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Focus Report • Lincoln Institute of Policy

Implementing Value Capture in Latin America and Tools for Urban Development

Martim O. Smolka Implementing Value Capture in Latin America: Policies and Tools for Urban Development Martim O. Smolka

Policy Focus Report Series The policy focus report series is published by the Lincoln Institute of Land Policy to address timely issues relating to , land markets, and taxation. Each report is designed to the gap between theory and practice by combining research findings, case studies, and contributions from scholars in a variety of academic disciplines, and from professional practitioners, local officials, and citizens in diverse communities.

About This Report Value capture policies and tools are undeniably arousing new interest and becoming more acceptable in Latin America. Initiatives to understand and experiment with the basic economic principles behind value capture have grown in both number and creativity, and value capture tools are being used in combination with traditional practices in many cases. The reasons for its growing popularity are manifold: regional economic stabilization and fiscal decentralization; more progressive strategies for urban and ; re-democratization, increased social awareness, and demands for equitable public policy responses; changing attitudes toward privatization and public-private partnerships; the influence of multilateral agencies; and pragmatic considerations to capture land value increments to raise funds for local community needs.

Based on more than 15 years of and research programs sponsored by the Lincoln Institute of Land Policy, this report provides a comprehensive review of the principles of value capture and its antecedents in Latin America and elsewhere around the world. It describes the primary tools and instruments used by jurisdictions to mobilize land value increments (unearned income or plusvalías) for the benefit of the community at large. It concludes with an assessment of key lessons to be learned from the many examples and case studies presented throughout the discussion, and offers specific recommendations to help public officials, landowners, and residents better understand how they could apply value capture in their own communities.

Copyright © 2013 by Lincoln Institute of Land Policy All rights reserved.

On the cover: 113 Brattle In Curitiba, Brazil, the taller on the left Cambridge, MA 02138-3400 USA graphically illustrates the Phone: 617-661-3016 or 800-526-3873 area above the basic FAR Fax: 617-661-7235 or 800-526-3944 of about six stories for which building rights were Email: [email protected] charged. The taller building Web: www.lincolninst.edu on the right also paid for additional building rights, but did not dramatize ISBN 978-1-55844-284-9 that fact in its . Policy Focus Report/Code PF035 © Gislene Pereira ......

Contents

2 Executive Summary

4 Chapter 1: Latin American and the Case for Value Capture 5 Unearned Income from Publicly Promoted Urbanization 5 Multiplier Effects of Land Use Changes 7 Windfalls from Investments in Urban 8 The Principles of Value Capture 10 The Growing Popularity of Value Capture Policies and Tools

13 Chapter 2: International and Latin American Experiences 13 Historical Precedents 14 Enabling Legislation 18 Applications to Public 20 Selected Value Capture Tools

21 Chapter 3: The Property and Betterment Contributions 21 The 23 Betterment Contributions

32 Chapter 4: Exactions and Charges for Building Rights 32 Exactions 35 Charge for Building Rights 37 The Use of OODC in Brazil 42 Transfer of Development Rights

45 Chapter 5: Value Capture Tools for Large Urban Projects 46 Privatizing Public Land for Redevelopment: Puerto Madero, 47 Public Acquisition of Private Land: Nuevo Usme, Bogotá 49 Land Readjustment 53 Auctioning Additional Building Rights: CEPACs in Brazil

58 Chapter 6: Conclusions and Recommendations 59 Key Findings and Lessons 62 Recommendations

64 References 68 Acknowledgments 69 About the Author 69 About the Lincoln Institute of Land Policy

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Executive Summary

© alvaro Uribe

Faria Lima in rbanization in Latin America by actions other than the landowner’s, São Paulo, Brazil, has is associated with strong pressure such as public investments in infrastructure been redeveloped with for the supply of serviced land, or administrative changes in land use norms funds obtained from additional building rights resulting in significant changes and regulations. The region has a long his- auctioned in the stock Uin land values that are distributed unequally tory with value capture policies, and many market through special among landowners and other stakeholders. countries, notably Brazil and Colombia, bonds (CEPACs). Conventional fiscal policies and instruments have passed explicit legislation calling for largely neglect how the costs of providing consideration of value capture principles. urban infrastructure and services are social- Nevertheless, national legislation has been ized, and how their benefits are privatized. found to be neither necessary nor sufficient The notion of value capture is to mobi- to allow some jurisdictions to use this lize for the benefit of the community at large potentially powerful financing mechanism some or all of the land value increments to implement a variety of tools adapted (unearned income or plusvalías) generated to their local needs.

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This discussion of the concept of value theoretical rationale and basic operational issues capture explains its justification and increasing involved in the implementation of value capture popularity, provides a brief review of its ante- policies and tools. cedents in Latin America and elsewhere around Accordingly, this review of value capture the world, and illustrates its many forms and in Latin America recommends steps that can longstanding presence in the be taken in three spheres: learning from varied agenda. The reasons for its growing popularity experiences with the implementation of value are manifold: regional economic stabilization capture policies and tools; increasing knowledge and fiscal decentralization; more progressive about the complex of varied value cap- strategies for urban planning and management; ture approaches; and promoting greater under- re-democratization, increased social awareness, standing among public officials and citizens and demands for equitable public policy responses; about how value capture tools can be used changing attitudes toward privatization and to benefit their communities. public-private partnerships; the influence of multilateral agencies; and pragmatic consider- Learn from Implementation Experiences: ations to capture land value increments to While value capture charges in theory are raise funds for local community needs. neutral regarding land use and should fall entirely The report examines three categories of on landowners, in practice successful implemen- voluntary and compulsory applications of tools tation demands management skills to deal with affecting existing, new, or changing land uses many complex factors and diverse stakeholders. in single or multiple property development In addition it requires proper understanding of projects: property taxation and betterment land market conditions, comprehensive property contributions; exactions and other direct nego- monitoring systems, a fluid dialogue among tiations for charges for building rights or for fiscal, planning, and judicial entities, and the the transfer of development rights; and large- political resolve of local government leaders. scale approaches such as development of public land through privatization or acquisition, land Increase Knowledge about Theory and readjustment, and public auctions of bonds Practice: Conducting research, documenting for purchasing building rights. and disseminating implementation experiences, Performance indicators of revenues, other and providing evidence about how value cap- private investments generated by value capture, ture policies work on the ground are essential and the effects of higher transaction trans- to overcome the disjunction between rhetoric parency and corruption mitigation in the land and practice and to change the behavior and market vary significantly among comparable juris- attitudes of public officials, landowners, and dictions applying the same tool. Although in the community at large. most places revenues are still low, the applica- tions of betterment contributions in Bogotá Promote Greater Public Understanding and CEPACs in São Paulo have generated and Participation: Land value increments revenues in excess of a billion dollars for those are captured more successfully from landowners . At the same time, the broader dissemi- and other stakeholders who perceive they are nation of these and other instruments is often receiving greater benefits from a public inter- blocked by powerful stakeholders (notably vention than those accruing from business landowners) and by opinion leaders (including as usual. Furthermore, value capture tools are academics) from both sides of the ideological more likely to succeed when used to solve a spectrum due to a lack of understanding of the locally recognized problem.

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Chapter 1 Latin American Urbanization and the Case for Value Capture © A lvaro U ribe

High-density rbanization in Latin American public interventions reinforced strong land- development in has produced a formidable set owning interests. When fiscal and the Barra da of urban problems ranging from are relatively scarce, the provision Tijuca area of Rio vast, often illegally occupied areas of urban infrastructure and services in those de Janeiro was withU minimal urban services to rampant dis- areas that can support higher densities creates built in the 1970s and 1980s as regard for building and land use regulations significant increases in land value. These envisioned in the in wealthier neighborhoods in some cities. linkages between services and prices allow master of This state of affairs cannot be attributed ample room for practices such as active land 1969. exclusively to broader macroeconomic speculation (Jaramillo 1994), clientelism, factors that contribute to urban , and other kinds of influence (including but also to how the provision of urban corruption) between public and private infrastructure and services is financed, how interests. This is why land ownership is such land uses are managed, and how property an important issue in the urban land policy rights are determined. agenda, and why the spatial allocation of Rapid urbanization over the last century public investment is so vulnerable to abuse led to the emergence of a vigorous land and favoritism by -positioned stake- market, and windfalls resulting largely from holders (Smolka 2011).

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Unearned Income from Box 1.1 Publicly Promoted Barra da Tijuca, Urbanization The expectation that land may be designated he Barra da Tijuca area, covering 82 square kilometers (km²) for future urban uses or redevelopment can T of developable land, provided an opportunity for extension produce significant land price hikes, even of the ’s high-income South Zone. It constituted 10 percent before any public investments actually begin. of the city of Rio de Janeiro, and half of Baixada de Jacarepagua, The opening of the Barra da Tijuca neigh- an area of 160 km² including a 20 km beachfront and 122.50 km² borhood of Rio de Janeiro in the 1970s illus- of developable land. trates the impact of selective investment on land value increments (box 1.1). Expensive public transit lines were announced in 1967 to open Over and above the unearned income this area for expansion in response to pressure from developers accrued to a privileged few, which could for more attractive, buildable areas. In 1969 the city hired Lucio otherwise be used to fund public investments, Costa, the responsible for Brasilia’s master plan in unaccounted-for social costs often result the 1950s, and his proposal for this neighborhood was approved from biased public decision making. The in the same year. Direct access through and an elevated of Latin American urban- expressway built in 1974, together with the master plan, were ization offers many examples of question- associated with an increase in land value of 1,900 percent from able (inefficient, unequal, unsustainable) 1972 to 1975. In the same period, land prices in most other public decisions regarding the spatial alloca- high-valued areas of Rio appreciated about 435 percent (Vetter, tion of investments in urban infrastructure Massena, and Rodrígues 1979). and services and the use of arbitrary land The plan’s land uses and building standards were implemented use norms and regulations. It is not hard in 1976 (Rezende 1982; 2005). The process was accompanied to see how the prospect of accruing wind- by frenetic land acquisitions leading to the control of almost 30 falls from such public interventions may percent of the new developable area by only three landowners. induce complicity between landowners By 1980 one developer had accumulated more than 6 km2 of and regulators. land, or about 8 percent of the whole area. Some of these For example, no have been imple- acquisitions are still under legal investigation.

mented around the petrochemical complex S ource in Itaboraí, near Rio de Janeiro, to capture part of the enormous increment in land : O riginal value generated by extensive public invest-

ment that could help finance much-needed P urban infrastructure (box 1.2). Moreover, an lan

from effective urban planning and financing policy has not yet been proposed to prevent the the M

growth of informal settlements amidst a unicipal booming market fueled by high concentrations of public and private invest- A rchive ment (Salandia 2012).

of R

Multiplier Effects of io

de

Land Use Changes J The stakes are high when it comes to the Proposed Master Plan of Barra da Tijuca by Lucio Costa, 1969 aneiro land value increments resulting from public

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intervention, whether in large complex designated for urban uses to its pre-existing developments such as Itaboraí or in smaller rural (agricultural) use value at the urban areas. The so-called urban multiplier—the fringe—is typically over 4:1. ratio of the per square meter price of land In Quito, Ecuador, the urban multiplier was estimated at five times the value of non-

Box 1.2 urbanized land in the Amagasi Inca neigh- Itaboraí Petrochemical Complex, Rio de Janeiro borhood (Barcia and Ortiz 1996). Compar- ing average or median values per square s a consequence of the discovery and exploitation of the meter of property transactions over 10,000 A pre-salt layer of oil reserves off the coast of Rio de Janeiro, m2 with those of plots from 250 to 600 m2 in 2006 Brazilian Petrobras announced the of a petro- for zones in the urban fringe of Rio de chemical complex on the east side of the metropolitan region in Janeiro, a statistically robust multiplier of the of Itaboraí (population of 218,000 in 2010). Work six was found over the period from 1968 to started in 2008, and in 2009 Petrobras announced the expansion 1984 (Smolka 1994). More recently, Vetter, of the original project doubling the capacity of the refinery that Massena, and Vetter (2011) used survey is to become operational in 2015. The Petrochemical Complex data for Rio’s West Zone to find a 4.29 Rio project (COMPERJ) occupies an area of 5,400 hectares, and multiplier. Data collected globally by Angel investments of over US$21 billion are expected to generate up and Mayo (1996) ratifies this order of to 150,000 jobs (Petrobras 2013). magnitude for land value increments. The local provision of investments in The complex, located near the end of Rio’s new beltway, the Arco urban infrastructure and services elicits Metropolitano, has so far stimulated 160 new businesses; com- three types of land use change (land use mercial and office spaces are now sold at US$7,000/m2 for a conversion; higher densities, footprints, or property gain of 40 percent in 2009 alone. A plot of unserviced other building norms; and regulations) land in a that previously sold for about US$14/m2 has that constitute important sources of windfalls quadrupled in price to US$55/m2. At the same time, are for well-placed landowners. Allowing for now rampant in this otherwise high-end real estate market where, higher densities (floor area ratios or FARs) according to the Regional Council of Realtors of the State of Rio or changing zoning from residential to com- de Janeiro, have appreciated over 70 percent from mercial uses generates handsome increments, 2009 to 2012. There is little evidence, however, that Itaboraí is albeit usually lower (in relative terms) com- developing a financial strategy to capture this increased value pared to rural to urban land use conversions and implement plans for a pleasant, sustainable, and socially where the base value is low (table 1.1). Reli- equitable urban environment. able data on the effects of changing norms on land prices are difficult to obtain, and Table 1.1 few studies are available. Effects of Administrative Land Use Changes on Land Prices Bank transactions on changes in land (Stylized Facts) use from residential to commercial in Colo- Price Price Windfall nia San Benito in San Salvador, El Salvador, Type of Land before Change Increment after Change on 5,000 m2 Use Change (US$/m2) (%) (US$/m2) (US$) reviewed by real estate assessor Gustavo Rural to Urban Sagastume, suggested a land value appre- 2 400 10 40,000 Conversion ciation of 108 percent, from US$196 to 2 Building Norms 100 80 180 400,000 US$407/m in 2004. Similarly, information Zoning drawn from a developers’ data bank on 200 100 400 1,000,000 Regulations property transactions in Bogotá suggested Source: Prepared by the author. changes ranging from 59 to 151 percent,

