São Paulo

Overview

São Paulo is the best-documented case of a large city that sells the right to build above a baseline. Under the 2002 Strategic Master Plan and Land Use Law 13,885 of 2004, a plot has a basic floor-area ratio (FAR) that any owner may build without charge and a higher maximum FAR; a developer who wants the difference pays a charge, the Outorga Onerosa do Direito de Construir (OODC). Inside designated Urban Operations the same idea runs through a securities market: the city issues Certificados de Potencial Adicional de Construção (CEPACs), auctions them, and must spend the proceeds within the operation's perimeter. The OODC proceeds outside the operations go to the citywide Urban Development Fund (FUNDURB), overseen by a management council.[2][3][4]

The legal footing is federal. Sandroni, a former São Paulo director of urban planning and public transportation, traces the principle that owners should not be the sole beneficiaries of public investment and zoning to the 1970s and to articles 182 and 183 of the 1988 Constitution, regulated by the 2001 City Statute (Federal Law 10,257). In his account the federal law ratified "the separation of the right to own land from the right to build."[2]

Seen from a Georgist angle, the instruments sit in the family of land value capture that charges for a public grant of value at the moment it is made. They are closer to a betterment levy or to the sale of air rights than to a recurring land value tax (the assessment section below sets out why). Peterson, in a World Bank review of land-based infrastructure finance, introduces the Faria Lima operation in just these terms: "In lieu of a betterment tax on land-value gains, the municipality offered to sell development rights" (p. 76).[1]

OODC: the charge for building rights

Basic and maximum FAR. Sandroni describes three coefficients: a minimum FAR (the use expected of a plot to meet its social function), a basic FAR (the buildable area an owner holds by right of ownership) and a maximum FAR (what existing infrastructure and zoning can support). The charge falls on the gap between the maximum and the basic FAR. In the 2004 law the basic FAR ran between 1 and 2 depending on the district, and the maximum was 1, 2, 2.5 or 4. In some districts the new rules cut building rights by setting a basic FAR of 1 on land that earlier legislation had allowed to build at 2 or more, while in others the maximum was lifted to 4 on land formerly limited to 1 or 2.[2] Friendly adds that the 2002 plan kept earlier FAR values of 1 or 2 as the basic ratio over most of the city, which left "considerable potential to construct at higher densities without paying for OODC" (p. 11), and that the 2014 master plan set a basic FAR of 1 for the whole city and a maximum of 4 along transit corridors and in special zones for informal settlements (ZEIS) (p. 12).[3]

The formula. The charge is not negotiated case by case. Friendly prints the 2014 formula as C = (At / Ac) × V × Fs × Fp, where C is the contribution per additional square metre of built area, V is the value of a square metre of land in the municipal Cadastral Land Value, Fs is a social factor between 0 and 1, and Fp is a planning factor between 0 and 1.3 (Figure 2, p. 12). The 2002 version multiplied a planning factor and a social factor by the added economic benefit, itself the land value per square metre divided by the basic FAR (note 22, p. 11).[3] Sandroni explains the two factors: the planning factor encourages or discourages density according to infrastructure, especially mass transit, and differs for residential and non-residential use; the social-interest factor runs from zero to one, and is zero for affordable and social housing, non-profit hospitals, schools, clinics and cultural, sports and religious institutions, so those projects pay no compensation for additional building rights.[2] Friendly notes that projects supplying social housing for the poor receive a discounted charge as an incentive (note 39, p. 23).[3]

Process. A developer checks the stock of additional density still available in the district, which the municipality publishes in a table, submits a project, and the municipality calculates the charge by formula; the project is approved only when the charge is paid in full (pp. 14–15).[3] The reference land values matter: Friendly reports that until the Land Value Register was created in 2014 the values used were generally low and outdated, and that the 2014 plan updated them toward market values, creating an expectation of higher charges (note 35, p. 18).[3]

