Bryan Caplan  

How High Is Schools' Implicit Land Rent?

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If a business rents land, any accountant will count the rent as a cost of doing business.  If a business borrows to buy land, any accountant will count the interest payments as a cost of doing business.  What happens, though, if a business owns its land outright?  A good accountant will estimate implicit land rent - the rent the land would have fetched in the open market - and count that as a cost of doing business.  Opportunity cost, not out-of-pocket cost, is what counts.

The same logic holds, of course, for schools that own their land outright.  If you're estimating the total cost of education, you should count schools' implicit land rent.  As far as I can tell, however, official spending numbers don't do this.

How big is the problem?  To get a rough answer, I searched for estimates of (a) typical school acreage, (b) rent/price ratios, and (c) the price of an acre of land.  What I found:

For (a), the best source I could find was a 1963 (!) piece by the Planning Advisory Service.  The report begins by quoting their earlier finding:

Although acreage is related to size of school enrollments, most authorities say that the minimum land area requirement for elementary schools is five acres, with an additional acre for each one hundred pupils of ultimate enrollment. Secondary schools should have a minimum of ten acres, plus an additional acre for each one hundred pupils of ultimate enrollment.

It then adds:

Although elementary school standards for minimum site size have not changed appreciably during the past decade, those for junior and senior high schools have increased rather dramatically, in some cases 100% over what they were in 1952. The recommended size of junior high sites ranges from 10 to 20 acres, with the median being 15 acres; recommended senior high sites range from 20 to 30 acres, with the median being 25 acres. The standard formula of one additional acre for each one hundred pupils of ultimate enrollment applies for both junior and senior high schools.

For (b), I found the Lincoln Institute of Land Policy's up-to-date numbers here.  The current rent/price ratio is about 5%.

For (c), I found no usable nationally representative numbers. (Please tell me if I've missed anything).

Fortunately, we don't need precise numbers on acreage price to see the magnitude of the effect.  Consider a high school with 1000 students.  Using the original rule of thumb, the school will have 20 acres.  So even assuming a very steep land price of $500,000 an acre, the per-student cost of land is only $500/year.  That's less than 5% of total spending.  Using a more normal - though still somewhat high - price of $100k an acre, implicit land rent only adds 1% to the education's true cost. 

Bottom line: Implicit land rent may be important in New York or San Francisco.  But at the national level, it's a rounding error.


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COMMENTS (11 to date)
Steve Sailer writes:

The Los Angeles Unified School District's Robert Kennedy Schools building that recently opened on the site of the Ambassador Hotel on Wilshire Blvd. where RFK was assassinated on the night he won the California presidential primary in 1968, was completed in 2010 after 21 years of wrangling at a cost of $578 million, or maybe $16 million per student:

http://isteve.blogspot.com/2010/08/578000000-public-school.html

LAUSD's Japanese Robot from Outer Space high school on the 101 freeway in downtown LA was recently completed at a cost of $237 million:

http://isteve.blogspot.com/2009/04/water-park-of-doom.html

foosion writes:

I wonder what the cost of the total subsidies provided to cars is - the cost of public roads and parking, including construction and implicit rent.

MG writes:

Sadly, the much bigger policy-analysis problem is that, overwhelmingly, whenever public funding for education is "debated" (from campaigning to think tank analysis) "costs" ignore ALL capital costs -- not implicit rent, but ALL capital costs. This is a point which the education analysts at the Cato Institute have made and quantified.

This idiocy reaches a crescendo when the discussion involves growing areas of the nation, where new (largely un depreciated) facilities are being built to serve (will serve) a growing population. The costs to acquire land and build schools are buried in obscure land swaps and general debt obligations -- costs which can not or are not allocated to education.

This idiocy has more than rhetorical implication when the local government funding, accordingly, then simply funds public charter schools to cover only operating expenses and leaves the charter to have to raise funds and then have to repay all costs to acquire/build facilities.

JA writes:

Are you assuming the cost of the buildings is already accounted for?

LD Bottorff writes:

Your analysis should also include foregone property taxes. It is the local government that pays for the land and buildings but that government would also be collecting property taxes on those facilities if they were converted to commercial use.

Mike W writes:

A good accountant will estimate implicit land rent - the rent the land would have fetched in the open market - and count that as a cost of doing business.

Nah, a good accountant would probably not go through what is essentially an academic exercise because there would be no actionable information that would come of it.

Steve Sailer writes:

Excuse me my bad arithmetic, the capital cost per student for the RFK Schools facility on Wilshire Blvd is $137,000 per student.

robbbbbb writes:

There's a complicating factor, here. In many jurisdictions, parts of public school facilities (the outdoor playgrounds) are effectively part of the public park system. Even though we homeschool, we regularly walk the four blocks to the local public school and let our kids play on the jungle gyms and run around in the grass.

Public parks are a true public good, and the school system provides essentially a supplement to the park system. Don't forget that in your calculation.

Acad Ronin writes:

Mike W, what gets measured gets managed. In my (limited) experience, older firms can end up owning a lot of real estate that they no longer use fully, if at all. There is an opportunity cost to the neglect. And if firms are neglectful, they have nothing on government agencies. I wish we had a federal real estate czar whose job it would be to sell-off surplus government real estate.

Mark V Anderson writes:

As an actual accountant, I can tell you that we definitely do not measure opportunity costs, because they are not objectively measurable. However, I do like the concept, and would support the idea of a whole separate field of accounting that is all about opportunity costs instead of actual costs. It certainly would be more useful in managing assets, as Acad points out, even though it would much less objective.

And getting back to Bryan's points, I think the non-profit sector (which includes government), has methods of accounting that are even less useful for management purposes than for profit accounting. As Bryan points out, they often exclude capital funding. They also have a completely different method of calculating future liabilities. As a for profit accountant, I don't totally understand their liability accounting, but I do know that this is one reason that government will put lots of funding requirements in future years, at which time the current office holders will be presumably running some other government office into the ground.

I think the idea of defining costs as opportunity costs instead of historical costs would be useful for all accounting.

Floccina writes:

The thing about that is here in Florida they use portables. They use portables because they say that they cannot afford to build and they use them to get taxpayers to fund them better.
But I know because I have a business that rents space from an owner who BTW pays a couple of months rent in property taxes that rent would be a tiny part of the school's budget. I think they use the portables because voters look at the portables and think they must need more money. You could house 3 classes in the space that we rent for $847 /month.

I think that the schools around here would better off to sell their properties to REITs and pay rent. Of course being politicians They could screw that up and give the REITs some absurd sweetheart deal.

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