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depending on the neighborhood (Borrero increment, supporting Donald Shoup’s Ochoa 2007). The same source shows land (1994, 236) poignant question: “Why is it value changes ranging from 80 to 100 so difficult to fund that percent when converting single-story increases the value of serviced land by more into residential of five or six stories, than the cost of the infrastructure itself ?” and additional increments of 40 percent Given Latin America’s chronically insuffi- for eight-to-twelve-story buildings. cient supply of serviced land, high levels of urban poverty, and the lag between the tax Windfalls from base and social needs, the land value incre- Investments in Urban ment could provide a substantial source of Infrastructure funding to mitigate these chronic problems, A comprehensive study conducted in three rather than provide substantial windfalls major cities of Brazil (Brasilia, Curitiba, to private landowners. and Recife) revealed significant differences For example, in areas predominantly in land value increments for plots at differ- occupied by the urban poor, such as the ent locations and distances from the urban West Zone of Rio de Janeiro, fully serviced center, according to the types of services land was priced at US$145/m2 in 2011 provided (Serra, Dowall, and da Motta compared to formal undeveloped land 2005). For example, the increased value sold at US$34/m2 (Vetter, Massena, and per square meter of an inner ring plot from Vetter 2011). Similar values have been supplying , pavement, or sewerage is found in the Global Urban Indicators much higher than that of plots in the outer database for 13 cities with over 500,000 ring. The differences vary with the combi- inhabitants in different countries (UN- nation of services available (table 1.2). In Habitat 2008). all cells, except for the provision of sewer- However, the cost of fully servicing land age in the middle and outer rings, the land intended for low-cost housing developments value increment exceeds the cost of provid- in compliance with urban codes ranges ing the service. The exceptions are because from US$10 to US$35/m2, depending on the lower density in the outer rings allows topographical conditions, quality of the in- individuals to install alternative sewerage frastructure, and scale of the project. These facilities more easily than to access water prices and costs demonstrate the potential supplies or build . for the use of land value increments to fund The investment cost to provide services public investments even in the lower end is much lower than the resulting land value of the land market (Bouillon 2012).

Table 1.2 Land Price Increments (US$/m2) Related to Plot Location in Brazilian , 2001 Distance to Central Business Investment Cost of Service Provision Increment for 5–10 km 15–20 km 25–30 km for 1000 m² Additional Services (inner ring) (middle ring) (outer ring) of Usable Area + Water 11.10 5.10 3.20 1.02 + Pavement 9.10 4.80 3.40 2.58 + Sewerage 8.50 1.80 0.30 3.03 Source: Adapted from Serra, Dowall, and da Motta (2005).

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The Principles of The notion is that benefits provided by Value Capture governments to private landowners should Value capture refers to the recovery by the be shared fairly among all residents. Further- public of the land value increments (unearned more, the principle that no citizen should income or plusvalías) generated by actions accumulate wealth that does not result from other than the landowner’s direct investments his own efforts, known as “unjustified en- (figure 1.1). Although all such increments richment with no cause” (enriquecimiento sin are essentially unearned income, value cap- justa causa), is prevalent in most Latin Ameri- ture policies focus primarily on the incre- can constitutions (Rabello de Castro 2012). ment generated by public investments and A typical value capture application would administrative actions, such as granting have the government recover only that por- permissions for the development of specific tion of land value increases created by its land uses and densities. The objective is to direct interventions. A broader application draw on publicly generated land value in- would have the government recover any crements to enable local administrations to land value increase from actions other than improve the performance of land use man- those of the landowner—for example, those agement and to fund urban infrastructure resulting from the direct impact of market and service provision. forces associated with a general increase in

Figure 1.1 Components of Urban Land Value

Value captured by the former landowner Actions of other private agents Former landowner’s “effort” Changes in building rights

Public works investments

a b c d

A B C D

Landowner’s “effort”

Overall land value increments

Land value increments other than the landowner’s

Land value increments from public actions

Land value increments from public investments

Source: Adapted from Furtado, Biassotto, and Maleronka (2012).

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urban population or from the indirect value of the buildings are not to be charged impacts on land values from the use of sub- or captured. sidies for housing and urbanization services. Second, different legal frameworks may In Chile such subsidies resulted in land interpret how community effort generates values increasing 316 percent from 1994 land value increments in various ways, over to 2004, ultimately absorbing 84 percent of and above any explicit public intervention the increase from the government’s adjust- in the form of a financial investment or an ments in the vouchers to keep up with rising administrative action applied to land uses. housing prices (Brain and Sabatini 2006). Land readjustment schemes, for instance, Other more geographically limited may be promoted by a nonpublic entity examples may relate to the legitimacy of with the resulting land value increment windfalls resulting from proximity to newly shared by the participants according to discovered archeological sites or from dra- criteria established in advance. matic changes in a neighborhood, such as Third, the term mobilization of the land new “celebrity” residents or retailers, that value increment is proposed rather than public make it more fashionable and thus more appropriation. The latter term refers to the valuable for others in the area. In all these conversion of land value increments result- cases the property owners did nothing direct- ing from a community effort into , fees, ly to enhance their land values. Thus, all or and the like to be spent on services and pub- part of the increased value should be shared lic investments. However, the community with the public (Brown and Smolka 1997). at large can benefit more directly when the This report focuses on land value changes process is applied to a set of landowners resulting from direct government actions who are both contributors to and benefi- or community efforts. Accordingly, value ciaries of the land value increment, as in capture is the process by which some of the the case of large-scale urban operations. land value increments attributed to govern- Although the general rule is that actions ment or community effort are mobilized, by entities other than the landowner, pri- either through their conversion into public marily the public sector or broader societal revenues as taxes, fees, betterment contribu- changes, affect most land value increases, tions, and other fiscal means, or through the certain actions taken directly by private provision of on-site land improvements that developers may enhance the value of their benefit the community. The reference to in- land. A common yet fallacious allegation crements in value rather than in land price of privately generated land value increment indicates that the increment or appreciation is made when a private agent develops a is often assessed according to estimated values high-end in a low-priced rather than realized market prices. In a few area, since this new project will dramatically cases, such as CEPACs in Brazil, the land enhance the value of the developed plots. value increment is revealed in market trans- An argument can be made that the capacity actions through public auctions. to create unanticipated that The working definition of value capture can be internalized in each plot should be encompasses three important components. appropriated in part by the investor or First, it refers exclusively to increments in developer as a legitimate gain, just as cer- the value of the land. Thus, when assessing tain gains from mergers or other actions property appreciation, the productivity gains are earned by business investors. However, or changes in values associated with the some of the accrued land value increments

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are not intrinsic to the development itself, as an attractive alternative. Even small but result from conditions already found municipalities in the Brazilian state of in the city. Paraná, which are losing population and In the case of two identical gated com- consequently their share of transfers from munities, the one located in a city facing the state or federal level, have resorted to strong competition from similar develop- betterment contributions as a complemen- ments would likely generate much lower tary source of revenue (Pereira 2012). land value increments than the other one located where no similar alternatives have Urban Planning and Management yet been offered. Thus, a significant compo- The shift of emphasis from comprehensive nent of the willingness to pay for attributes planning to city management over the last of the gated community (e.g., location, few decades has created an environment amenities) corresponds to the willingness more receptive to the application of instru- to pay for attributes found in other parcels ments based on negotiation and relaxation in the city, just as the value of a single plot of existing norms (Vainer 2000). Local plan- is determined according to its differential ning officials find greater flexibility in tools attributes compared to other plots. In other that tend to be applied on a project or site words, the value of the internalized exter- basis as opposed to traditional, citywide nalities is affected by the gated community’s fiscal instruments. overall value in the city as a whole. This trend has been coupled with the growing presence of private investors eager The Growing Popularity to promote specific proj- of Value Capture Policies ects. While developers would always prefer and Tools not to be charged extra fees, they are often Value capture legislation or applications can willing to surrender a share of the gains be found in local jurisdictions in most Latin from additional building rights, as in various American countries, even when no national linkage programs and urban operations in legislation exists. Several factors account for Brazil. Some practitioners, especially critics this growing popularity of value capture as of comprehensive urban planning, find value part of the urban planner’s toolbox. capture tools useful as a strategy to make large-scale urban development more viable, Decentralization or as a guarantee of the of The trend toward fiscal decentralization— individual projects. This view has shaped a process accompanied by restraints on recent urban development throughout the traditional revenue transfers together with region, and in São Paulo in particular. greater fiscal autonomy and more respon- sibility for service provision—encourages Redemocratization and municipalities to expand their own statutory Increasing Social Awareness sources of revenue. Many administrations Redemocratization in many Latin Ameri- are placing higher importance on local sales can countries has raised the level of popular taxes and other fees, while a few are looking participation, increased the politicization of at means to improve the performance of the social inequalities (the so-called social debt property tax (De Cesare 2012). Given the accumulated from the former authoritarian widespread unpopularity of this tax, how- and dictatorial regimes), and challenged ever, some jurisdictions view value capture governments to address the roots of these

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Many citizens participated in Brazil’s third Conference of the Cities in 2007. © M inistr y of

the C ities , B rasilia

inequities. Social demands in turn put pres- as adhering to marginal principles of price sure on local officials for increased public efficiency. The dissemination and influence spending. Many value capture initiatives of the so-called neoliberal agenda has are associated with, and motivated by, the paradoxically helped reduce ideological mobilization of new and more flexible resistance to value capture. funds to finance special social programs. Tolerance of free riders is certainly not In the land policy realm, value capture a neo-liberal idea. In 1974 a mayor of the has been associated with many constitutional Providence Commune ratified by General and legislative reforms that redefine prop- Augusto Pinochet’s dictatorship in Chile erty rights, obligations (often embodying the (the epitome of laissez-faire practices in social function of property and the right to Latin America) argued publicly that value housing, or more generally the “right to the capture was indispensable to urban plan- city”), and the ability of public administra- ning proposals. In this high-income area, tions to redistribute the benefits and costs a charge was proposed on landowners of urbanization. These ideas contradict benefiting from the construction of a new the pervasive and traditional mode of state avenue (named 11 of September, honoring intervention in Latin America, typified by the date of the military coup). The proposal the phrase “socialization of costs and was later blocked by the finance minister, privatization of benefits.” but the construction of a subway line under the avenue had required some expropria- Neoliberal Agendas and Privatization tions that were compensated well below The notion that the beneficiaries of a pub- the appreciation values anticipated by the licly provided benefit (potential free riders) landowners, thus indirectly benefiting the should compensate society is easily accepted community in any case (Cáceres and by proponents of mainstream Sabatini 2002).

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Privatization, in turn, has set the stage tools for financing infrastructure (Blackburn for the development of more flexible and Dowall 1991) and on ways to unlock public interventions, public-private part- land values to finance urban infrastructure nerships, and direct negotiations over land (Peterson 2009). The Inter-American uses and regulations. Significant examples Development Bank organized a seminar are the release of public land into the pri- in January 2013 to identify what is being vate land market and better coordination done in Latin America and the need for between real estate and public sector further research on ways it could adopt interests to promote new areas for urban value capture tools in their funding prac- development. tices in the region.

Influence of Multilateral Agencies Pragmatic Considerations Value capture ideas have been promoted by With the macroeconomic stabilization of multilateral agencies stressing user fees and most economies in the region, the dramatic cost recovery of public investments as good reduction of chronic inflation gave trans- practices. For example, explicit concerns parency to windfalls otherwise disguised as with value capture can be found in the nonoperational real estate gains. In highly Declaration (UN-Habitat 1976), inflationary regimes land value increments which includes Recommendation D3.b: are often embedded in mark-ups reflecting expectations of price increases. Opportun- The unearned increment resulting from the ism is another motivation behind some rise in land values resulting from change in attempts by public officials to implement use of land, from public investment or decision, value capture policies, since the value that or due to general growth of the community is captured can be directed to funds or proj- must be subject to appropriate recapture by ects not covered by regular taxes and other public bodies (the community), unless the own revenues, thus leveraging the local au- situation calls for other additional measures thority’s discretionary expenditure capacity. such as new patterns of ownership, the Value capture often emerges as a prag- general acquisition of land by public bodies. matic substitute for the poor performance More recently UN-Habitat has organized record of property tax collections and other conferences to understand how value cap- instruments. This option is especially attrac- ture is practiced in different regions and tive when, due to active political opposition, has made more use of value capture tools a local administration finds it cannot increase (Sietchiping 2011). The World Bank also its own fiscal revenues, let alone carry out has commissioned papers on alternative investment plans for social programs.

