Market value vs. legal value in land use change in Spain

The Spanish Land Law of May 28, 2007 gave rise to a radical change in the determination of the legal value of the land for agricultural use under compulsory purchase proceedings linked to the transformation of their use. Under this new law the compulsory purchase value is calculated based on the real or potential discounted cash flow at a determined rate set in the rule, with the aim of avoiding the negative effects of speculation. The aim of this work was to compare if there are significant differences between the values obtained when applying the methodology provided under the new law and the values presented in the national land prices survey. We have considered whether differences actually exist between the values obtained when applying the methodology provided under the new law and the values presented in the national survey; and the aim of this work is to compare these values. For this purpose the variables relevant for the application of the capitalization method were estimated based on the data published in the Spanish official statistics. Significant differences were found between the legal rate and the one which estimates the market values, with an average value for the studied period of 3.45% and 1.75%, respectively; additionally, different trends were observed. Also the existence of different discount rates for the market value depending on the land use against the unique rate set in the rule has been verified; therefore, the real distortion which a single capitalization rate could give rise to is very significant.