How to Value Land in Complex Land Swaps

How to Value Land in Complex Land Swaps - StateAidHub blogpost25 LandSwap RealdMadrid scaled
A private investor assesses all components of a complex transaction and takes into account not just profit, but also the legal implications of the prospective transaction and possible future liability.
When a public authority sells land, it should either auction it through a competitive and unconditional process or have it valued beforehand by an independent expert.Sometimes, public authorities enter into complicated deals in which they swap public for private land. This happens, for example, when they want to move a factory to another location. In principle, swaps of land are free of State aid when the plots which are exchanged are of equivalent value.However, when different plots are subject to different conditions of use, equivalence is difficult to establish.The General Court addressed the issue of equivalence in its ruling of 22 May 2019 in case T‑791/16, Real Madrid Club de Fútbol v European Commission.[1]Real applied for annulment of Commission decision 2016/2393 which found that Spain had granted State aid to Real.

Between 1991 and 2011, the City Council of Madrid and Real were involved in a series of agreements involving land swaps which were initiated as part of the renovation of the Bernabéu stadium. At some point the exchange of land got bogged down because the transfer of one of the plots – B-32 – also required the consent of the Autonomous Region of Madrid. Eventually, a “settlement” agreement was reached in 2011, which provided, among other things, for compensation amounting to EUR 22.7 million to be paid by the City Council to Real for a swap that could not be completed.

After the Commission became aware of the land swaps, it initiated the formal investigation procedure which culminated in a negative decision ordering Spain to recover EUR 18.4 million. The Commission held that a private investor would not have compensated Real by more than the market value of the land in question which was estimated at EUR 4.3 million [=22.7–18.4].

Must a market vendor obtain ex ante legal advice?

Real argued that the Commission was wrong to consider that the City Council had not acted as a market economy operator just because it had not sought external legal advice on its liability in case of failure to fulfil the contract.

The General Court recalled that “(40) it is now settled case-law that the supply of goods or services on preferential terms is capable of constituting State aid for the purposes of Article 107(1) TFEU”.

“(41) The application of the test of a private operator in a market economy entails comparing the way in which the public authorities acted with the way in which a private operator of a comparable size would have acted in the same circumstances. If the State is merely, in fact, acting as any private operator would under normal market conditions […], then there is no advantage attributable to intervention by the State because the recipient could theoretically have derived the same benefits from the mere functioning of the market”.

“(51) The applicability of the private investor criterion requires that it be established, unequivocally and on the basis of objective and verifiable evidence, that there was an evaluation comparable to one to which a private operator would have had access prior to or at the point of adoption of the measure at issue”.

The Court then noted that Spain failed to communicate to the Commission two technical expert reports from the City’s own departments before the conclusion of the settlement agreement in 2011.

The Court also noted that although the reports contained a summary of factual information “(55) such a summary cannot be regarded as a real legal analysis of the causes leading to the acknowledgement of that city council’s liability for the non-transferral of that plot. […] Nor is there any analysis of who would be liable, and on what grounds, for the non-transferral of the plot in question.”

“(58) The Commission did not err in concluding, […], that a prudent market economy operator, when faced with a situation such as that in the case before it, would have sought legal advice before signing the 2011 settlement agreement and accepting full legal liability for the impossibility of transferring plot B-32 under the 1998 implementation agreement.”

“(65) It is important to observe that the applicant therefore knew, at the date the 1998 implementation agreement was concluded, that Madrid City Council was not the owner of plot B-32, that that plot fell within a specific category, namely the category of being for basic sport use, and that it was necessary, at the very least, that the city council concerned acquire the plot and that the plot be registered in the Property Register before its transfer to the applicant could be envisaged.”

“(67) It is apparent from the contested decision and from the answers to the questions put by the Court that [a certain document] with regard to which competence is held not only by Madrid City Council but also by the Autonomous Community of Madrid. That city council cannot amend [that document] of its own motion, but must propose that amendment to that autonomous community.”

“(70) It is important to add that, inasmuch as neither the Kingdom of Spain, nor Madrid City Council or the applicant have communicated to the Commission a detailed legal analysis concerning that city council’s liability for the non-transferral of plot B-32, it is not for the Commission to carry out that analysis itself and to make a global assessment, taking into account — in addition to the evidence provided — all other relevant evidence enabling it to determine whether the Kingdom of Spain took the measure in question in its capacity as a market economy operator”.

On the basis of the above reasoning, the General Court rejected the plea of Real. A private investor does not enter into an agreement whose legal consequences cannot be properly ascertained beforehand.