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chapter 2 International and Latin American Experiences

alue capture policies and tools but it probably existed before then since it is are by no means limited to Latin based on the understanding that if you get America. A long trajectory of benefits, you should pay for them (Villamil international experiences has dem- 2000). Arguments calling for fees to be im- onstratedV that defraying at least part of the posed on landowners benefiting from some cost of urbanization by using the land value type of public investment (roads, , increment created in the process is feasible and the like) can be found in Portugal and and practical (Hagman and Misczynski 1978; Spain in the 1500s, and their application Smolka and Furtado 2001; Vejarano 2007; in Latin America has been traced back to Peterson 2009; Muñoz Gielen 2010; Alterman 1607 in Mexico (Reyes 1980). 2012; Ingram and Hong 2012; Walters 2012; used valorization around the Furtado and Acosta 2013). year 1650 to build along the Lea and Thames Rivers, and in 1801 the The Bridge of the Historical Precedents of Lords authorized a betterment levy for was built in 1809 in Bogotá, The use of valorization to construct new urban development purposes. France began Colombia, using a roads and maintain aqueducts has been to use valorization in 1672 to build , form of betterment documented as early as the , roads, and bridges, and a special type of contribution. © kamilokardona / wikimedia

commons

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valorization was also used after 5 percent of the revenues in 48 counties. to reconstruct the country. In Italy it was In the state’s large counties with over one used as early as the seventeenth century to million inhabitants, such as Orange County, enlarge parks and to make improvements in these fees accounted for 28 percent of the city of Florence (Reyes 1980). local revenues (Burge 2010). Elsewhere around the world, Japan relied Notwithstanding growing concerns with extensively on land readjustment instruments lack of access to serviced land by the urban to promote urbanization following World poor, the underlying principle of paying War II, and these tools are also applied in for urbanization costs using the associated South Korea and Finland (Hong and Need- land value increment has not been widely ham 2007). has had an explicit tax adopted in most parts of the third world. on land value increments since the times Strong market-based countries like the of Dr. Sun Yat-Sen, the founding father of and Canada have actually China’s republic, inspired by his Equalization been more active in recovering the unearned of Land Rights principles. Leasing systems income resulting from land rents than coun- on public lands capture value through regu- tries south of the U.S. border, although in lar contract adjustments in Hong Kong and a less explicit form (Smolka and Amborski still play an important role in various cities 2007). in the Netherlands, especially Rotterdam. Gains associated with rights provided in Enabling Legislation partial or comprehensive plans have been The most comprehensive and systematic used to fund new urbanized areas in many examples of value capture legislation in European countries, such as England’s right Latin America are found in Colombia’s to tax the increase in value caused by the 388 of 1997 (Ley 388 de 1997) and Brazil’s rezoning of land and France’s Plafond Légal Statute of the City of 2001 (Estatuto da Cidade). de Densité, whereby charges were levied for Although both resulted from a long period building rights over and above a certain of trial and error with other legislation, they baseline. In Spain, munici­palities capture differ significantly. The Colombian process part of the value increase in urban exten- has been markedly top down, whereas in sion areas by requiring landowners to cede Brazil social mobilization associated with between 5 and 15 percent of the serviced the urban reform movement played a sig- building plots to the municipality. In addi- nificant role in the post-redemocratization tion, landowners must provide the of the Constitution in 1988 and needed for infrastructure, pay the related other initiatives. costs for service provision, and pay the Colombia’s Law 388, in Article 73, overhead costs and a profit margin introduces the notion that public actions (Muñoz Gielen 2010). that improve urban land uses, including Since the 1970s, about 25 percent of the associated air space, give the public the jurisdictions in the United States have right to participate in the resulting land imposed impact fees on developers to fund value increments (plusvalías). The law’s Article the provisions of infrastructure improvements 74 specifies the sources of these benefits as paid for by the community (Lawhon 2003). the conversion of rural land to urban uses, In Florida, for example, over US$2 billion changes in zoning and density, and the rate was collected in fiscal years 2005–2006, of land occupation. Article 79 states that with the fees accounting for more than local or district councils may share from

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Varied types of buildings illustrate changing land uses over time in Rambla Mahatma Gandhi, Montevideo, Uruguay. 30 to 50 percent of the plusvalías. The law In regard to administrative actions, includes other provisions relating to value such as charges on development rights, the capture, such as permitting the public auction Colombian law has had more influence on of idle land to be used for social housing subsequent legislation in other countries of after proper notification of the owners; the the region than the Brazilian statute, which right of the public to have the first option to contemplates a broader scope and calls for buy the land; the public acquisition of land capturing up to 100 percent of the land val- at prices listed before the announcement ue increment. This difference is likely due to of the project; and the enabling of land the language and imprint of Spanish legisla- readjustment in partial plans. tion in Colombia, whereas Brazil was more Brazil’s 2001 statute incorporates many influenced by the French precedent. principles relevant to value capture that Several other countries have passed were established previously in Article 182 national legislation enhancing the power of the 1988 Constitution. They include of governments to mobilize land value in- the social function of property as reflected crements. Uruguay’s 2008 Law (Ordenamiento in the application of progressive property Territorial y Desarrollo Sostenible) establishes taxation on vacant land; the separation of the principle of equitable distribution building rights from land ownership rights; among public and private actors of charges new tools like the Consortia for Urban and benefits from the urbanization process, Operations that allow special treatment for including the capture of values generated recognized stakeholders (owners, residents, in land use planning and development. Its users, and private investors) to redevelop Article 46 contains an explicit value capture large areas; the right of first option to provision authorizing municipalities to share municipal governments to acquire land; and in the higher land value increments result- the use of transfer of development rights. ing from their interventions.

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Citizens support a The instrument, referred to as a return The smaller municipality of Maldonado congressional debate on valorization, is set at a minimum of in the state of Punta de Este, Uruguay, by over the promulga- 15 percent of the increment resulting from contrast, has collected US$4.5 million, or tion of new land development public actions. This charge on the full addi- more than 11 percent of its US$40 million for the Province tional property value represents an ingenious worth of investments (Mendive 2013). of Buenos Aires, way to bypass the difficulties of calculating Ecuador’s 2010 COOTAD (Código . the land value appreciation resulting from Orgánico de Organización Territorial, Autonomía public actions since the 15 percent figure y Descentralización) established a 10 percent is an estimate of the average share of land tax on land value increments when properties value in the final price of the property. are transferred, a deduction of plusvalías in The municipality of Montevideo has expropriations for social housing and regu- been applying an instrument referred to as larization projects, and an explicit recogni- compensatory price since 2001, thus even tion of illicit enrichment with no just cause. before the national act was passed. It charges Argentina has had an ongoing congres- 10 percent on the value of the entire prop- sional debate over national legislation, erty or up to 10 percent when developments but Buenos Aires and other municipalities, are in strategic areas or are part of special including Córdoba, Moreno, Morón, Rosario, plans. In 2011 the city collected only US$3.8 San Fernando, Trenque Lauquen, and million from this source, about 2.5 percent Venado Tuerto, already have and of its total investment budget of about distinct value capture experiences. Ordinance US$150 million. However, some new devel- 3808 of 2011 in Tranque Lauquen, one of opments, such as FORUM in the Puerto the 135 small municipalities in the province del Buceo area and a new of Buenos Aires, calls for 12 percent of the (Shopping Nuevo Centro), are expected plots in new subdivisions at the urban fringe to generate about US$5 million each. to be transferred to the government for

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social housing. These areas are over and lation was to be regulated by the Law on above the regular obligatory cessions of the Plusvalías Tax and Improvements Fees, land for preservation, , public facilities, which also had language regarding the and the like. The fee transfer has been ap- social character of the benefits accruing to plied to many requests for rezoning (affecting property owners. As with similar initiatives FAR increases from .8 to 1.2 and minimum in the region, the project was blocked by lot size reductions from 600 to 300 m2) gen- strong opposition from landowners and erating for the municipality a sizeable num- others who characterized it as socialist. ber of plots to be used for social programs. Venezuela, in its 1999 reform of the A progressive Law on Fair Access to Bolivarian Constitution, included the pos- Habitat for the Province of Buenos Aires, sibility for municipalities to charge special approved in late 2012, required the contri- contributions for land value increments re- bution of at least 10 percent of the land sulting from changes in land use or density. value increment generated by large urban The municipality of Baruta included in its developments occupying more than 5,000 zoning ordinances for the development of m2; a 50 percent increase in the property La Naya-Las Manitas and Urbanización tax on vacant land; a special contribution Las Mercedes a charge of 5 percent of on plots benefiting from zoning changes; plusvalías; between 2002 and 2010, US$9.4 and opportunities to readjust public land million was collected from properties in for social housing programs. that area (Monserrat Guzman 2010). In general, across all countries in the Other countries have had varying region and at different times, national or degrees of success in fully establishing local legislation can be found to include and enforcing their value capture legisla- provisions for some form of value capture. tion. In Mexico, Article 115 of the 1982 A 1940 decree in Honduras, for example, reform of the constitution allows munici- allowed for property owners to pay a third palities to collect additional fees (as defined of the cost of paving projects on streets that by the states) on certain actions associated bordered their properties. In 1976, another with land development (e.g., subdivisions decree explicitly authorized the Central or consolidations), and on improvements District (Tegucigalpa) to collect betterment that change the value of properties. Fiscal contributions. This provision was extended legislation in seven states refers to this tool in 1984 to the municipality of San Pedro as a tax on plusvalías, although in essence Sula, and in 1987 to all municipalities it is a betterment contribution that has (Kehew 2002). Costa Rica’s Urban Planning not been fully implemented countrywide Law No. 4240 of 1969 allowed for better- (Perló Cohen and Zamorano Ruiz 2001). ment contributions, and it was later broad- Local officials often allege their hands are ened in the reform of 1972. Nicaragua’s tied and they avoid taking action, even when Municipal Arbitration Plan of 1988 also they actually are permitted to apply many anticipated use of a betterment contribution. value capture instruments. This situation In the emblematic case of Guatemala, resonates throughout the region where prin- Article 132 in the 1956 Constitution estab- ciples (sometimes in explicit value capture lished that property owners who benefited parlance) established administratively or by from plusvalías as a result of public works law are essentially ignored in practice, or at were obligated to contribute an amount best are implemented partially or selectively in proportion to their benefits. This stipu- in a few jurisdictions.

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Applications 388 of 1997. Under this powerful provision to Public Lands the commercial value (for compensatory The disparity between principle and practice purposes) cannot include the increment is illustrated by the challenges surrounding attributed to the planned project itself. In the acquisition, retention, and disposition practice this condition freezes the acquisition of public lands. Each step in the process is land price to its level prior to the announce- heavily regulated, often with an explicit value ment of the project, and therefore is an capture rationale, in virtually all jurisdictions expedient instrument to capture the land in the region, though only a few places have a value increment that otherwise would accrue specific policy tool in place. Public authorities to the landowner, or to reduce the land cost acquire land relying on , that the local administration would pay for expropriations, direct purchases, or another its own urban development projects. means. Each approach has some concern re- For example, the city of Bogotá managed garding the “just price,” usually as prescribed to acquire 62 hectares of land for the Nuevo by law but often equated to the current Usme project in 2000 at about US$8.5/m2 commercial price (Rabello de Castro 2006). and in 2010 about 80 hectares at US$3.5/m2 on average, when the typical commercial Public Acquisition of Land value of similar land sold by pirate subdi- The recently enacted Decree 9050 of viders was rarely below US$20/m2 (Pinilla June 15, 2012 in Venezuela seeks to deter- 2013). One of the largest landowners in the mine the just price of properties in cases project area stated in his appeal against the of emergency expropriations for housing administrative expropriation that his land and settlements. Article 2 establishes that was worth US$50/m2. In fact, the land was the just price is to be based on the value acquired at below US$2.50/m2 in 2000. of the property’s most recent acquisition. If that occurred within the same year, the base value would be the previous registered It is generally understood that the stock transaction. Article 3 states that the value of public land should be used diligently would be updated according to the average and strategically according to socioeconomic price indexes and nominal interest rates and urban development priorities. Land defined by the central bank. Most impor- banking is one way to acquire large tracts to tant, it adds that in no case may the cal- be held for relatively long periods of time to culation of the just price consider any better control the use of the land, to prevent influence or impact generated by planned speculation, and through their ultimate sale public or private investments in the imme- or to capture for the community any diate area, nor the expected returns derived increase in land value resulting from public from uses established by urban land use or market actions. Public officials frustrated norms and regulations. It also establishes with land market regulations are often that the just price cannot consider the seduced by this idea, but its effective imple- current market value. mentation in Latin America has been limited Colombia is one of the few countries for several reasons: lack of resources; higher where an explicit tool has been designed short-term priorities for scarce public funds; to address the calculation of public land thorny legal procedures for acquiring land; acquisition prices: the Project Announce- the local influence of strong private land- ment (Anuncio del Proyecto) included in Law owning interests; the disruptive impacts