A stock cap. The 2002 plan and the 2004 law set a ceiling on the additional buildable area for each of 91 of the city's 96 districts. Sandroni reports that by October 2010 the residential stock was exhausted or nearly so in 17 districts and the non-residential stock in 5, and that developers' efforts to raise the ceilings in the 2007 revision of the master plan did not succeed.[2]

Precursors. Friendly traces earlier experiments: the operações interligadas of 1986, which granted higher density on favela land in exchange for social housing and were declared unconstitutional in 1998, and the urban operations used since 1991. She credits them with instilling "the culture of payment in exchange for building potential" among developers and with building valuation skills in the municipality (pp. 10–11).[3]

CEPACs and the Urban Operations

A CEPAC is a security the city issues for an Urban Operation, sells at auction on the stock market, and later redeems for additional building rights inside that operation's perimeter. The Mahendra et al. working paper (Lincoln Institute and World Resources Institute) describes the holder's two options, converting it into building rights or reselling it, and notes that, as a security, it is overseen by the Brazilian Securities and Exchange Commission (CVM). Proceeds go to a dedicated operation fund that can be spent only on the interventions listed for that perimeter (pp. 12–13).[4] Sandroni makes the contrast with OODC explicit: inside the operations, "the new building rights are priced through the auction of CEPACs, and the revenues must be invested in the area corresponding to the urban operation instead of going to the FUNDURB fund to benefit the city as a whole."[2]

Faria Lima. Peterson describes the operation as aimed at a growth pole created by the extension of Faria Lima Avenue and other public investment, in a 410-hectare area. Land values in the area "reportedly" rose from about US$300 to US$7,000 per square metre after the public works, and the municipality offered 2.25 million square metres of additional floor space. Rights had sold for as much as R$1,100 (US$630) per square metre, and as of 2005 about 42 percent of the designated stock had been sold, for R$320 million (US$190 million) (pp. 76–77). He adds that a proposal to extend the approach to financing a metro line failed because the state government owns the metro while the municipality controls development rights, and the city preferred to spend the receipts on projects within its own legal responsibility (pp. 9, 77).[1] Peterson does not use the term CEPAC, and describes a "preset fee" for additional floor space. Mahendra et al. report that the first CEPAC auction for Faria Lima in 2004 failed, which they attribute to the lack of integration with the citywide scheme: most of the area's potential had already been sold through OODC, and CEPACs were cheaper in the nearby Água Espraiada area, diverting investment (pp. 13, 34).[4] The sources read do not reconcile the 2005 sales total with the 2004 auction failure, so the chronology of Faria Lima sales is left open here.

Água Espraiada. The Água Espraiada Urban Operation (OUCAE) was approved in 2001 and began implementation in 2004 after the CVM reviewed the CEPACs and an environmental study was completed. It covered nearly 1,400 hectares in six sectors, among them favela settlements along a stream and business districts adjacent to Faria Lima. The paper describes it as the first use of CEPACs to finance an Urban Operation, although it also reports a Faria Lima CEPAC auction in 2004. The planned works were road and drainage infrastructure, including the Octavio Frias de Oliveira cable-stayed bridge, and the resettlement of informal housing in a flood-risk area (pp. 13–14).[4] Its equity design had three parts: resettling displaced families inside the operation, earmarking a fixed share of CEPAC revenue for affordable housing and slum upgrading (10 percent in 2004, rising to 30 percent in 2018), and reserving land for social housing zones (p. 16).[4]

What they raised and where it went

All amounts are Brazilian reais (R$ or BRL) unless a dollar figure is given as reported by the source.

