The Importance of Sewer Extension Costs for Determining the Value of Future Development on Agricultural Lands

Abstract

M any previous studies have explained agricultural land prices in terms of two components-the net present value (NPV) of agricultural use and the added value from future urban development. For example, Hardie, Narayan, and Gardner estimate farmland values as a function of both farm returns (to represent the NPV in agriculture) and developed land values, household income, population density, and location (to represent the influence of future urban development). Capozza and Helsley (1989) developed the theoretical model used in this study and many others. This dynamic model has two land uses-agriculture and urban-and demonstrates theoretically that population increases will impart a growth premium to agricultural land, due to the expectation of future development as the city expands into an agricultural area. This model was later extended to incorporate uncertainty in future urban rents (Capozza and Helsley 1990). Plantinga, Lubowski, and Stavins find empirical evidence on how uncertainty in rents increases U.S. agricultural land values. These prior studies assume there are only two land uses, namely, agriculture and urban. However, Newburn and Berck found that suburban and rural-residential development are distinct types of residential development. The fundamental difference is that urban and suburban uses require municipal sewer and water service to develop at higher densities (>1 unit per acre).