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Many sections of Brazil’s coastal land, as in Copacabana Beach in Rio de Janeiro, are publicly owned and leased to private users. of high inflation on land prices; and poor (and more secure) to occupy public than management practices. private lands. Again, although it is an almost univer- sally approved urban policy, only a few Land Leasing Latin American countries have applied land A significant amount of public land is dis- banking effectively. Mexico has used this posed under leasing concessions to private approach most systematically through its users who pay a fee for the right to occupy Reservas Territoriales program (Brito 1998). the land for a given time period, often in In perhaps the most interesting application, perpetuity. This type of lease is widely used the municipality of Aguascalientes man- in the region, especially in coastal areas. aged a successful program to prevent the Residents in the Copacabana beach neigh- establishment of informal settlements dur- borhood in Rio de Janeiro, for instance, ing the 1980s and 1990s. The administra- technically do not own their properties, just tion acquired land through expropriation the right to use and transfer them. Fees for and other negotiations to provide an alter- the right of use tend to be set at symbolic native to informal occupations while at levels and collection is often ignored. the same time imposing sanctions on sub- However, when land is transferred, a fee divisions offered by pirate developers (referred to as a laudemio) is charged up to (Jiménez Huerta 2013). The program was 5 percent of the transacted value. discontinued, however, when an opposing As in the case of land banking, there is political party took over the administration. little experience with land leasing as a value In general, land banking has a convolut- capture tool to promote urban development ed in Latin America, since publicly in the region. A notable case is the autono- owned assets are easily disposed of by the mous fiscal and administrative district of clientelistic practices of politicians, given the historic center of Havana, Cuba, which away for questionable projects, or invaded is under the control of the Office of the by low-income families who find it easier Historian. Through an operative corporation,

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Cia Habaguanex, the office restores buildings of multiple jurisdictions; consistent in the to rent, lease, or sell, and also sells special application of core principles over time; and services. A revolving fund, created by the effective in terms of the level of impact. lease payments, tax revenues, and interna- Although value capture instruments are tional donations for historic preservation, conventionally categorized as taxes, contribu- supplements the 5 percent tax collected on tions, fees, exactions, and regulatory charges revenues from businesses operating in reha- (Smolka and Amborski 2007), here they are bilitated buildings in the district. organized within three groups: On a somewhat smaller scale the munici- • taxes and fees, including betterment pality of San Fernando near Buenos Aires contributions; created a joint public-private entity that is • exactions and other regulatory charges owned 51 percent by the municipality and for building rights; and 49 percent by CACEL (the Argentinean • a variety of tools used in large urban Chamber of Light Boat Manufacturers). development projects. Through a 20-year lease, it administers the of a commercial marine on The distinctions are not exclusive, however, public riverfront land covering about 5 km2. because the same tool may embody subtle- Besides participating in the company’s prof- ties that defy classification. The Colombian its, the municipality receives CACEL’s an- Participación in Plusvalías, for example, can nual lease payment and other regular local support betterment contributions to recover taxes and fees that generated about US$4 the cost of public works investments or million in revenues over the last six years. exactions to capture the increased value re- Half of these funds have been used to sulting from a change in zoning regulations. finance social housing units and the upgrad- Moreover, in Colombia this instrument is ing of low-income neighborhoods and the considered a tribute or fee, but in Brazil a other half to invest in park improvements similar instrument that charges for addi- and public access along the river bank. tional building rights (Outorga Onerosa do Direito de Construir, OODC) is not. Under Selected Value Capture Tools Brazilian law building rights are not con- Over and above the rather erratic applica- sidered an inherent component of the real tion of otherwise ubiquitous institutional estate property right but rather a way of provisions affecting public land manage- using the property bestowed by the public ment, jurisdictions in most countries have (Rabello de Castro 2012). devised tools to capture some land value Similarly, in most uses of exactions where increment resulting from a public interven- the generating factor is flexibility in land tion. The variety of issues addressed under use norms, the compensation is often made many institutional circumstances often through public works to support the permit- results in a local interpretation being given ted new uses. Although the revenues collect- to the tools, which makes an objective ed by all of these kinds of tools are included assessment of their use very difficult. in the overall municipal budget, typically This report focuses on selected tools managed by the local treasury secretary, in that meet the following criteria: innovative some cases the value capture proceeds take and original; most relevant to the urban the form of in-kind compensation. problem being addressed; representative

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chapter 3 The Property Tax and Betterment Contributions © B orrero O choa y A sociados L tda ., B ogot á

roperty taxes, contributions, and rights is added to the regular property tax. Avenue Boyacava fees are typically levied on existing The Brazilian Supreme Court has ruled in Bogotá, Colombia, land values or on increments to that the charge on additional building rights is a north-south those values due to changed condi- (OODC) is not a tax but rather a charge route passing through residential and commer- tionsP or land uses. Revenues tend to be used imposed on the use of “additional building cial areas. This public to defray investment or maintenance costs rights that are not part of the owner’s assets work collected about for public works, transportation, and other but a that belongs to the city US$320 million in infrastructure. as a whole” (Rabello de Castro 2012, 18). betterment contributions. Some observers consider value capture The Property Tax a replacement for land value taxation at the Any tax on land value, typically levied only margin. But because property taxes are not on private property, is a form of value capture usually associated with any particular public in so far as much of the land value results intervention, others question whether they from accumulated public actions and invest- should be recognized as an instrument of ments. It follows that the property tax cap- value capture. tures some value since the tax rate applies In making their decision on where to to both buildings and land. This point has reside, individuals often consider the bundle led some to wrongly claim the imposition of of services offered by a jurisdiction in return double taxation when a charge on building for a particular property tax payment. The

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celebrated Tiebout hypothesis suggests that burden falls entirely on landowners, it does the property tax can be seen as a user charge not distort economic decisions in regard to because taxpayers can choose which juris- land use, and it does not generate the excess diction offers the highest level of benefits in burden (deadweight loss) common to most exchange for a particular tax rate (Fischel taxes (Oates and Schwab 2009). At the 2005). This hypothesis of “voting with your same time, it has a bearing on value capture feet” is weaker in Latin America than in the because public expenditures for infrastruc- United States because fiscal autonomy and ture and service improvements, norms and the share of property taxes in local revenues regulations affecting land uses, and other are minimal. locational attributes (externalities in general) are all fully capitalized in land values (as The property tax is, economically speaking, opposed to buildings that tend to be valued on their intrinsic attributes). a combination of one of the worst taxes— The same principles that solidly ground the part that is assessed on real estate land value taxation in economic theory apply in principle to value capture, since improvements . . . and one of the best taxes— public benefits are ultimately capitalized as the tax on land or site value. land value increments. Observed land prices can be perceived as either the accumulation William Vickrey (1999), Nobel Prize in Economics, 1996 of all land value increments over time or the present (or discounted) value of a stream of It has some bearing, though, on the de- land-based services expected to be obtained bates surrounding certain wealthy neighbor- in the future. hoods seeking more legal autonomy, such as In its more radical version that advocates the arguments raised by residents of Barra full confiscation of all rents related to public da Tijuca in Rio de Janeiro in the 1990s, actions, the would ultimately or as a criteria to redistribute a centrally eliminate the need for any additional value collected property tax among municipalities capture tool (George 1992). It should be in a fragmented context such as the metro- clear that a full tax on such land rents would politan area of Santiago, Chile. In both result in its market value dropping dramati- situations residents claimed that their tax cally as the present value of the expected share was higher than the services they re- flow of future rents net of taxes would also ceived. On the other hand, Bogotá’s voluntary be small. The landowner nevertheless would 10 percent supplemental tax payment allows still be taxed periodically for an amount taxpayers to choose how their additional corresponding to the total contributions should be spent from among of his land. 10 publicly provided city services, thus A system in which the property tax falls offering an opportunity for local taxes to entirely on the land value has few precedents. be treated as direct user payments (Pinilla The most significant experience can be found and Florián 2011). in Baja California in Mexico, especially in Mexicali (Perló Cohen and Zamorano Land Value Taxation 1999). In a recent study, López Padilla and The land value tax presents, in theory, many Gómez Rocha (2013) found that the shift to desirable features compared to the conven- a land value tax base in Mexicali improved tional land-plus-building property tax. Its tax collections by about 400 percent over

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the last 20 years. By 2005 Mexicali out- for only about 8 percent of total city revenues, performed comparable municipalities with second to the gross local income tax, and conventional tax bases, or at least matched it is charged at rates that increase progres- well-known high performers such as the sively according to bands of assessed much richer (in per capita income) city property values. of Hermosillo. In addition, there are indi- cations that Mexicali expanded at a higher Betterment Contributions density, as would be expected from theory. A betterment contribution (known as a In spite of these desirable features, tax special assessment in the United States) is a authorities in Latin America tend to favor charge or fee imposed on owners of selected the conventional property tax on land and properties to defray the cost of a public buildings due to the ease of observing and improvement or service from which they recording market transactions, as opposed specifically benefit (Borrero Ochoa 2011; to the more roundabout land value assess- Borrero Ochoa et al. 2011). It is not only ment methods for built-up areas. They have the oldest but likely the most consistently also been reluctant to implement land value used value capture instrument, with cases taxation in part because it could be regres- since the early nineteenth century in coun- sive for the large numbers of low-income tries such as Argentina, Brazil, and Colombia. families for whom the land represents a In Bogotá, the Bridge of the Commons higher share of their property value than was built in 1809 using a form of betterment their precarious housing structures contribution, although the first specific (De Cesare et al. 2003). national legislation was not approved until 1887. It was established to distribute the Temporary Property Tax Rate costs of dike projects to those benefiting Increase from their construction. “Subsequent legis- Value capture may also be associated with lation in 1921 authorized the use of assess- a temporary rate increase in property taxes, ments in rural areas for and as when an additional charge is applied for projects. By 1936, Law 195 allowed cities financing large-scale urban infrastructure hard-pressed to find infrastructure financ- that benefits all residents directly or indi- ing mechanisms to use special assessment rectly in proportion to their property values. financing to supplement existing resources” For example, to pay for a new 40 km sub- (Walker 2000, 114). way line in Buenos Aires that would double In Brazil, such a levy was introduced the existing capacity, Law 23.514 of 1987 constitutionally in 1934, but it had appeared created a special fund with a 5 percent addi- in a 1921 decree of the then Federal District tion to property taxes from all city residents, (Rio de Janeiro) as a real estate valorization plus another 2.4 percent surcharge for those contribution. In 1909, São Paulo established residents within 400 meters of the stations a law that the city council would only ap- (Cuenya et al. 2003). In 2012 revenues prove new streets proposed by private inter- accruing to this fund amounted to about ests if they would cover half of the pavement US$750 million. However, other revenue costs, and in the 1920s a pavement fee was sources from expressway tolls, betterment introduced (Sandroni 2001). contributions, and automobile licenses gen- Almost all Latin American countries now erated four times that amount. In general, have national laws that permit some version the property tax in Buenos Aires accounts of a valorization fee or charge to enable the

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public sector to capture the increments of .25 percent of all fiscal revenues and land value directly associated with public 6.8 percent of all property-related tributes investments (Manon and Macon 1977). Even (Afonso et al. 2010); and in Rosario, Argen- in El Salvador, where full property taxes tina, it accounted for .30 percent of own have not yet been introduced, the constitution revenues (Alvarez 2009). allows for the collection of special contribu- Some notable municipal outliers are in tions (Lungo and Oporto 1998). In Chile, Colombia, where in 1968, at the height of where value capture issues are still viewed its use, the betterment contribution was skeptically, contributions for pavement responsible for 45 percent of all local public programs have been promoted since 1927 expenditures in Medellín; in the early 1980s, and have been defined under law since 30 percent of Cali’s expenditures; and in 1953 (Cáceres and Sabatini 2002). 1993, 24 percent of Bogotá’s local revenues (Furtado 2000; Jaramillo 1998). After peri- Significant Variations in Performance ods of neglect in Bogotá its use resurged in In spite of the betterment levy’s apparent recent years, with about US$1 billion worth universality, it still plays a negligible role in of public works being funded by the instru- most jurisdictions’ finances, as it typically ment (table 3.1). accounts for much less than 1 percent of A lesser known outlier is the municipality own local revenues. In Mexico, for example, of Cuenca, Ecuador, which over the last 10 it represents no more than .42 percent of years issued 1,800 contracts for public works municipal revenues (Pérez Torres and Acosta projects and collected almost US$200 per Peña 2012); in Brazil in 2011 it represented capita, much higher than Bogotá’s US$150 in the same period. Cuenca’s US$25 per

