Recently published new cadastral values point to both a significant increase in property values and a multi-fold increase in real estate tax for all payers. Such a situation will force land managers and producers to seek effective solutions, while some small landowners may choose to sell their property.

This conclusion was reached during a discussion held by Dienas Bizness in cooperation with the portal zemeunvalsts.lv regarding the impact of the newly published land cadastral values on land management. It should be recalled that this year the Ministry of Justice and the State Land Service published the cadastral value base for 2022, 2023, 2024 and 2025, according to which the projected (planned) cadastral values have been calculated. Their scale has sparked a major storm of indignation. While the ruling politicians have currently "taken a break" on the issue of real estate tax (that is, they are silent), they will return to this matter sooner or later. Calls have previously been made to either "freeze" the current cadastral values, revise real estate tax rates, or completely change the existing methodology for calculating real estate tax, thereby avoiding the negative consequences for the national economy that would arise if the projected cadastral values were adopted. "Looking from the perspective of forest economics, there is no basis for increasing the cadastral value of land in forestry, as the prices of timber, which is the base product of forestry, have not risen. And it is precisely these prices that determine the base – the value of forest land," explains Dagnis Dubrovskis, a lecturer at the Latvia University of Life Sciences and Technologies. In his view, the chosen methodology for determining the cadastral value of forest properties is inappropriate for the purposes for which it is used.

Increases measured in multiples

Edgars Treibergs, Chairman of the Farmers' Parliament (LOSP), admits that farms of various sizes (according to the area of managed land and field of activity) in different parts of Latvia have been assessed. "As a result of the changes in cadastral values, the value of real estate will increase by two or even four times. Accordingly, land managers will certainly be affected by the increase in the amount of real estate tax payable," concludes E. Treibergs, drawing attention to a very significant increase in costs for production facilities as well. For example, the value of one fish processing plant will increase from the current 2.5 million euros to 4.5 million euros. "That is a huge sum that will somehow have to be compensated for. When producing goods for export, it is not possible to raise their selling price for foreign buyers because competitors in other countries will not allow it," E. Treibergs points out, highlighting the problem. He suggests that small producers who have their own retail outlets might try to increase product prices, but there is no certainty whether customers will accept such a solution. "It is possible that when thinking about creating new processing plants, their placement in neighbouring countries – Estonia or Lithuania – will be considered, where there is no such huge real estate tax as there might be in Latvia. Owners may also consider the possibility of relocating existing plants," warns E. Treibergs. Meanwhile, forest owner Madars Kalniņš admits that he is afraid to even look and see what the potential projected land value might be after the updated cadastral values, because the increase has already been several thousand euros each year in the past.

Raising prices is not an option

"According to data from the Ministry of Justice, the State Land Service has calculated that 1.7 million euros more should be paid for agricultural and forest land, but the level of competitiveness must be taken into account, especially if Latvia is in last place in the EU in terms of area payments per hectare of agricultural land; labour has also flowed abroad and there is no one to work, as it is not without reason that farmers are purchasing various robots (picking berries, milking cows, etc.)," points out E. Treibergs. In his view, we must think about how to keep existing farmers and foresters (providing them with work and a livelihood) right here in Latvia. "We can only develop something by introducing new technologies. Competitiveness is decreasing, it will be increasingly difficult to compete in the market, and although the EU promises more money, many and various conditions will be put forward for receiving it, so effectively, calculated per hectare, the funding will be less," explains E. Treibergs. He believes that neither milk nor meat producers will be able to ask for more money (higher prices) or earn more. "Swine fever in Germany 'closed' pork exports because China, a major consumer of pork, is no longer buying this meat from Europe and no one knows where to put it. The consequences are a drop in prices and a wave of bankruptcies," is how E. Treibergs describes the situation in just one market segment. M. Kalniņš stresses that forest owners can ask for a higher price, but whether anyone will be prepared to pay that requested increased price is another matter. "The greatest threat lies in the rise in costs. There are three categories of land managers – small domestic ones, large local ones, and foreign investors who invest relatively free cash, whose goal is not to earn profit but to serve as a safe investment. With every tax increase, our small land managers – the maintainers of the rural environment – and some of the larger domestic landowners are most at risk. Thus, at the state level, we are creating ever greater opportunities for foreign investors to buy up properties and start operating (especially in forestry)," M. Kalniņš explains his position.

The way out – more freedom

D. Dubrovskis sees the solution in the liberalisation of the existing order, giving land owners greater freedom of decision-making. "For example, in forestry, reducing restrictions on economic activity (tree felling age, diameter limits) fixed in regulatory acts. Any restriction involves costs, and by reducing expenses, the rising real estate tax payment can be covered," stresses D. Dubrovskis. He points out that in agriculture, harvests are obtained annually, and therefore income from every hectare is also obtained annually. In forestry, financial income can only be "generated" once every 20 years, which means that the predicted tax will not actually correspond to what is written at the specific moment. "A forester effectively has to work with borrowed money. The sum that would have to be paid as tax is higher than the income," explains D. Dubrovskis. It should be taken into account that real estate tax does not currently have to be paid on young forest stands. "In such a situation, people in local governments have a desire not to 'promote' forestry, because it means larger areas of young stands and accordingly smaller real estate tax payments," warns D. Dubrovskis. He points out that in other countries, such a real estate tax as exists in Latvia does not exist. "A specific amount is determined that must be paid when carrying out economic activity – for every cubic metre felled, which stimulates local production and does not require an expensive, complex and opaque tax administration system." Such solutions have been talked about for years, unfortunately, nothing changes. "Such solutions are in force in the USA and also in Finland. We have examples from which to draw experience for future action," says D. Dubrovskis.

Don't rush in blindly

"I hope that the new cadastral values will not come into force and that real estate tax payments will not increase so significantly," says E. Treibergs. He points to situations where the market value of a property is lower than the set cadastral value. "This is not right and I hope that decision-makers will listen to the arguments of farmers and foresters, and that common sense will prevail," stresses E. Treibergs. M. Kalniņš also believes that the current system should not be changed, or that it requires improvements. "It is not really right for a forest owner to have to pay the entire value of the property in real estate tax during their lifetime and then, when harvesting, pay income tax on it. One cannot, without considering the consequences, determine (impose) ever higher payments for producers," says M. Kalniņš.

Risk of sale

E. Treibergs points out that owners of small land areas, upon seeing the new, planned cadastral values and deriving from them the possible amount of real estate tax to be paid, will try to sell their land. "The Altum Land Fund already had a large supply of agricultural land for purchase this summer," says E. Treibergs. In his view, this is not a good trend. M. Kalniņš believes that an increasing real estate tax will most affect small foresters. "If a small forest owner sees that they will not be able to get any income from their property over the next 20 years, a sharp increase in the real estate tax payment will be an incentive to get rid of their property. Some of these properties will sooner or later fall into the hands of foreigners," predicts M. Kalniņš. D. Dubrovskis believes that getting rid of property will be determined by its method of use. "The planned tax in no way promotes the efficiency of land management, because when determining the cadastral value of land, neither the composition of the specific forest owner's stand nor what influences it in a specific place is taken into account. "The study shows that about 10% of forest lands contain stands that create negative value for the land – the value of felling the stand (timber assortments) does not compensate for the work invested and the costs of forest regeneration. Owners of such land are not stimulated to manage the land so that it provides both profit for the owners and benefits for the state," says D. Dubrovskis.
The video of the discussion is available here:
https://www.youtube.com/watch?v=X4F-NyXDb40&feature=youtu.be