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Correct valuation

Then, Real challenged the value of plot B-32 as estimated by the Commission.

There is no standard or single methodology on the basis of which to calculate the value of land. At the very minimum, the cost of acquisition of land establishes a price floor. At maximum, the value of land is determined by the prospective revenue that can be generated by the commercial use to which the land is put. Somewhere in between are the sale prices of comparable plots of land. In addition, the expert who carries out the valuation must take into account the impact of any legal restrictions on how the land may be used or disposed.

The Court, first, clarified that “(85) the conduct of a private investor, which must be compared to that of a public investor, need not be the conduct of an ordinary investor laying out capital with a view to realising a profit in the relatively short term. That conduct must, at least, be the conduct of a private holding company or a private group of undertakings pursuing a structural policy — whether general or sectoral — and guided by prospects of profitability in the longer term”.

Then the Court dispelled one of the most widely held misconceptions about the market economy investor.

“(86) In those circumstances, the application of the criterion of the private investor is not aimed at establishing what could be the maximum profitability obtained by an investor in a particular sector or across the whole economy, but at establishing whether a comparable private investor could, in the circumstances of the case under consideration, have made the investment concerned. It is thus a matter of establishing whether the investment concerned is the result of a degree of economic rationality, at least in the long term”.

In other words, a private investor commits its own money when the return compensates it for the risk it assumes or covers its cost of capital, whichever is higher. A private investor is not expected to be able to identify the most profitable investment from the universe of possible investments. If that were the case, then the benchmark of the hypothetical private investor would be hopelessly high and would have been called the “private champion” rather than the mere investor.

The Court went on to “(87) assess whether, having regard to the initial intention of the parties to the 1998 implementation agreement, and also to the regulations applicable to plot B-32, both at the date at which that implementation agreement was signed and at the date of the signing of the 2011 settlement agreement, it is reasonable to think that a market economy operator would have accepted to pay all the compensation for the non-transferral of the plot concerned, which was estimated to be equal to the value of that plot, namely EUR 22 690 000.”

“(91) It is important to add that, since plot B-32 was not transferred, it was provided that compensation would be paid whose valuation is characterised by the absence of an unconditional bidding procedure. Such a fact may also render the Commission’s task complex”.

The Court drew attention to the fact that “(93) it is apparent from the contested decision and the other information in the file that the various estimations made in order to determine the value of plot B-32 differ considerably.”

“(94) For the purposes of the 1998 implementation agreement, the assumed value of plot B-32 was determined by officials in the City council urban development department at EUR 595 194. It is stated that that valuation was made ‘using the valuation methodology laid down in Spanish law’, without any further details being provided.”

“(95) For the purposes of the 2011 settlement agreement, the departments of Madrid City Council based their assessment on the cadastral value, which, according to the applicant, takes account of factors such as the value of the land, the value of the constructions thereon, the location and the market at issue. In the report published on 27 July 2011, those departments determined the value of plot B-32 to be EUR 22 693 054.44. […] That was the value which was adopted in the 2011 settlement agreement.”

“(96) After the 2011 settlement agreement was signed, the officials of the Spanish Land Registry, which is part of the Spanish Ministry of Economy and Finance, updated the value of plot B-32 and estimated that value as not less than EUR 25 776 296. According to the applicant, such an update serves to bring the cadastral value closer to the market value, without exceeding that market value. The cadastral value is based, for example, on data relating to actual transactions on the market. Those officials are independent from the officials of Madrid City Council.”

“(97) The applicant commissioned and has produced the property consultancy’s report, in which the market value of plot B-32 in 1998 was assessed at EUR 574 000, which is thus relatively similar to the value upheld for the purposes of the 1998 implementation agreement. In the same report, the market value of the same plot in 2011 was assessed at EUR 22 690 000, which approximately corresponds to the value upheld in the 2011 settlement agreement. The applicant states that the property consultancy’s report uses the static residual valuation method, on the assumption of the sale of the various units shortly after construction of sports infrastructure on the land concerned. That report took into account a transfer to full ownership without restrictions as to resale as well as the objective of that settlement agreement to provide compensation.”

“(98) In the property valuation office’s report, ordered by the Commission, in short, four scenarios were envisaged: scenario SE-00, in which the land is public property and has no market value but only a cost price, namely EUR 3 930 000; scenario SE-01, in which the land is intended for the construction of social housing and is assessed at EUR 18 000 000; scenario SE-02, in which the market value of the land corresponds to 10% of the value in the sector, namely EUR 12 245 000; scenario SE-03, in which plot B-32 cannot be transferred, but can only be the object of a right of use, which would allow exploitation of that land for 30 years for sport use, any subsequent resale being excluded, which would lead to a value of EUR 4 275 000.”