Table 3.1 capita fees collected in the single year of Charges Collected from Public Works Programs Funded 2010 (totaling US$12.4 million) also far by Betterment Contributions in Bogotá, 1993–2013 surpassed those of Bogotá in any single Programs Year of Approval Date of Charge US$ (TRM) year. Cuenca also excelled in terms of per- Basic Valorization 1993 1993 106,160,600 formance, with 90 percent of across the City Subtotal 106,160,600 making their contributions in less than four years, 95 percent of the projects collecting

Forming the 1995 1996–1998 351,928,000 60 percent in betterment contributions, and City Program only 3 percent of contributors found to be 2001 2002 55,931,000 (Formar Ciudad) noncompliant. Subtotal 407,859,000 Collection of betterment contributions Agreement 180 2005 Phase I- 2007 and 2010 319,311,000 of 2005 (modified is not consistent among countries, or within Phase II- 2012 326,108,000 by Agreement countries among their jurisdictions or across 398 of 2009) Phase III- 2014 321,685,000 time. For example, in Mexico, only four Phase IV- 2016 105,000,000 states—Coahuila, Estado de México, Sonora, Subtotal 1,072,000,000 and Zacatecas—account for 86 percent

Agreement Ring Road #1 Charges in 2012 220,000,000 of total national revenues from betterment 451 of 2010 contributions (Pérez Torres and Acosta (Master Plan, Peña 2012). In Ecuador, 74 percent of all Zone North) betterment contributions are collected in Note: TRM represents the conversion rate from Pesos to US$ (millions) at the respective market value in each year during this time period. its three largest cities (Cuenca, Quito, and Source: Borrero Ochoa et al. (2011). Guayaquil), although they account for only

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30 percent of the population (Rodríguez Brazilian municipalities did the betterment Parque de la Madre in and Aulestia 2013). contribution represent more than 10 percent Cuenca, Ecuador, was Pereira (2012) shows for Brazil that of all tributes on properties. funded by about US$5 million in betterment although the betterment contribution in Whereas municipal size is an important contributions. the 2000–2010 decade overall was no more factor, larger population is associated with than 1 percent of total tributes on properties, higher collections in absolute terms, but the share in Maranhão, one of the poorest lower population is associated with higher states, was over 10 percent. The municipality collections relative to other local taxes— of Bacabal in this state has per capita possibly because the poorest and smallest GDP of only $1,300, but collected over municipalities collect little from the service US$32 per capita—about half of the high- sales tax. The share of contributions is 3 est per capita contribution in any city in percent of total revenue in municipalities the country. with fewer than 10,000 inhabitants, and the By contrast, São Jose dos Pinhais, in the share declines as population increases. Over state of Paraná (the sixth richest in Brazil), the 2000–2010 decade, no city in Brazil col- with a per capita GDP of about $13,000, lected as much as Bogotá or Cuenca (figure collected no more than US$12 in betterment 3.1). In other words, there is an enormous contributions per capita. The same study variance in the use of the instrument among indicates that for the state of Paraná munic- and within countries, and no robust relation ipal GDP is negatively related to the relative between its performance and a particular importance of this fee. For the country as a city’s size or wealth, suggesting that whole, per capita contributions were about may be playing an important role in explain- US$1.50. Overall in only 667 of the 5,505 ing the observed differences.

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Figure 3.1 Total Revenues from Betterment Contributions in Brazilian Municipalities, 2000–2010

No revenue US$0–6,700 US$6,701–70,127 US$70,128–15,276,430

Notes: 2,890 Brazilian municipalities (52.5 percent of all municipalities) collected some revenue from betterment contributions. The revenues were converted annually to US$. The abbreviations in the map refer to state names. Source: Pereira (2012).

Considerations in the Application it manageable. In practice the estimation of Betterment Contributions of the charge and its distribution among the Although the logic of paying a betterment beneficiaries of a project depends on several fee for an investment whose benefits will important considerations. exceed the fee is straightforward, the appli- cation of such an instrument can be quite The total cost of the project or complicated. This may explain its poor overall investment to be recovered performance as a revenue source and why In most places these are the direct costs, the most successful cases seem to rely on but in others some additional charges are rather arbitrary technical shortcuts to keep imposed, such as in Colombia’s Law 25

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of 1959 that authorizes adding up to independently of the project cost. Others, 30 percent to account for items such as like the Colombian Law 9 of 1989, are the costs of feasibility studies, interest, and more similar to a full-fledged cost-recovery administration associated with the public scheme since the charges are collected works (García Rojas 2012). In addition to independently of the benefit. direct costs, the law also includes an allow- The practical relevance of these distinc- ance for future cost contingencies. The tions emerges when distributing the charges amount to be recovered varies according to among individual properties in the impacted the jurisdiction and type of project. Author- area. In effect, technical imperfections in ities often consider the payment capacity properly estimating how each property in of contributors in the affected area when the defined impacted area will benefit often determining the total amount to be charged. leads to situations where the charge may be Most existing legislation limits the higher than the net benefit for some prop- amount to be recovered to the lowest value erties while others receive a lower share of of either the project cost or the land value the cost than of the accrued benefit. increment. That is, if the project generates a larger increment than its cost, the latter The overall land value increment, prevails, whereas if the estimated increment valorization, or benefits resulting from is lower, then only this amount is to be the investment recovered. Some legislation, such as the In principle any public investment should Water is trucked into Brazilian Law of 1967 (no longer in effect), generate some social improvement, yet not an informal settlement allowed recovery of the full value increment all benefits are necessarily reflected in land in Guayaquil, Ecuador. © M artim O. S molka

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value increases. For example, in a small city impacts of Bogotá’s Transmilenio bus rapid with a precarious water distribution system, transit system, obtained from various studies an area serviced with piped water has a that followed distinct methodologies, illus- land value premium that corresponds to trating the difficulty of assessing these land areas that must pay higher costs for water value increments. provided by trucks. Once water is universal- ized the land price differentials disappear Definition of the impacted area and and, at the same time, no additional land identification of all benefited properties values are added to the land price in the This can be a complex problem since the originally unserviced areas. That is, in spite size of the impacted area (or area of influ- of its great social benefit for the community, ence) depends on the relevant threshold the piped water investment may yield an established for the impact on individual overall net reduction of land values. properties and lower thresholds produce This suggests that citywide investments larger aggregate impacts. This interdepen- may not be good candidates for betterment dency is further aggravated if the impact fees. For example, public investments thought of the project varies among properties of as general interest projects may not be according to distance or even over time. desired by neighboring property owners. A When assessing the impacts of bus rapid study of São Paulo’s Ring Road shows that transit, for example, the properties closest the land value increments vary significantly, to the stations and the line may actually and negative values may occur between be valued lower than those in more inter- entry and exit points where the expressway mediate locations that still enjoy the conve- may generate noise and but no nience of access yet experience less noise clear accessibility benefits (Maciel 2009). and pollution. As distance increases Table 3.2 presents varying estimates of the from the stations, the impact progressively

Table 3.2 Studies of Bogotá’s TransMilenio Bus Rapid Transit (BRT) System and Property Values Study Method or Measurement Result Rodríguez and Rents on 494 properties in a 1.5 km A premium of 6.8 to 9.3 percent was found for every Targa (2004) area of influence surrounding two TransMilenio corridors. 5 minutes of time closer to a BRT station. Muñoz-Raskin Values of 130,692 new multifamily properties provided by Properties within the immediate proximity of feeder lines (2006) the Bogotá Department of Housing and Control from 2001 (0–5 minute walk) were valued higher than those requiring to 2004. a 5–10 minute walk. High-value properties were valued even higher if they were close to a feeder line, but the effect was the opposite for trunk lines. Mendieta-López Assessed property values from cadastral data in 2007 for Property prices increased between 12 and 38 percent, and Perdomo- 1,547 properties within 1 km of TransMilenio. depending on the distance to the BRT at 5-minute increments Calvo (2007) in walking time to a station. Perdomo-Calvo Analysis of 304 residential properties and 40 commercial Mixed results, with most comparisons yielding statistically et al. (2007) properties to compare asking prices in two zones, one with insignificant results. In only one case at standard levels of and one without BRT access. confidence, a premium of 22 percent for residential properties with BRT access was found. Rodríguez and Single-family properties at 1 km from the system network Premium between 15 and 20 percent, before inauguration; Mojica (2008) and local changes in land value from 2001 to 2006. no evidence of increments along the corridor that had no station but is now serviced by an extension. Source: Adapted from Rodríguez and Mojica (2008).

28 policy focus report � Lincoln Institute of Land Policy ...... © B orrero O choa y A sociados L tda ., B ogot á recedes to zero. The rate of perceived erty, for example by applying a factor to ac- A road interchange at decline in benefit with distance may not commodate corner properties compared to Street 100 and Avenue be constant (Rodríguez and Targa 2004; those within a block or with other unique 15 in a high-income area Flores 2011). attributes. of Bogotá was funded by betterment contributions. Again in practice the problem is resolved Two primary methods are used to distrib- by the application of known, fixed factors ute the charge among the individual bene- drawn from past comparable project contexts, fitted properties: the method of factors and as for example the long-standing practice the method of double valuation. The first for street paving projects of simply identify- describes the individual physical plot with a ing the beneficiaries as those properties series of known or predetermined attributes within 500 meters of the project, or for to calculate a score for each plot. These subway expansions, properties within a attributes may include the distance to the 600 meter impact radius around a station. public works, built-up area, density, number of retail stores, quality of the building, and The criteria to distribute the charge the use of the property (industrial, commer- among beneficiaries cial, residential, or charitable). In Colombia In principle charges should not be equal for the strata of the neighborhood is scored ac- otherwise similar properties with different cording to its access to urban infrastructure degrees of access to public works benefits, and services as well as socioeconomic attri- such as their relative physical location. Ad- butes of the occupants. All such scores are ditional adjustments can be made according used to determine the charges (Borrero to the size, frontage, or position of the prop- Ochoa 2011).

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These two methods are not very differ- ent since the parameters are (or should be) obtained from similar hedonic functions. In both methods interpolations of estimated values are made to generate so-called iso- beneficiary zones, that is, homogeneous zones where the same rate is applied to all plots in the area. Other more arbitrary procedures are sometimes used to distribute the added val- ue of public works, as illustrated for the city of Rosario, Argentina (Alvarez 2009). Plots located within the closest 50 percent of the influence zone absorbed 35 percent of the cost, those in the 50–80 percent influence zone received 24.5 percent, and those in the 80–100 percent zone (estimated originally as 500 meters from each side of the pave- © Diego Erba ment) absorbed 10.5 percent, with the The intersection of The second method relies on the applica- remaining 30 percent of the cost taken San Martin and Córdoba tion of impact factors from past experience up by the public entity. streets in Rosario, with comparable situations, typically obtained Argentina, was remodeled for pedestrian use with from hedonic econometric estimations of The payment schedule for the charges partial payments from the effects of relevant property attributes— Finally, the payment schedules also vary betterment contributions. that is, estimations of land value apprecia- significantly among jurisdictions in different tion from comparable types of projects, countries. For example, Colombia imposes interventions, and impacted areas. the total charge for small projects or a first This is illustrated by the estimation installment before the investment begins, provided by Chulipa (2007) in the city of but Brazil collects payments only upon Osorio in the state of Rio Grande do Sul completion of the project, allowing for in Brazil to forecast the likely impact of a grace period, and then up to five years a pavement program to be funded by the for full payment. In Cuenca, Ecuador, the World Bank. Using parameters obtained payment period can last up to seven years. from estimations of other plots in the city, Installments are also typically limited to a the plot distance from the central business percentage of the fiscal value of the bene- district or a subcenter, and the location with fited property (e.g., 3 percent in Rosario, respect to the new paved area, the study Argentina) or to a percentage of the annu- found a unit value of US$30.72 for plots ally collected property tax (90 percent in adjacent to paved areas and US$25.78 for Brazil and limited to five years). those without such access. A 19 percent rate of appreciation was applied to plots that Contributions Backing would benefit from the paving. Relying on Third-Party Loans original cadastral values for all plots, an Some successful cases of local public invest- overall estimate could be determined for ment funding involve input from extra- all locations affected by the project. municipal entities to help repay a loan or

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for pay-as-you-go financing with schemes urban amenities are typically occupied by grounded in betterment contributions. Some high-income families that were not charged examples are loans provided by the Inter- when these services were originally provided. American Development Bank (IADB) to Thus it would be unfair to impose charges San Pedro Sula, Honduras, since 1985; and on those who receive the publicly provided the Paraná-Urbano programs in the state services later. of Paraná, Brazil, in the 1990s through its Evidence shows that expectations regard- financial agency Paranacidade (originally ing publicly funded future upgrading pro- funded by the IADB; Goelzer and Saad grams lead to higher markups or premiums 1999; Pereira 2012). These initiatives include on current land prices in irregular or illegal a capacity-building program, since many settlements. Charging residents for infra- small local jurisdictions receiving loans structure benefits would shift the responsi- are unfamiliar with such instruments. In bility for collecting the payment from the Honduras, most of these IADB projects subdivider to the government. In other after 2001 were for local sanitary sewer words it is not the case that low-income infrastructure, and one was to rehabilitate families cannot pay for certain costs. They a school (Kehew 2002). are already paying the charge to the sub- More recently the case of the Co-respon- divider through inflated land prices rather sabilidade para el Bien Vivir promoted by the than to the public provider of the services Ecuadorian Bank offers access to subsidized (Smolka and Iracheta 1999). credit to municipalities willing to increase This point seems to be well understood their fiscal effort (in essence, a betterment by many lower-income populations, like contribution) as charges associated with the those in Lima, Peru, where a successful urban infrastructure investments funded by program featuring some 30 projects used the bank’s credit line. This program resulted a contributory tool to finance public works in an increase in municipal contributions of in the early 1990s. Low-income beneficia- 67 percent, from US$4.9 million to US$8.2 ries met the payments since they represented million, allowing these municipalities to a guarantee of service. Yet, when the policy access over US$20 million in credit. The was extended to higher-income neighbor- program focused on the 112 municipalities hoods, it generated such strong resistance with populations over 20,000, but excluded that it was ultimately discontinued (Gamarra the three largest cities of Ecuador; 82 of Huayapa 2008). these municipalities adhered to the program, The alleged inability of poor urban indicating that people will pay increases populations to pay for improved services in local tributes that are linked to greater appears to be a myth. In practice, the strat- investment in public works. egy of attracting some public intervention to one’s neighborhood, even if it means Are Betterment Contributions paying some of the costs, is perceived as Anti-Poor? better than no service at all. The charges It is often argued that it is unfair to charge must be reasonable, however, because in the urban poor who benefit from the provi- some cases the policy has been applied in sion of urban infrastructure and services, low-income areas not to benefit the occu- for the cost of upgrading or regularization pants, for example, but to justify programs. The critique is based on the sug- or force out those who cannot pay for gestion that the areas best endowed with the improvements.

