Municipal Real Property Asset Management:

An Application of Private Sector Practices

Olga Kaganova, Ritu Nayyar-Stone and George Peterson
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The World Bank
Urban Development
1818 H Street, NW
Washington, DC 20433
USA
Internet: www.worldbank.org/urban
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Municipal Real Property Asset Management: An Application of Private Sector
Practices
By
Olga Kaganova, Ritu Nayyar-Stone and George Peterson

In nearly all countries, municipalities own or control substantial amounts of real
estate. Although municipal governments generally to the day-to-day operational needs of
their real estate holdings, few such governments think of their holdings as a "portfolio"
whose composition might be modified to better serve public purposes. This note hopes
to persuade the reader that municipalities have much to gain from understanding and
applying modern principles of asset management (AM) to their real estate holdings.
More specifically, the analytical techniques, accounting tools, and practical approaches
of AM, developed in the private sector (at non-real estate corporations), are generally
applicable to most publicly owned real property. This note will also demonstrate the
importance of an asset-oriented vision, based on the balance sheet approach (as
opposed to the more traditional budgeting approach), for municipal finance, and the
financial implications of municipal real property AM.

Real estate represents a major component of local public wealth. By some
estimates, real estate accounts for 50% of assets of municipalities in the U.S., and this
percentage may be greater than 90% in other countries. However, there continues to be
a lack of basic comparable data such as the size of public land holdings which hinders
AM (see table 1).

Table 1
Size of Public Land Holdings in Ci ties Examples
City Population
(thousand)
Land in Public
Ownership
(percent of the
total city area)
Vacant Land
a
in
Public Ownership
(percent of the
total city area)
Comments on
Availability of
Data
Amsterdam (the
Netherlands)
712 80+ percent N/A Estimates only
(1992)
The Hague (the
Netherlands)
576 77 percent N/A Estimates only
(1992)
Columbus (Ohio,
USA)
565 N/A 3 percent One of three
American cities that
was able to provide
complete land
census data (1998)
Orlando (Florida,
USA)

128 N/A 14 percent One of three
American cities that
was able to provide
complete land
census data (1998)
Saskatoon
(Canada)
207 26 percent
(estimates for local
government only;
includes built up
area)
The City Planning
Department
prepared data
specially for this
study
St. Petersburg
(Russia)
4,700 94 percent N/A From a World Bank
sponsored project for
collecting real estate
2
data (1998)
Taganrog (Russia) 289 82 percent N/A From a World Bank
sponsored project for
collecting real estate
data (1998)
Kano Metropolitan
(Nigeria)
Estimated as
2,500 to
5,000
100 percent N/A
Notes:

a
There is no commonly accepted definition of vacant land. However, the usual meaning is
(1) usable land (i.e., excluding streets, rights of way, wetlands, etc.), and (2) unused or
abandoned land, or land that supports derelict or ruined structures.
Sources: Extracted from research publications, World Bank reports, and material provided by the
City of Saskatoon.

Municipal assets, balance sheet, and finance

The municipal balance sheet identifies all of a municipalities assets and liabilities
that have financial value, and has the same accounting equation as one in the private
sector:

Assets = Liabilities + Equity

In the public sector, the equation can be re-arranged to emphasize the idea that
shareholder (citizen-taxpayer) equity is equal to the excess of assets over liabilities:
1


Citizen/Taxpayer Equity = Assets - Liabilities

Understanding the municipal balance sheet is important to municipal finance
analysis because:

The assets (and liabilities) of municipalities in developing and re-structuring countries
often are very large compared to their annual budget revenues or expenditures. Often, a
municipality may have only a vague idea of the economic value of some of the most
important assets it owns, or may have no clear conception even of the list of things that
it owns. Municipalities frequently are startled to find the magnitude of the cash holdings
they possess, once a thorough accounting of the cash on hand is taken into account.
The City of Ostrava (population 325,000), in the Czech Republic, for example,
discovered that it had 910 million Czech crowns in cash holdings at the end of 1996, or
about US $34 million. These funds were scattered throughout city departments, many
earning zero or nominal interest.

Local governments often have even less awareness of their liabilities. For
example, the Novgorod Oblast in Russia as of July, 1997 had provided unconditional
guarantees for the debt of other entities, primarily commercial enterprises, in the amount
of R31.6 billion, or more than 10 times the Oblasts own outstanding debt. Given that 46
percent of the regions enterprises had been unprofitable in the previous year, the
potential liability under these loan guarantees was substantial, but the Oblast had never

1
Stephen J. Gauthier, The Balance Sheet: A Guide for Preparers of State and Local Government
Financial Statements, Government Finance Officers Association (Chicago, IL: 1997).
3
undertaken an examination of its risk exposure, either before or after providing the
guarantees.
2


Municipalities usually have much more freedom of choice over their handling of
municipal assets and liabilities than they do of municipal revenues. While central
governments in developing countries often impose rigorous limitations on the right of
local governments to establish their own taxes, set their own tax rates, or borrow from
the credit market, they rarely place any limitations on the rights of local governments to
own, operate, acquire, or dispose of discretionary assets not critical to public service
delivery.

