By Jeff Wynkoop
Have you ever come across a rice paddy wedged in between office buildings in a Japanese city? Most likely you were looking at a “Productive Green Area.” There are over 63,000 of these parcels of land scattered throughout the country, but mostly concentrated in Tokyo, Osaka, and Nagoya. Here’s how they could dramatically affect commercial land prices in 2022.
The law behind these so-called Productive Green Areas (生産緑地地区) gives landowners a substantial property tax break in exchange for not developing their land or using their land commercially. The original concept of the law was to promote urban agriculture, and over time additional green areas were authorized, such as land for parks, land important to maintaining water tables and bedrock foundation, etc.
However, the legal designation of most Productive Green Areas is set to expire in 2022, and now the government is looking at ways to prevent these parcels from flooding the commercial real estate market and dragging down land prices.
Economic High-Growth Years
During the high growth years of the Japanese economy, cities were encouraged to grow very quickly, and some land that had always been used for farming became located in areas earmarked for new urban development. Owners of this land were usually forced to sell their properties because the property tax (固定資産税 or Fixed Asset Tax) for the land was increased to a level that made it uneconomical to continue to use the land for farming.
Tax Breaks for Productive Green Areas
However, by the early 1990s, the national government and local municipalities became interested in promoting green areas in urban centers to support a more livable city environment.
For this reason, in 1992 the government enacted the Law on Productive Green Areas (生産緑地法) to authorize localities to designate certain parcels of land as “productive green areas”, allowing the owners to enjoy a substantial break on property taxes in exchange for the owner using the land solely for agricultural purposes. Another benefit of having land designated as seisan ryokuchi (生産緑地 in Japanese or a “productive green area”) is the possibility to ‘defer’ all inheritance taxes for the land.
A good example of seisan ryokuchi can be found in northern Osaka, where one can find many conspicuous instances of rice paddies surrounded by modern office buildings on two sides.
63,000 Parcels of Urban Farms and Parks
Subsequent to the 1992 enactment of the law, the legal conditions to be designated a “productive green area” were amended to authorize not only land to be used for agricultural purposes, but also land appropriate for parks and other public facilities as designated by the local government, with consent of all of the relevant landowners.
Accordingly, seisan ryokuchi are adjunct use districts (補助的地域地区) located in urbanization growth areas and created under the City Planning Law as designated by local governments in the main metropolitan centers.
As of 2015, there were over 63,000 of these “productive green areas” with a total area of over 13,442 hectares (ha), and almost all of this land is located in the three main metropolitan centers.
Tax Breaks Will Expire for Most Parcels in 2022
The Ministry of Land, Infrastructure, Transport, and Tourism (the “MLIT”) estimates that almost 80% of the current productive green areas were designated in 1992. This is important because landowners are required to use productive green areas solely for agricultural purposes, etc. for a period of 30 years. Under Article 10 of the law, after 30 years the landowner has the right to request the local municipal government purchase the land at market price.
The problem is, most local governments are short of funds. Under Article 14 of the law, if the land is not purchased within three months of the request, the land loses its exceptional tax status as a “productive green area,” and with a simple notification from the owner, the land can be converted for regular use as commercial property (宅地,) to be sold to a third party.
Thus, at present theoretically over 10,750ha of land in Tokyo-Yokohama-Chiba, Osaka-Kobe-Kyoto, and Nagoya may come on the market as commercial land in 2022.
When one considers that approximately 6,000ha of new land for commercial development comes on the Japanese real estate market every year (this according to the MLIT in its 2014 survey), there is the potential for the seisan ryokuchi land to flood the commercial real estate market in 2022.
This could have a severe impact on real estate markets, and accordingly there are a number of ideas being considered at the MLIT to alleviate the potential 2022 problem.
Solutions Being Considered by the MLIT
One solution is to change the law to allow easy 10-year extensions for landowners wishing to retain a property’s status as a productive green area. However, this may not be enough of an incentive. The problem is, the legal requirements to having a productive green area at present restrict owners’ rights to sell and/or build on the land, so many owners (not wanting to continue farming) may be eager to convert and sell their land as commercial property after waiting 30 years to do so.
Another idea to encourage landowners not to sell is to allow productive green areas operate fresh farm-to-table restaurants and food stalls.
The MLIT recognizes the significance of the issue to the real estate market as a whole, and is working on an array of solutions and policies to promote city living+urban farming well before the year 2022.
You may also be interested in: Key issues facing the Japanese real estate market