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chapter 4 Exactions and Charges for Building Rights

ctions taken by local planning Exactions authorities regarding urban norms Exactions are the most common value cap- and regulations often affect land ture tool used throughout Latin America. uses or users, and in turn create They illustrate how landowners may be The access road directA or indirect land value increments for compelled to make cash or in-kind contri- Boulevard Los Próceres butions to obtain special approvals or per- in Guatemala City was a single plot or a group of plots. Capturing funded with the Impacto that increment to benefit society is accom- mission to develop or build on their land. Vial instrument. plished through the use of cash or in-kind These contributions may be stipulated exactions and other types of charges for through subdivision or development the use of building rights. agreements based on a particular norm or expectation, or they may be negotiated on an individual basis. In-kind exactions require the land devel- opers to set apart some of the land for pub- lic facilities, including streets, schools, parks, or environmental conservation areas. The most common example in the region requires the land subdivider to release from 15 to 35 percent of the area for public uses. Though ignored in many lower-income subdivisions on affordability grounds, these contributions are often supported by developers of high- end projects on well-located sites with strong valorization potential. In the municipality of Iribarren, Venezuela, a group of land- owners actively agreed to contribute to the implementation of many public works, including a park, to enhance the area. In a São Paulo case, a developer applied for air rights to build an overpass between a shopping center and a garage in another building across the street. His initial expecta- tion of the exaction amount was US$15,000, but after the negotiation he had to pay US$5 million for these rights, based on the costs estimated by public officials that the shopping center would incur to provide public parking facilities if the overpass was not built. An important lesson can be drawn from this case: when negotiating for an exaction, © Municipality of Guatemala City, Department of Public Works

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its upper limit should include the land hood are notified of a charge to cover the value increment resulting from the approved budget gap. When the type of required exceptions granted to the project. project to mitigate the impacts is still too In Rio de Janeiro, the municipality costly, an earmarked fund is created to required the developer of office collect contributions from other licenses towers to renovate nearby historic buildings or actual projects in the area. and build a large tank to store rainwater This process is similar to a cost-recovery runoff. In the new expansion area of Barra betterment contribution since the fee is as- da Tijuca, land developers were required sociated directly with the cost of the public to extend sewerage trunk lines as part of works. It can also be compared to the one- the agreements to allow construction of time monetary levy (known as an impact new buildings. or development fee) that developers in some Other more ad hoc forms of exactions U.S. counties must remit to the local govern- include those negotiated directly between ment in order to obtain a building permit. the developer and the local authorities when The differences are that the Guatemalan a license request is submitted for a project policy has a narrower scope and that devel- that may generate negative externalities opers make in-kind payments. Typically in the form of , as in the payments do not even pass through the Guatemala, or that modifies existing build- municipal coffers because the work is done ings or land use norms and regulations, directly by private agents who are consid- as in Córdoba, Argentina. ered more efficient than the public entities. For example, overpasses have been built in Mitigating Road Traffic Impacts four months by private contractors, when in Guatemala they may take from 12 to 16 months if An instrument known as Impacto Vial has executed by the government. been devised in Guatemala whereby the re- For large projects with strong negative sponsibility for road improvements is shifted traffic impacts the mitigating works must to private developers for investments that be concluded before the inauguration of otherwise would be borne by the public. the development. Since 2006 this instrument When a large private development project has funded nearly all the road construction, is submitted for a license, a road traffic totaling more than US$20 million (Munici- study evaluates its impacts on the surround- palidad de Guatemala 2013). It is not con- ing community. An infrastructure plan is sidered to be a fee but a mitigation exaction then designed to mitigate any negative for road traffic impacts. impacts, together with a calculation of the share of the cost the developer should cover. The Use of Exactions in Argentina The work itself is executed by the devel- Argentina does not yet have national legisla- oper under municipal supervision. Should tion to support specific means for capturing the cost of the work be higher than the land value increments, but certain munici- developer’s estimated share, the value of the palities have some autonomy granted by license (about 4.5 percent of total building Article 123 of the National Constitution costs, typically US$230/m2) is also used to and have enacted legislation to that effect. make up for the difference. If both combined Ramon Esteban (2007, 4), former secretary sources of funding are insufficient, then of planning and now a current city coun- other prospective projects in the neighbor- cilor in the municipality of San Fernando

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then soliciting, negotiating, or de- manding from them some infrastruc- ollinati

M ture works or improvements in the area of the city where the authorized atalina

© C development takes place.

The city of Córdoba, through Articles 180 to 188 of its province’s constitution, exer- cises its autonomy through its charter that affirms its competence to establish and modify land use norms and regulations. Under this mandate the city has been able to charge for changes in existing building norms and impose an obligation on devel- opers through what is referred to as com- plementary public works. Under this local legislation the municipality defines the pub- lic works to be executed by the developer seeking a change of land use for his own project. As a condition for obtaining the final inspection certificateor f the building (a requirement for its registration), the specific public orksw improvements must be finalized. An ordinance from the city’s Deliberating Council in 2007 determined that changes in land use norms and regulations convey- ing additional land use benefits to the owner or developer would require a compensation payment in proportion to the benefit. Such payments are provided in-kind in the form of sewer services, drainage, public lighting, or other public works the municipality finds necessary and of comparable cost to the A new tower in the in the province of Buenos Aires, synthesized benefit received. Portal del Abasto zone the relevance of this tool in the region: In another form of exaction, the negotia- of Córdoba, Argentina, required the payment of We do not know of municipalities tion may involve changes in building norms exactions to obtain a or other Argentinean state entities that place no direct additional burden on change in building that act explicitly in relation to value existing urban infrastructure and services. norms. capture. We believe nevertheless that In one Córdoba case, a project in the Portal municipalities act informally by either del Abasto zone at the south margin of the commission or omission. They autho- Suquía River actually proposed a reduction rize developments within the legal of the total area to be built from 12,000 to 2 framework or exempt them of com- 11,000 m , lowering the FAR from 4.5 to pliance with existing land use norms, 4.1. However, the project created a new

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tower of 16 stories that enclosed about that limit required payments based on the 6,300 m2 over the allowed height of the additional square meters of built area. original building of seven stories. Whereas Brazilian lawyers, planners, and other the norms limit land coverage to 80 percent, urban experts gathered in Embu, in rural the proposed new tower covers only 64 per- São Paulo State, in 1976 to sort out the con- cent of its plot. After the valorization of troversial issues of legally separating land- the whole project in 2011, the developer related rights. Although such a change was was asked to return the equivalent of about originally considered unlawful, a precedent US$220,000 to the city for the change granted was found in the existing regulations affect- in land use rights. This contribution was ing subdivisions that limited building rights to be paid in-kind in lieu of cash. by the area granted to the public for roads and other facilities. This approach illus- Charges for trates how authorities with sufficient politi- Building Rights cal motivation can find creative solutions to Instruments in this category are based on otherwise intractable juridical situations. the separation of building rights from land The first attempt to introduce this con- ownership rights, which allows the public to cept into a national law in 1983 failed, but recover the land value increment resulting it was later included in the Statute of the from development rights over and above City in 2001, referencing articles 182 and an established baseline. 183 of Brazil’s 1988 Federal Constitution. Precedent for this instrument is found Since then a mandate has been granted to in Italy, when in 1971 members of the Euro- all municipalities that enables them to charge pean Economic Commission (EEC) and for any approved building rights over and housing and urban planning experts pro- above a baseline. Technically speaking the posed the separation of building and prop- additional square footage of the building erty rights, suggesting that the former should constitutes public patrimony, and is not to belong to the community and be granted be given away to favor one citizen above exclusively by public authorities (Furtado another. et al. 2010). Other references can be found Over time the charges levied have in Spain, Great Britain, and Colombia; in evolved from the more ad-hoc manner of a memorandum from the 1976 UN-Habitat exactions, whereby compensation for build- meeting in Vancouver; and in the U.S. city ing rights is negotiated directly with authori- of . ties, into one where it is calculated according However, the French urban reform and to predefined criteria applying to any devel- land policy of 1975, Plafond Légal de Densité, oper seeking additional building rights. In likely had more influence on Brazilian dis- a further extension to more systematic and cussions in 1976, when this notion was first consistent rules, the policy shifted from ex- raised among urban experts. This law sought traordinary building rights to any additional to enhance land use control efficiency, reduce right over and above a common baseline, social inequalities, and promote more citizen and to all properties in the city or in a well- participation in planning. It sets a density defined zone based on the master plan. ceiling (FAR) of 1 by right for most of the country, with the exception of Paris, where Linkage Operations it was fixed at 1.5. Any building rights A linkage operation is a particular type of admitted by local legislation over and above charge that offers permission to build at a

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higher density or FAR in exchange for the expansion area of the city. The 23 requests developer contributing toward, or actually in the later period included 11 for changes providing, units or other of land use, 10 for building height, and the community benefits. These policies have remaining two for occupation ratios or been used as much in and San Fran- other changes. The operations generated cisco as in São Paulo and Rio de Janeiro US$26.7 million, with US$12 million in (Alterman 1989), though not explicitly in the peak year of 1999 (Xavier 2011). other Latin American countries. In some The main criticisms of this approach cases, linkage requirements may be imposed involved issues of irregular management of along with exactions, as in the Urban Code the approvals, because many of them were approved in Querétaro, Mexico, in 2012 not submitted to the Municipal Council of (though not yet implemented), or as mandates Urban Policy as required by the law. Under- within Uruguay’s integrated action program estimation of the value of additional build- (Programa de Actuación Integrada). ing rights and the diversion of the funds In the case of São Paulo, the linkage from the original purpose were just two policy evolved from a 1986 zoning law of the other abuses observed. whereby owners of high-valued land occu- The possibility of paying the assessed pied by slums could request higher FAR or valorization in special areas, such as histori- other uses for the property as long as they cal heritage or environmental preservation built social housing for the original occu- projects, opened the way for underpayment pants who would be displaced. A municipal of the effective accrued land value incre- decree in 1988 extended the prerogative ment. Urban planners and other analysts to owners of land not occupied by slums, also questioned its role in gentrifying the thereby establishing a broader linkage pro- original neighborhoods, since most new gram. In 1995 landowners were allowed social housing was built on the urban to pay their compensation in money rather periphery. than in social housing itself, since most de- These issues and other administrative velopers argued that they were not interested irregularities created a social image of in the social housing business. From 1987 to arbitrary decisions associated with political 1998 an additional 857,424 m2 of building influence and corruption. The selling of area was approved by the city of São Paulo zoning exceptions under criteria defined in about 328 linkage operations generating at a commission level rather than by a legis- US$122.5 million (US$142/ m2) that in lative body was deemed unconstitutional, turn funded 13,000 social housing units and these operations were halted in 1998 in (Sandroni 2011). São Paulo and in 2000 in Rio de Janeiro In Rio de Janeiro, 100 applications for (Cymbalista and Santoro 2006). linkage operations were made to the city’s secretariat of urban development through Participación en Plusvalías November 2000, after the establishment of in Colombia Law 16 of 1992 and of regulations in Law The 1997 Law 388 in Colombia addresses 2128 in 1994. Of 36 approved operations charges for changes in building rights through (13 from 1993 to 1996 and 23 from 1997 the Participación en Plusvalías instrument, to 2000), 26 were finalized and 22 of these whereby 30 to 50 percent of the assessed were for projects to be developed in the increased land values resulting from admin- Barra da Tijuca neighborhood, a planned istrative actions, such as for density, zoning,