For many of the financial choices that municipalities must make in developing or
restructuring countries, a more useful instrument of analysis is the municipal balance
sheet. A municipality that re-considers its appropriate mix of asset ownership, in light of
its service priorities and its mission, may decide to sell off some of the housing stock or
municipal enterprises that it owns, in order to re-invest the sale proceeds in assets (like
the public water and wastewater system) that are more critical to its mission. It is
possible to consider this choice within a budgetary framework, but it seems more natural
and useful to analyze it as a portfolio choice. Decisions about municipal borrowing
likewise often need to be made in the context of the balance sheet. In countries other
than the U.S., including some countries in Western Europe, the equivalent of general
obligation borrowing is balance sheet borrowing, where municipal debt is secured by all
of the assets owned by a municipality

The Definition and Framework for Municipal Real Property Asset Management

The meaning of the term AM, when it refers to public real property or public
management, varies substantially. One approach for analyzing this term is to compare it
with private sector real estate AM.

In the private sector, real property AM is the decision making process about
acquiring, holding, and disposing of real property, which may be held for a companys
use or as an investment. Asset (or portfolio) management is among the core business
activity, supported by rapidly developing methodologies and advanced financial
techniques. Its goal is to maximize corporate value (or profits).

In contrast, the traditional public sector goal of real property AM is to supply the
right quantity of property for public goods and services at least cost compared with all
alternative feasible arrangements including private sector provision. The more recent
non-traditional goals are to support local economic development and obtain revenues
from alternative sources.

A successful framework for managing municipal real property assets can be
demonstrated by the Denver model (see Box 1 and the next section) which is based on
the corporate real estate AM prototype. Although the framework is generally
straightforward, it involves several conceptual and methodological issues that are still
under debate.

2
George E. Peterson, Measuring Local Government Credit Risk and Improving Creditworthiness,
World Bank, March,1998
4
Box 1: Framework for Real Property Asset Management
Inventory Level
Property Management / Accounting Level
Asset (Portfolio) Management Level
Strategy Implementation Level
Develop/maintain comprehensive records of properties
Develop/maintain a property management & accounting system on a property by property basis
Include the value of each property in the accounting database
Use private sector property management approach for improving public property management
Formulate a strategic role of real estate in attaining municipal goals
Develop classification of property and apply it while conducting an inventory
Develop class-specific financial tools and performance standards for each property
Implement portfolio management approach within the real estate and public assets portfolio
Develop and implement policies aimed at rationing property demands and consumption
Establish a centralized real estate authority with overview or direct control over AM
Devise written policies and decision roles for acquisition/holding/disposition of assets
Develop in-house expertise to derive maximum financial returns from certain property
Set up incentives for better AM within the municipality


For example, a fundamental concern at the Property Management / Accounting Level is
how to combine accounting requirements for municipal financial reporting and for
efficient real property AM. An accounting system that uses book value of the property
may be satisfactory for reporting financial results. However, this is not sufficient for
rational decision making regarding real estate assets which should be based on market
value of the asset.

Best Practice Model of Municipal Real Property Asset Management

The best practice models for strategic AM involves categorizing the portfolio of
local government assets by use: government, social, surplus, and specifying a different
financial goal for each category, as shown in Table 2.

Table 2
The Denver Portfolio Classification Model
Asset Use Financial Goal Example of Activity or
Property
Financial Information
Needs
Government


Social


Surplus
Maximize Efficiency and
minimize costs

Quantify and minimize the
subsidy

Maximize financial returns
City hall, fire or police stations,
sewage treatment plants

Housing, parks, economic
development

Land lease, fee parking lots,
small land/building parcels
Expenses, internal
rent, value-in-use

Expenses, subsidy,
market value

Expenses, revenues,
market value
Source: Adapted from Utter (1989).
3


3
Marilee A. Utter. Public Asset Management. Economic Development Commentary. 1989: 4-11.
5

Government Use Assets

The financial goals of maximizing efficiency and minimizing the costs of assets
used directly by the government can be achieved by:
Increasing the efficient use of facilities, by requiring governmental departments to
justify their demand for space.
Minimizing operating costs.
Locating government offices and services in functional, not prime, areas.