“(99) The Commission stated that in the present case it adopted the value as it followed from scenario SE-03 of the property valuation office’s report, having regard to the land planning classification of the land determining its use and excluding its resale.”

“(100) First of all, it must be held that the Commission did not commit any manifest error in adopting the value following from such a scenario, which was estimated having regard to the right of use of plot B-32.”

“(101) It is not disputed that, in order to determine the value of plot B-32, it was necessary to base the assessment on the situation at the date of the 2011 settlement agreement. That date corresponds in fact to that of the offsetting of debts and payment of compensation as decided upon in that settlement agreement and which are at the origin of the present proceedings.”

“(102) As is apparent from the legal regime applicable to plot B-32, at that date, such a plot was part of public land and could not be transferred, it being only possible to grant a right of use.”

“(103) As the Commission correctly observed in recital 123 of the contested decision, were the payment of compensation to be sought from Madrid City Council, the value of plot B-32 had to correspond to the value which it had for that city council, and thus to the right of use of that plot and not the hypothetical value it would have had had it been transferrable.”

Consequently, the General Court rejected the claim of Real that the Commission did not calculate the value of the plot correctly.

The valuation must be comprehensive

Real argued that the Commission focused on the value of plot B-32 and ignored the value of other plots included in the land swap. Accordingly, the Commission erred because it assessed “merely some of the benefits of the transaction in a selective and isolated manner”.

The General Court, first, reiterated that “(117) so far as concerns the assessment of the value of aid in the form of the sale of land by a public entity to a private individual at a purportedly preferential price, the principle of a private investor operating in a market economy applied and that the value of the aid was equal to the difference between what the recipient actually paid and what it should have paid at the time under normal market conditions to purchase an equivalent piece of land from a private vendor”.

“(118) It must be stated that, according to the case-law, to assess the lawfulness of the contested decision, it is necessary to take into account the information at the Commission’s disposal or available to it at the date on which it adopted that decision. In that regard, if it should prove to be the case that the Commission’s assessment is contradicted or placed in doubt by information of which it was unaware during the administrative procedure, it must be established whether such information could have been known to and taken into consideration by it at the appropriate time and, if that were the case, whether that information should as a matter of course have been considered by the Commission, at least as relevant data in order to apply the private investor test”.

“(119) In the present case, it must be pointed out that the Commission has accepted that it examined whether there was State aid resulting from the compensation granted by Madrid City Council in connection with the 2011 settlement agreement.”

“(120) It is important to note that, under the 2011 settlement agreement, the parties agreed that the compensation would be paid by replacing the transfer of plot B-32 by the transfer by Madrid City Council of other plots to the applicant and by offsetting their mutual debts. The result was a remaining net claim of EUR 8.04 for the applicant against that city council.”

“(121) The 2011 settlement agreement thus did not concern only the acknowledgement of the debt resulting from the non-transferral of plot B-32, but it sought to compensate the applicant for that non-transferral by transferring other plots to it and by offsetting mutual debts.”

“(122) However, it is common ground that the plots transferred instead of plot B-32 have not been subject to a valuation by the Commission. It reproduced the values accepted in the 2011 settlement agreement.”

“(125) Therefore, by merely examining the value of plot B-32, the Commission did not take into consideration all the aspects of the transaction at issue and its context. Contrary to what it was required to do, it thus could not have carried out a complete analysis of all the relevant factors, for the purposes of establishing not only the valuation of the amount of aid, but also, above all, whether there was in fact an advantage resulting from the measure at issue, considered in the light of all the relevant factors.”

“(128) The Commission therefore has not proven to the requisite standard that the measure at issue conferred an advantage on the applicant. Since at least one of the cumulative requirements [of Article 107(1) TFEU] is not satisfied, the Commission could not treat the measure at issue as State aid for the purposes of Article 107(1) TFEU.”

The General Court went on to annul Commission decision 2016/2393.

In conclusion, the Court faulted the Commission for not examining all components of the transaction. Real Madrid should not celebrate yet. It is rather obvious that the Commission will re-open the case and take a closer look at the valuations of the other plots. Given that the Commission did not question the other valuations that were included in the 2011 agreement, it should not come as a surprise that it finds them to exaggerate the debt of the City of Madrid towards Real.


[1] The full text of the judgment can be accessed at:



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 is professor at the University of Maastricht and the University of Nicosia. 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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