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or rural to urban land conversion, may also could support. It imposes a charge for the right be subject to partial recovery by the public. to develop land above a basic FAR as defined Payments to be made in cash or in-kind by the municipality up to a higher level es- are designated primarily for the provision tablished in its master plan. It also applies to of social housing and infrastructure in other types of changes yielding more profit- underserved neighborhoods, as well as able land use options, such as conversions for public works of general interest. from rural to urban uses or the rezoning Despite initially high expectations for of areas for renovation or commercial uses. its success, the instrument has yet to show The legitimacy of the charge is grounded its strength. In Bogotá, revenues increased in two ideas: the implicit understanding that from about US$6 million in 2005 to US$8.5 in order to support the additional building million in 2008, US$25 million in 2011, rights or higher land uses the public has to and an expected US$40 million in 2012, provide investments in urban infrastructure but these amounts are considered far below and services; and second, the principle that the potential annual revenue (Parodi 2010). the public cannot favor one property over Notwithstanding its conceptual consisten- others when granting additional building cy, the instrument’s regulations are loaded rights or new land uses. Thus, the instru- with costly, cumbersome, and contradictory ment potentially allows all landowners to administrative procedures leading to conflicts share the benefits resulting from public in- and ample margin for different interpreta- terventions supporting urban development. tions (Maldonado 2008). Elaborate guaran- A basic FAR is not necessarily set at 1, it tees to protect citizen interests created un- may not be uniform across the city, and the certainty for both public and private agents. percentage of the accrued land value incre- The crux of the matter is the norm used to ment also may vary. The city of Curitiba, calculate the value of the increment, since it for instance, has been selling building rights considers the situation before Law 388 was since 1991. Higher FARs were granted for implemented and not the current situation. free in some sectors of the city as an instru- From a legal perspective this opened the ment to promote transit-oriented development way for the recognition of acquired rights in corridors where bus rapid transit systems by landowners, reinforced by the fact that where installed. The maximum FAR limit before the enactment of the law in 1997 was raised even further for developers pay- many cities had overly generous, and often ing into a fund earmarked for social housing. unlimited, norms and regulations regarding The rights for building additional density urban development projects. In addition, were generally sold at less than the full the implementation process and the admin- appreciation value under the debatable istrative operation of the mandates are premise that this policy would stimulate time-consuming and complex. denser development, and thus help to defray part of the transit investment costs The Use of OODC in Brazil (Teixeira and Moreira 2011). The instrument that regulates charges for additional building rights in Brazil (Outorga Calculating the Value of Onerosa do Direito de Construir, OODC) is based Building Rights on the notion that the landowner’s property Different methods or formulas are used to right is limited to a basic FAR coefficient calculate the land value increment resulting that is different from the maximum the area from the OODC, but all such methods have

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Charges for building limited accuracy, since no two plots of land build the additional 500 m2 on the same rights in Curitiba, or development projects are perfectly com- plot. For this additional area the developer Brazil, have helped to parable. In theory, the value of land developed would be paying the equivalent of two more promote transit-oriented development. with an FAR of 3 compared to a baseline plots of land with the original or pre-exist- FAR equal to 1 should be the difference be- ing FAR of 1 in the same area that has now tween the residual values of their respective been zoned for a higher FAR. This base highest and best uses. In practice, this is not square-meter value of land for the zone is so simple since no two buildings in the area obtained from the city valuation maps used are the same and changes in some plots for property taxation purposes. This method affect the for nearby is used by cities such as Blumenau, Curitiba, plots. Higher density is not always more Porto Alegre, Salvador, and São Luis (Fur- profitable for developers, thus in certain tado et al. 2010). Again, this is a proxy for areas the maximum allowable FAR may not the real value as conditions will change once be of interest to them, including in some an area is rezoned, but it allows for some high-end areas (Furtado and Silva 2010). consistency. These complications are only partially In practice, charges for additional build- resolved by the prevailing so-called virtual ing rights vary among jurisdictions applying land method. Under this method a develop- the instrument, and difficulties in assessing er interested in a 750 m2 building in a zone the value of the additional building rights where the basic FAR is 1 and the maximum have led many jurisdictions to adopt short- is equal to 3 could either acquire a plot of cuts relying on base values that are proxies 750 m2 or one of 250 m2 and in addition for or are only indirectly related to the accrued acquire building rights through OODC to land value increment. The cities of Flori-

38 policy focus report � Lincoln Institute of Land Policy ......

anopolis and Natal, for example, calculate Silva 2010). New master plan legislation in the charge as a percentage of the basic unit 2011 raised the basic FARs to 3 or 4 in places of construction cost applied to the additional such as Copacabana and other high-end area to be built, which some argue is more areas, with the possibility of designating even like a building permit fee (Furtado et al. 2010). more areas under special circumstances, vir- Adjustment factors to the assessed value tually eliminating the baseline for the charge. are also typical, with some of them defined The majority of Brazilian cities are not on technical but on politically negotiated not yet able to ensure implementation of grounds (e.g., in the municipalities of Goiânia this law. Challenges include the necessary and Alvorada). While Campo Grande existence of a master plan and zoning pre- charges a fixed 70 percent of the estimated scriptions, a detailed formula of how the land value increment, Salvador simply building rights are to be assessed, forms of applies 50 percent over the original value payment, definition of rules to apply the on the property. Though some cities refer resources (usually by the establishment of to the estimated market value, others rely a special fund), and a council to oversee on the fiscal value (Furtado et al. 2010). the resources. These requirements are out of reach Challenges in the Application for more than 90 percent of Brazil’s 5,565 of OODC municipalities, especially those with a popu- The 2001 Statute of the City imposed lation below 50,000. According to the 2008 a mandate on all municipalities to charge Municipal Management Survey (MUNIC) for any conceded building rights over and dedicated to land use norms and regulations, above the baseline. Many jurisdictions are only 881 municipalities contemplated incor- still unwilling or unprepared to apply this porating the OODC (let alone implement- legal mandate, and they circumvent it by ing it). Among the 1,626 municipalities with setting the basic FAR coefficient at the more than 20,000 inhabitants, 323 (about maximum level. Since property rights are 20 percent) did not even have a master usually defined by national constitutional plan, in open violation of the 2001 statute law, some analysts have concluded that to (IBGE 2008). make OODC operative and consistent, the On the other hand, promising progress basic FAR should also be set at the national has been made. In 2001 only 221 munici- level, or an extra-municipal law should be palities had passed the required legislation, enforced to reduce the vulnerability of whereas by 2009 the number increased local authorities to succumb to landowner to 1,059. In a study revisiting the 2005 interests. MUNIC survey, a random sample of 60 An extreme case is Rio de Janeiro, whose municipalities out of the 241 municipalities administration has ignored the mandate, with more than 50,000 inhabitants at the in part due to the city’s ease in obtaining time stated they had the legislation for funds to prepare for the 2014 World Cup OODC, but in only 39 or 65 percent of and 2016 Olympics. Its 1992 master plan them did it actually exist, and in only eight established a basic FAR of 1 for the whole of those (or 13.3 percent of the full sample) city, with higher maximum FARs in certain was it being implemented effectively by zones, although no initiatives have been 2007 (Cymbalista and Pollini 2009). taken to actually regulate charges for the Consistent with other findings, the more corresponding building rights (Furtado and qualitative study by Furtado et al. (2010)

smolka � Implementing Value Capture in Latin America 39 ......

found that many cities stating they had collected about US$17.5 million in ad hoc applied the OODC had actually relied on charges for building rights (Gazeta do Povo round-about formulas or other adjustment 2013) and São Paulo about US$250 million factors to accommodate local stakeholder (Maleronka and Furtado 2013). interests (e.g., real estate developers and landowners), resulting in revenues at only Implementation of OODC in symbolic levels. São Paulo and Rio de Janeiro In Curitiba, for example, in spite of the To implement OODC in the municipality OODC’s longstanding presence, the aver- of São Paulo between 2002 and 2004, pre- age annual revenue from 2007 to 2009 was existing FAR coefficients were reduced to 1, about US$1.5 million (Teixeira and Moreira but in some areas an allowance was made to 2011). These values contrast dramatically 1.5 and even 2. The city also redesigned the with the performance of São Paulo, which maximum FAR maps ranging from 1 to 4 earned more than US$50 million per year in (and thus the associated potential margins that period, although they are quite differ- for applying the OODC). In some areas ent types of cities and Curitiba’s population the FAR could then be lower than, equal to, is only about one-third that of São Paulo or even higher than the original pre-existing (Sandroni 2010). In 2011 and 2012, Curitiba FARs (table 4.1).

Table 4.1 Changes in FAR Coefficients in São Paulo, 2002–2004

Land Use Zones Established Basic FAR by the Strategic Development FAR up to Maximum Plan in 2002 Land Use Zones before 2002 2002 In 2003 From 2004 on FAR Exclusive Residential Zones (ZER) Strict horizontal single-family residential 1.0 1.0 1.0 1.0 zone (Z1) Mixed Use Zones (ZM) Predominant horizontal residences 1.0 1.0 1.0 1.0 zone (Z9) Predominant low demographic density 1.0 1.0 1.0 2.5 residential zone (Z2) Predominant low demographic density 1.0 1.0 1.0 2.0 residential zone (Z11, Z13, Z17, Z18) Predominant medium demographic 2.5 2.0 2.0 4.0 density residential zone (Z3, Z10, Z12) Mixed use zones and medium high 3.0 2.5 2.0 4.0 demographic density zone (Z4) Mixed use zones and high demographic 3.5 3.0 2.0 4.0 density zone (Z5) Special use zones (Z8 007-02, -04, -05, 3.0 2.5 2.0 4.0 -08, -11, -12) Special use zones (Z8 007-10, -13) 2.0 2.0 2.0 4.0 Special uses zones (Z8 060-01, -03) 1.5 1.0 1.0 2.5 Mixed use with predominance of 2.5 1.5 1.0 4.0 commerce and services zone (Z19) Industrial Zones under Predominant industrial zone (Z6) 1.5 1.0 1.0 2.5 Restructuring (ZIR) Strict industrial zone (Z7) 1.0 1.0 1.0 2.5 Source: Adapted by the author from São Paulo municipal data.

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Contrary to expectations, no major not yet applied for building licenses could judicial cases were filed for what many may not necessarily claim acquired rights based consider to be a reduction of land property on the pre-existing FARs (box 4.1). Clearly, rights, illustrating that properties that had land building potential was reduced, since a

Box 4.1 Acquired Rights versus Takings in Rio de Janeiro

and value increments are generated L after the authorization for a new land use is granted (usually through the building license). Before this occurs, only general norms and regulations are in place, and they do not actually generate rights or the possi- bility of charging for the increments. In other words, the request for the building license generates the right to demand payment as

a result of new anticipated development. © M artim This limitation is not a taking, as often sug-

gested. Technically a taking occurs when a O. S

change in the norms and regulations leaves molka a property with no possibility of economic use—for instance, when the pre-existing The sign states: “Mr. Mayor (Rio de Janeiro) — This APAC (designated area of norm allowed for housing and the area is cultural/historical/environmental protection) devalued our properties. A private now to be used only for conservation, property is the fruit of a struggle!” However, this zoning regulation did not devalue the property, but rather affected the potential value if the property with no possibility of commercial exploitation. were to be converted for a more intensive use with a higher FAR. Alternatively, a taking would occur when a change in norms and regulations affects only one landowner, constituting a taking without compensation. A change in norms and regulations that still allows for the land to be used, albeit charging for it, is not a taking. No legislative body recognizes a pub- lic obligation to compensate for an unfavor- able change of norms and regulations or for the elimination of rights for unrealized and as yet unauthorized land uses. © M

Signs adorn a multifamily property artim in Rio de Janeiro with APAC protection. O

The owners are protesting that it . S molka cannot be demolished so they could build a larger structure.

smolka � Implementing Value Capture in Latin America 41 ......