OODC and FUNDURB

• Early years. Sandroni reports OODC receipts of R$650 million (about US$325 million) in approximately five years, despite the global credit squeeze at the end of the period, and states that this is net of the more than US$1 billion generated by Faria Lima and Água Espraiada, which stayed inside those operations.[2]
• 2004–2015. Friendly, using the city's own process database, reports almost R$1.9 billion collected (about C$712 million), an average of about R$145 million a year, peaking at R$339.9 million in 2011. On Nobre's figures this corresponds to 5.2 million additional square metres of built area at an average of R$316.63 per additional square metre. Interviewees told her OODC represents about 1 percent of the city's gross revenue, and 2015 receipts were almost 20 percent below 2013 (pp. 17–19).[3] Mahendra et al. give a larger total, R$2.7 billion for 2004 to January 2019, for the citywide OODC, over a longer period than Friendly's series (p. 18).[4]
• Where it was collected. Collection has been concentrated in the districts of most interest to developers, the south-eastern quadrant of expensive neighbourhoods, which have the most developed infrastructure (p. 19).[3]
• Early FUNDURB commitments. As of September 2008, approved projects included drainage and sanitation (R$108 million), regularisation of informal settlements (R$50 million), 15 linear parks (R$42.5 million), restoration of cultural heritage buildings (R$37 million), sidewalk and street improvements (R$21.2 million) and community facilities (R$21.1 million).[2]
• 2013–2015 spending. The 2014 master plan earmarked 30 percent of FUNDURB money for social housing, preferably in ZEIS and mainly for land acquisition, and 30 percent for mobility. Over 2013–2015 Friendly reports more than R$800 million spent: 28 percent on housing (nearly 40 percent in 2015), 23 percent on drainage and sanitation, 21 percent on public transit, cycle lanes and roads, and 10 percent on pedestrian projects. By number of projects, sidewalks made up 59 percent and housing 7 percent (pp. 23–24). Between 2005 and 2013, 4 to 12 percent of the city's total investment came from FUNDURB (p. 19).[3]
• Geography of spending. Friendly describes a "Robin Hood" pattern in which funds are captured in the most expensive regions and applied in poorer ones (p. 26), but her grouping of subprefeituras shows a mixed picture: the group receiving the most FUNDURB money (30 percent of projects) took 57 percent of funds, the group receiving the least (33 percent of projects) took 9 percent, and "the majority of funding has not gone to the poorest neighbourhoods" (pp. 29, 31).[3]

Água Espraiada (OUCAE)

Mahendra et al. report that the operation sold 3.4 million CEPACs in auctions between 2004 and 2012 for R$2.9 billion (US$806 million at the 2018 average rate of R$3.65 per dollar), and that with financial returns on the operation's fund the resources reached R$3.9 billion by January 2019. The average CEPAC price rose from R$305 in 2004 to R$1,271 in 2012, an increase of 317 percent; the authors use the auction price as a proxy for land value because local land-price series are lacking. No new auctions had been held since 2012 at the time of writing, because the city requires the interventions of one distribution to be completed before the next (pp. 2, 15, 18, 43).[4]

Table 1 of the paper (p. 16) classifies spending from 2004 to January 2019, converted at the same rate:

The authors group social housing, public transport and public space as 33.7 percent of spending that directly benefits lower-income families, against 59.6 percent for roads, which they describe as serving car owners, who "tend to be higher-income" (pp. 2–3, 16). They report that at least 8,000 families were displaced by construction in the area, that many ended up in slum-like conditions along the stream, that as of January 2019 only 778 social housing units had been built, and that about 79 percent of the money spent on social housing went to projects that were still unfinished. Almost half of social-housing spending (45 percent) went on expropriation, which they link to the higher cost of land once values had risen (p. 16).[4] A note to the paper records that displaced families received eviction notices with small compensation and social housing offered on the periphery (p. 43).[4] The authors also record that the operation's management commission, which included government, investors, community members and civil society, published its discussions and reports, and that the CVM allows a new distribution of CEPACs only when the investments of the previous one are done (p. 17).[4]