Social Use Assets

The financial goal for these assets is to quantify and minimize the subsidy. For
example, in the case of public housing, the difference between the market rent and the
actual rent paid is the subsidy to the program. The term social use assets refers to
property used to satisfy social objectives of the government and usually not utilized for
its highest and best use. The financial goal for social assets can be achieved by:
Presenting true expenses to facilitate best decisions.
Generating program alternatives to reduce the subsidy as much as possible
while still accomplishing the mission.

The decision to subsidize is usually political and can change, or other
alternatives can be considered, if quantified information on the amount of subsidy are
presented to decision makers along with the program.

Surplus Property

These are properties not needed for city use or social programs. They are
declared surplus and either held for generating recurrent revenue from lease or sold.
The goal for these assets is to maximize their financial return (which requires the highest
and best use of the property, if possible), and to control costs. This can be achieved by:
Leasing surplus property to generate revenues.
Privatizing surplus property to generate sale revenues and property taxes.
Reducing maintenance costs and liability on the property if it cannot be leased or
sold.

Overall, strategic AM of public assets yields multiple benefits:

Local governments can capitalize on property location and / or development potential
by selling or leasing this property to generate revenues. The government can also
reduce maintenance expenses by disposing of surplus property and rationalizing
property use by governmental agencies and social programs.

Surplus or foreclosed properties can also be recycled for socially desirable uses
such as housing and recreational facilities to increase social benefits to citizens.

Public investment in land and infrastructure can lead to job and income growth in the
private sector.

6
Local governments often compete with each other in attracting businesses and
industry by providing land and financial subsidies. The optimal use of real estate
holdings can be important for achieving a higher employment and property tax base for
the city.

Current Practices and Problems of Municipal Real Property Asset Management

Despite many national differences in municipal AM, there are some features that
are common for most cities across the world:
With the exception of a very few countries and cities, municipal real property AM
lags far behind AM in the private sector.
Public real estate in any particular city, is usually owned and managed by several
independent agencies.
Even when cities have a strategic or at least a pro-active approach to real
property AM, it is usually focused on some narrow sub-sector of real estate, while the
rest of local public property is managed inefficiently.

Specific problems associated with municipal real property AM are:
Inadequate valuation standards and practices regarding public real estate for
effective AM even in developed countries like the US, UK, and New Zealand
Absence of revenue and expenditure data on a property-by-property basis, which
restricts efficient use of the property and strategic holding/disposition decisions.
Financing of land acquisition for public purposes on an emergency basis in many
developing countries, which results in higher purchase prices of the land.
Sales of surplus land for covering current budget deficit which is a short-sighted
solution to budget problems.
Privatization of land and dwellings to reduce subsidies to households and
agriculture, and decrease the current account deficits of the local government (for
example Hungary).
Illegal squatting and development of urban public land, and the emergence of
informal land markets. Caused by inefficient public land management, this results in
lost potential revenues, depending on a governments ability to evacuate the
squatters (without compensation) and find alternative use for the land, and/or recover
some payments from the current users of land.

Implications for the World Bank

The World Bank, as a leading think tank and a major lender to the public sector,
can assist client countries develop their real property AM agendas and facilitate progress
in this area. We envision several specific activities, where the Bank might play a
constructive role:

1. Add the real property AM dimension to more traditional urban issues such as:
Land management in developing countries.
Government decentralization, municipal finance, and privatization reforms in
countries in transition.
Public-private partnerships for land development and redevelopment.

2. Assist client countries to develop an enabling AM framework at the national level. In
particular:
7
Amend existing laws that regulate local government activities, and are currently
obstacles for pro-active municipal real property AM.
Establish standards of accounting and reporting for public property that are cost-
efficient and useful.

3. Develop recommendations for client countries on surplus property issues:
What criteria should be used for determining an optimal size of surplus public
property in cities?
Which governments - central or local- should own urban surplus real property in
countries where public property has not been finally divided yet?
What is the rationale for the region-wide trend in countries in transition to shift
surplus real property from direct municipal ownership to assets of municipal
enterprises?

4. Launch a program of accumulating knowledge, promoting general awareness and
disseminating best practice experience on public real property AM. The program
should be targeted at various users, in particular: (1) Bank and other donors country
staff across the world, and (2) central and municipal officials, policy makers, and
legislatures in client countries. It should comprise of:
Formats for data gathering on public real property holdings and public AM.
Collection of such data through both Bank urban projects in various countries
and specialized international information projects (such as Urban Observatories,
OECD surveys, etc.).
Case studies regarding best practices in both donor and client countries.

5. Identify and support technical assistance that will improve local public real property
AM and benefit interrelated areas, such as municipal finance, property privatization,
etc.

6. Use urban loans as a lever for improving local public real property AM.