because he cannot sell it for a higher price. No potential buyer would be willing to pay any higher price.

The concept of a well-functioning “market” presupposes the existence of many similar products which can be compared by many sellers and buyers. If there is no multiplicity of products [and sellers and buyers], it is difficult to derive a meaningful market price. This is especially the case with durable assets, which last for a long period of time. An additional complication in the case of land is that it comes in many different sizes and locations which may or may not be comparable.

Irrespective of these complications, the market mechanism is “forward looking”. It takes into account all available information on the various possible uses of land and the revenue that they may generate. The market is not infallible. However, it never ignores any relevant information. Therefore, a public authority that sells land may not knowingly disregard any information which affects the value of that land. This is the essential element that must be incorporated in any method of land valuation method. Let’s consider now the two “standard” methods and an alternative method that has recently been proposed by Germany and approved by the Commission as ensuring sales free of state aid.


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Land valuation: Standard and alternative methods

Sales of public land give rise to problems because such sales are infrequent and the size and location of the plots vary significantly. The Commission Communication on State Aid Elements in Sales of Land and Buildings by Public Authorities defines two standard methods for ensuring that a sale is free from state aid: [2]

  1. i) Sale through a well-publicised, open and unconditional bidding procedure.
  2. ii) Sale after an ex-ante valuation report prepared by independent expert.

However, as the Court of Justice explained in C-239/09, Seydaland Vereinigte Agrarbetriebe, it cannot be ruled out that other valuation methods may be applied so long as it is assured that the price actually paid by the purchaser reflects the market value of land.

Indeed, in a recent decision [SA.33167], the Commission accepted that an alternative method proposed by Germany was capable of identifying the market value of land. [3]

The German method – the so-called VPS method – was based on the principle of “comparative” valuation. The VPS method works as follows. From a large data base with extensive information on past transactions, a set of comparable transactions is identified. This set contains all the transactions that took place within a radius of 20 km, for similar plots of land during the previous 12 months. If the set contains fewer than 10 transactions, then the radius is extended to 30 km. If it contains 10 or more transactions, it is considered to be statistically robust and the median price is then calculated. That price is the derived “market value” of the land “as much as possible”.

It is instructive to consider what appears to have persuaded the Commission to accept that the VPS method reflected as “much as possible” the market value of land. In the absence of an auction which replicates the market, valuation by an independent expert satisfies two important conditions. i) It is objective in the sense that it may diverge from the wishes or views of the public authority that sells the land. Because a professional land surveyor has a strong interest to protect his reputation, it is reasonable to expect that he will not provide valuations that merely serve the policy aims of the commissioning public authority. ii) It takes into account all relevant information concerning the plot that is being sold, the overall market conditions and the use that the land will be put in by the prospective new owner.

The VPS method was objective. It depended entirely on actual sales data. At issue was whether the VPS method was capable of taking into account all relevant information available on the market.

Given that the data base from which information was obtained was continually updated, there was no doubt that it reflected historic price movements correctly. However, such a data base could not be forward looking as any proper economic valuation method must be. Curiously, the German authorities assured the Commission that when the VPS method would be used, it would also be ensured that no land would be sold at a price below market value. In the words of the Commission, “since it cannot be definitively ruled out that, in certain cases, the VPS method may lead to a result below market value, the German authorities commit, pursuant to the obligation on all the organs of the State including the national courts and administrative authorities to set aside a rule of national law which is contrary to EU law, that the BVVG shall refrain from applying this method in any such cases.” [paragraph 36]

This commitment seems to have tipped the balance in favour of VPS and led the Commission to the rather circular conclusion that “insofar as it reflects the market value of the land sold, it does not confer an advantage on the purchaser of that land and thus precludes the presence of State aid within the meaning of Article 107(1) TFEU”.

But if the VPS method is not sufficient to preclude the presence of state aid, how would the German authorities know that? In other words, if the objective VPS method is not to be applied blindly, how can it ascertain that its derived price is below market value? The answer was that Germany also proposed to reveal the results of the VPS method to independent valuation experts who, presumably, would prevent any sales below market value. What is not known is how the price would be adjusted to remove any element of state aid.

Conclusion: Experts are still needed

It appears that, without an auction, the valuation performed by an expert is still indispensable. The reason is that an expert, as opposed to a mechanistic method such as the VPS, is forward-looking and takes all relevant information into account.

Although the Commission decision concerning the German VPS method appears on surface to endorse it as an equally valid alternative method for land valuation, in fact it reveals the difficulty in dispensing with auctions or methods where experts perform at minimum verification or validation of mechanistic calculations such as those produced by VPS.

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[1] C-239/09, Seydaland Vereinigte Agrarbetriebe, paragraph 34; C-290/07 P, Commission v Scott, paragraph 68; T-244/08, Konsum Nord ekonomisk förening v Commission, paragraph 61.

[2] Commission Communication on State Aid Elements in Sales of Land and Buildings by Public Authorities , OJ C 209, 10/07/1997, pp. 3-5

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:1997:209:0003:0005:EN:PDF

[3] Commission decision SA.33167on proposed alternative method for the valuation of agriculture and forestry land in Germany sold by the public agency BVVG.

http://ec.europa.eu/competition/state_aid/cases/246093/246093_1396874_125_2.pdf

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About

Phedon Nicolaides

Dr. Nicolaides was educated in the United States, the Netherlands and the United Kingdom. He has a PhD in Economics and a PhD in Law. He presently holds positions at the College of Europe and the University of Maastricht. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.

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