FUNDURB governance

The City Statute requires that resource-generating tools such as OODC have a separate fund. FUNDURB receives the OODC proceeds, and a management council approves allocations across the city. Friendly reports that the 2002 master plan said only that the council would include "members appointed by the executive, guaranteeing the participation of society," which left civil-society representation to the discretion of each administration. Before 2014 the council had 25 members, 16 from secretariats and municipal businesses and 9 from civil society. She writes that with the 2014 plan "the council's composition became evenly divided between public-sector and civil society representatives, instituting a more democratic, accountable process." The council meets four times a year and answers to the Municipal Urban Development Council (p. 15 and note 30).[3] She also notes that the decision on where FUNDURB money goes originates with the municipality's administrative arm (p. 17), and that data on FUNDURB spending were only published from 2016, an official calling earlier years "a black box" (note 40, p. 23).[3]

Assessment

What kind of instrument it is. The sources describe a charge triggered by the grant of extra building potential. Sandroni emphasises that, unlike a recurring property tax, "revenues from the sale of building rights will fade in time as the additional building potential is exhausted," and that in some sectors the stock was already used up by 2010.[2] On the interpretation offered here, that makes OODC and CEPAC a one-off capture of publicly created value at the point it is created by zoning, in the family of betterment charges and building-rights sales, not a substitute for an annual land value tax. Interpretation: the continuing rent on land that is already developed stays with owners in this design, and the sources do not address that point.

How much of the uplift is captured is not shown. None of the four sources estimates the share of the zoning uplift that the charge recovers. What they report points in different directions. Sandroni concludes that the charge "does not seem to have affected the profitability of developers," that raising the maximum FAR to 4 improved their returns, and that developers came to prefer paying the increment to government because the money was turned into improvements that "frequently benefited the developers' projects."[2] Friendly reports that the 2014 changes produced a situation in which "as the permitted FAR increases, the value of the OODC charge decreases," so that the more developers build, the less they pay per square metre, and she concludes that using the planning and social factors as incentives means OODC "is no longer a truly redistributive tool" (p. 35).[3] The basic FAR also decides how much is chargeable at all: a basic FAR of 2 over most of the city under the 2002 plan left more building potential free of charge than the citywide basic FAR of 1 adopted in 2014 (pp. 11–12).[3]

Scarcity and land prices. Sandroni reports that setting a ceiling on buildable area appeared to push land prices up, especially where the stock was small, and he anticipates pressure on the city to raise the ceilings, with a risk that the aim of raising revenue could outweigh planning criteria and infrastructure limits.[2] On the interpretation offered here, this shows the limit of charging for rights rather than taxing land: a scarcity created by the stock cap capitalises into land prices, and owners keep that gain. A related study by Alvarez and Biderman uses the OODC rate schedule to estimate builder markups, an adjacent finding about market power rather than about land rent.

The distributional record. The Água Espraiada figures above are the most direct record in the sources: a large revenue raised through CEPACs, spent mainly on roads, with at least 8,000 families displaced and few social housing units delivered. Mahendra et al. conclude that "this is more a failure of equitable spending (or project implementation) of LVC revenue than it is a failure of equitable or effective design of the LVC mechanism," yet they decline to call the operation a success where benefits were not equitably shared (p. 18).[4] They also rate São Paulo the most successful of their three cases and credit a robust real-estate market, private-investor interest and strong institutional support with a transparent process (p. 18).[4] The citywide FUNDURB record is better on its stated targets, with housing near its 30 percent earmark in 2013–2015, but Friendly finds that most spending did not reach the poorest areas.[3]

Accountability. On the sources, FUNDURB's governance is the mechanism that connects revenue to spending: a ring-fenced fund, spending data published from 2016, and a council that moved from 9 civil-society seats of 25 to an even split in the 2014 plan. Friendly stresses that the master plan and its revision are themselves political outcomes shaped by councillors, courts and civil society (p. 17), and notes that a revision was not due until 2024 (note 44, p. 31).[3] The sources read run only to 2019 and do not report what later revisions changed.

Limits of the evidence. Friendly's revenue series ends in 2015 and her spending data cover 2013–2015; Mahendra et al. cover spending to January 2019 and note that inconsistent presentation of the data over the years hinders detailed analysis (note 8, p. 43).[3][4] The Faria Lima chronology is not settled across sources, as noted above.

See Also

• Land Value Capture — the broader family of instruments, including building-rights charges
• Betterment Levy — the event-based charge on publicly created uplift that OODC most resembles
• Alvarez & Biderman: Market Power in Housing Markets — a study that uses the OODC rate schedule to measure builder markups
• Air Rights — the private-market analogue of selling building rights
• Public Land Leasing — the other way a government captures value by selling rights, here by the lease
• Unearned Increment — the concept behind charging for publicly created value
• Valorization Tax (Contribución de Valorización) — Colombia's betterment charge, another Latin American instrument
• Land Value Tax — the recurring alternative to one-off capture
• Ethiopia — another case in the same Mahendra et al. comparison
• London — the English experience with negotiated rather than formula-based capture

Sources

1. George E. Peterson, Unlocking Land Values to Finance Urban Infrastructure, World Bank / PPIAF, 2009. World Bank Documents — used for the Faria Lima Urban Operation (410 hectares, 2.25 million square metres of additional floor space, reported land-value rise from US$300 to US$7,000 per square metre, R$1,100 per square metre at most, about 42 percent of the stock sold by 2005 for R$320 million), the "in lieu of a betterment tax" description and the failed attempt to extend the approach to metro financing (printed pp. 9, 76–77) (A-claim for what the report states; the land-value figures are reported as "reportedly" and are second-hand; the book does not name CEPACs).
2. Paulo Sandroni, "Recent Experience with Land Value Capture in São Paulo, Brazil," Land Lines, Lincoln Institute of Land Policy, July 2011. lincolninst.edu — used for the legal framework, the basic and maximum FAR and the 2004 coefficients, the planning and social-interest factors, the stock ceiling and district exhaustion by October 2010, the R$650 million early OODC receipts, the 2008 FUNDURB project list, the CEPAC and FUNDURB distinction, and the assessment points on one-off revenue and land prices (B-claim; a practitioner-economist's article in a Lincoln Institute magazine; the web edition read carries no page numbers, so section headings are the locators; the stated total additional buildable area for the 2004 stock is printed in a form that looks mis-scaled and is not repeated here; the article gives no Faria Lima CEPAC history beyond the combined US$1 billion figure).
3. Abigail Friendly, "Land Value Capture and Social Benefits: Toronto and São Paulo Compared," IMFG Papers on Municipal Finance and Governance No. 33, Institute on Municipal Finance and Governance, University of Toronto, 2017. hdl.handle.net/1807/81190 — used for the OODC formulas (note 22, p. 11; Figure 2, p. 12), the 2002 and 2014 basic and maximum FAR, the precursor tools, the 2004–2015 revenue series, the Land Value Register (note 35, p. 18), FUNDURB's council composition and its 2014 change (p. 15, note 30), the 2013–2015 FUNDURB spending split and its geography (pp. 23–31), and the 2014 formula's effect on charges (p. 35) (B-claim; academic working paper by a planning scholar; page numbers are the printed numbers; revenue and spending data end in 2015; some figures come from personal communications cited in the paper).
4. Anjali Mahendra et al., "Urban Land Value Capture in São Paulo, Addis Ababa, and Hyderabad: Differing Interpretations, Equity Impacts, and Enabling Conditions," WRI Working Paper commissioned by the Lincoln Institute of Land Policy, December 2020. wri.org — used for the CEPAC mechanism (pp. 12–13), the Faria Lima auction difficulties (pp. 13, 34), the Água Espraiada Urban Operation's history, equity design and governance (pp. 13–17), the R$2.9 billion, 3.4 million CEPAC and R$3.9 billion figures and price rise (pp. 2, 15, 18), Table 1 expenditure shares (p. 16), displacement and social-housing outcomes (pp. 16, 18, 43) and the assessment of spending versus design (p. 18) (B-claim; working paper by a research institute based on desk research and interviews; its expenditure data are drawn from the São Paulo urban-development agency's reports and the paper notes inconsistencies in how they are presented over time).