Figure 4.1 Comparison of Revenues from OODC and the Property Tax in Sào Paulo, 2002–2011

250 10.00% 8.9% 9.00% Residential Use 200 Non Residential Use 8.00% Total OODC 7.00% OODC/IPTU 150 5.0% 6.00% 4.8% 5.00%

100 3.7% 3.7% 4.00% US$ Milions

2.4% 3.00% 50 1.8% 2.00% 0.8% 1.00% 0.0% 0 0.00% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Maleronka and Furtado (2013).

charge would now be imposed on what distributed through the FUNDURB by six landowners previously perceived as a right municipal secretaries for projects including to build free of any charges. Many factors bus terminals, transportation corridors, may explain this outcome, the most impor- parks and green areas, regularization, tant one being that at the time of imple- historical preservation, and drainage mentation in 2004 the real estate market (Maleronka and Furtado 2013). With the was expanding and thus veiled the net im- increasing use of the instrument, future pact on landowners who viewed their prop- improvements expected as part of the man- erty as combining land, buildings, and other date must take into account the realities improvements (Sandroni 2011). The success of the real estate market. of the São Paulo case relative to Rio de Janeiro suggests that proper care in timing Transfer of may be critical for changing the regulatory Development Rights regime into one that can take advantage Transfer of development rights (TDR) is a of value capture. certificate by which the city administration Figure 4.1 presents the revenues obtained compensates an owner in-kind for constraints from OODC payments over nine years that on building rights imposed on the property included the global financial crisis and its (e.g., historical preservation or environmen- consequent restricted credit. These funds tal conservation) or when the owner surren- are deposited into the Urban Development ders some of his land for a public interest Fund (FUNDURB), created to implement project such as widening a road, creating a special plans and projects in urban and park, or rehabilitating a slum. These rights environmental areas or other interventions can be sold to third parties or used directly contemplated in São Paulo’s 2002 muni- in developments in predefined receiving cipal plan. In 2012 about US$175 million areas. The instrument has also been used to originating from OODC payments were facilitate the imposition of stricter norms on

42 policy focus report � Lincoln Institute of Land Policy ......

building rights within certain areas, as when The feasibility of this scheme was constraints are specific for FARs on single grounded in the city’s policy since 1979, plots but not in the whole zone or sector when the municipality began charging for where the plot is located. These principles development rights generated by land ex- are incorporated in urban legislation such propriated for public works such as parks as the Brazilian Statute of the City and and streets. Since the original building Law 388 in Colombia. rights were already defined, development In a successful TDR case, the municipality rights could be bought for use on other plots of Porto Alegre, Brazil, managed to acquire within the planning zone of the expropriated an extensive area for a new artery, 3a Avenida area or elsewhere in the city. Perimetral, by compensating property own- The absence of similar municipal pre- ers with development rights that could be rogatives in the application of TDR in used elsewhere in the city. As a result of the Mexico City is demonstrated in an attempt 13.2 hectares of land acquired along the to use it in the late 1980s as a tool to finance 12.3 km extension and 40-meter-wide avenue, the recovery of the historical center. Since including exclusive tracks for bus rapid tran- no clear norms existed to impose on devel- sit, 50 percent of the cost (US$9.8 million) opers a charge for the additional building New transportation infrastructure in Porto was covered by TDRs, representing 65 rights in the receiving area, the project Alegre, Brazil, is made percent of the land acquired in a way that relied on the discretionary concession of possible by the use avoided expropriation or contested judicial such rights by planning authorities. It was of transfer of orders (Uzon 2007). suspended in the 2000s under mounting development rights. © C ristine R ochol / P orto A legre M unicip al G o vernment

smolka � Implementing Value Capture in Latin America 43 ......

suspicions of bribes for such concessions, as Care must be taken in applying TDRs well as for lack of enforcement when certain and other instruments that charge for build- landowners and investors requested more ing rights such as the OODC. On the one flexible land use norms and regulations, hand a property owner may be properly which were given generously, thus voiding compensated for building rights that must the effectiveness of the TDR charges. be surrendered, for example, for historical In another interesting application of preservation purposes, but on the other TDR, the city of Curitiba raised the funds, hand developers must buy building rights originally estimated at US$45 million and if they want to build over and above the later increased to US$62 million, for needed baseline. This can create confusion about renovations of the Joaquim Américo soccer how to compensate the owners whose stadium, owned by the Atletico Paranaense building rights are taken. Club, to comply with the rules of the Inter- A partial solution to this conundrum is national Federation of Football Associations to limit TDR compensation to the value of for its use in the 2014 World Cup matches. the actual building right up to the relevant To rebuild the stadium, Paraná’s state gov- baseline. Thus, if an historic building actu- ernment received a loan from the Brazilian ally uses a FAR of .75 but the baseline FAR National Development Bank (BNDES) to for the zone is 1.25 and the maximum FAR be transferred to the club, which in turn is 3.25, then the property owner may be received building rights from the city to be compensated up to .50 (1.25-.75), not 2.5 used as . Critics of this financial (3.25-.75). Other developers would have to scheme argued that the large number of acquire the additional 2.0 FAR (3.25-1.25), building rights being issued by the city but it would not be fair to compensate the would devalue the land and jeopardize historic property for that full amount. the whole operation.

44 policy focus report � Lincoln Institute of Land Policy ......

chapter 5 Value Capture Tools for Large Urban Redevelopment Projects © A lvaro U ribe

any cities in Latin America their serviced land to recover their own Puerto Madero in have initiated large-scale re- investments. Buenos Aires, Argentina, development projects in newly Urban reforms, like those initiated in was redeveloped on public land in the old incorporated yet nonurbanized Paris by Baron Haussmann, were also intro- district to stimulate Mperipheral areas or in abandoned or vacant duced in Latin America in the early twentieth economic recovery in sections of older neighborhoods (Lungo century by Mayor Pereira Passos in Rio de the metropolitan region. 2004). The projects typically involve rezon- Janeiro from 1903 to 1906 and by interna- ing and updating the urban infrastructure tional urbanists such as Alfred Agache in and services, often resulting in significant his 1930 master plan for Rio de Janeiro benefits for the original landowners. Various and Karl Brunner’s 1930 plan for Santiago, instruments have been devised to defray Chile, as well as in New schemes for some of the costs incurred. These initiatives Caracas, Venezuela, and São Paulo, Brazil have antecedents in the past, when entire (Almandoz 2004). These plans included neighborhoods were created by public utili- language referring implicitly to the internal- ties that used the land value increment on ization of prospective externalities created

smolka � Implementing Value Capture in Latin America 45 ...... © M artim

Renovated warehouses O. S along the harbor molka bring visitors to Puerto Madero.

from the proposed well-designed, multi- and more than US$2.26 billion in private faceted projects. investments have been triggered by the ini- tiative. By 2011 the corporation had sold Privatizing Public around US$230 million worth of land— Land for Redevelopment: a value resulting from the internalization Puerto Madero, of externalities created by the project. The Buenos Aires proceeds funded public works worth US$113 The emblematic case of Puerto Madero in million and an overhead for management Buenos Aires comprised the fees and the like. of ​160 hectares of the old port located near The initial investment included the land downtown and owned by a federal agency, (assessed originally at US$60 million) and the General Administration of (AGP). a set of intangible services (project design, The redevelopment project was proposed expertise, consulting), reaching a total of in 1989 in the context of a financial crisis US$120 million. Land values per square to promote economic recovery and job meter were originally set at US$150–300, creation, as well as to reaffirm the primacy were later traded at US$600, and today of downtown Buenos Aires within its exceed US$1,000. Most of the recent metropolitan system. valorization is no longer captured by the A corporation was created to undertake corporation but by private investors who the project with participation from the reap the benefits from their control of national and city governments. Over the large parts of the development area. last 20 years about 1.5 million m2 of floor The project has contributed four major space has been developed, which is compa- waterways covering 39 hectares and 28 rable to the annual rate of 1.5 to 3 million hectares of green space for the city’s park m2 throughout the city of Buenos Aires. system. Puerto Madero today is a premier The state contributed the idle port land, tourist destination of Buenos Aires and has

46 policy focus report � Lincoln Institute of Land Policy ......

stimulated development in the central city Usme is an area located in the southeast- as intended. In 2011 the corporation trans- ern sector of Bogotá, where some 900 hect- ferred the maintenance of all areas to the ares have already been developed by powerful city government, but retains the concessions pirate (illegal) subdividers who provide no on water bodies, piers, and parking lots as services or infrastructure and do not have a source of income; it also kept two proper- proper approvals from the public adminis- ties with an estimated sale value of about tration. In June 2000 the city’s master plan US$30 million. All in all, the project is con- allocated another 800 hectares for urban sidered to be a creative in urban expansion and set up Operación Urbanística management in terms of self-financing Nuevo Usme (OUNU), a project designed to mechanisms and interjurisdictional cooper- address the problem of illegal developments. ation in urban governance (Garay 2012). It is expected to expand into another 600 Critics of the project argue that it repre- hectares where the administration already sented a give-away of a public asset to pri- has invested in water and sewer systems, vate interests, resulting in one of the most extension of the bus rapid transit system, gentrified neighborhoods in an exclusive and construction of low-income housing area detached from the urban fabric. Ques- units (Maldonado and Smolka 2003). tions have been raised about the lack of OUNU involves the planning and man- public participation in the decision-making agement of 432 hectares for collective uses, process, which could have brought to the such as roads, protected areas, open space agenda other, more socially responsible and recreation areas, and other amenities, uses for the area, especially in the context and 368 hectares for 56,000 housing units. of the economic crisis when many urgent Over 40 percent of these units will be on priorities needed to be addressed. developed plots that will also include housing for higher-income families, and 67.5 hect- Public Acquisition ares of land will be allocated for commer- of Private Land: cial and agro-industrial uses. The OUNU Nuevo Usme, Bogotá project was originally conceived to provide Other initiatives throughout the region are a competitive and sustainable alternative designed to share in the resulting land value to the informal yet affordable land offered increment and/or defray part of the public by pirate subdividers. investment costs needed to rezone and re- The core idea for this project was to structure large tracts of the urban fabric. mobilize the land value increment in low- These efforts involve original or prospective income urbanization processes. In such cases, landowners in exchange for their receiving a raw land is typically traded at less than share of future revenues. More challenging US$3/m2; the cost of fully servicing land and rare are cases where a value capture ranges from US$10 to US$35/m2; and the strategy is used to self-finance the provision fully serviced land provided by the formal of serviced land to meet the needs of low- market is conservatively estimated at more income families. The cases of the Social than US$55/m2. In contrast, unserviced Urbanizer experiment in Porto Alegre, Brazil land sold by pirate subdividers is generally (Smolka and Damasio 2005; Damasio 2006) about US$28/m2. The self-financing OUNU and the Nuevo Usme project, though still scheme would rely on three key value cap- unfinished, are emblematic for their boldness ture tools: acquisition of land at prices set and combination of value capture tools. before the announcement of the project;

smolka � Implementing Value Capture in Latin America 47 ...... © M artim O. S molka

The Nuevo Usme a partial plan to readjust the land of those negotiations with landowners who accepted development project landowners that agree to dispose of their the sharing of costs and benefits entailed in Bogotá, Colombia, land for the project instead of having it in the corresponding partial plan. was designed to provide expropriated; and the use of Participatión in Given the project’s magnitude, extended affordable housing and other services by using Plusvalías as a tool to share the land value timetable, and innovative character, its im- various value capture increment resulting from the changes of plementation has not been continuous or tools. land uses. smooth. Over the last decade it has been The plan was to offer local landowners interrupted many times by other adminis- the option to either be expropriated at the trative and political priorities, changing in- prevailing assessed land price before 2000, stitutional organizations, and unanticipated or to entrust their land to the project with a obstacles. Three new challenges are now guaranteed return on the sale of the land in being addressed: the designation of a proportion to their contribution, the num- significant part of the area as a National ber of participants, and the overall land ap- Forest Reservation; the discovery of an preciation, net of all urbanization costs and archaeological site; and a movement by the share designated for the public benefit. local peasants, supported by the current To ensure affordability by the new lower- administration, against a densification income inhabitants, a cross-subsidy scheme policy for the region. ranged from an affordable $16/m2 for ser- These interruptions and periods of pub- viced housing lots up to $80/m2 for com- lic inaction have allowed opportunistic pirate mercial lots, $21/m2 for serviced lots com- subdividers to sell land at a premium in the bining housing and commerce on the main expectation of future regularization and in- roads, and up to $70/m2 for housing lots creasing land values. While the original idea for higher-income families. Although about of self-financing the provision of serviced two-thirds of the land was acquired though land to low-income families with the land public expropriations, the remaining one- value increment generated by the project third was obtained through voluntary still holds, more ad hoc decisions have been

48 policy focus report � Lincoln Institute of Land Policy ......

taken independently for different zones different size and shape, the overall value of the project, compromising some aspects of each plot should be higher due to the of the overall plan. investments. That is, the participants expect that the appreciation resulting from urban- Land Readjustment ization will more than compensate for the In complex cases where parcels in a project smaller size of each readjusted plot, and area belong to many individuals, coordinating they bear that . their interests to generate a win-win result is The concept of land readjustment dates difficult. It often requires the establishment to the nineteenth century in Germany and of a third-party public, semi-public, or even has been used extensively in Asia (Japan and private entity in the form of a trust with a Korea) and many European countries. The mandate to carry out the development. Spanish version has influenced the redevel- One such instrument to promote the de- opment schemes of Colombian partial plans, velopment of large areas is land readjustment. and the French zone d’aménagement concerté As implied by its name, its value capture (urban development zone) has influenced logic is based on in-kind (usually land) con- the Brazilian program known as urban tributions by all landowners in the area operations. to an entity that in turn uses (sells) these contributions to self-finance investment in Partial Plans in Colombia urban infrastructure and services that then An antecedent for the application of land increases the value of all properties in the readjustment in Colombia can be found in area (figure 5.1). Although the plots of each Law 9 of 1989, which included a provision original landowner are readjusted into a for land assembly through direct acquisition

Figure 5.1 Schematic Presentation of Land Readjustment

Before the Project Streets and Public Areas After the Project b g a b a g h h c e i j c e i d f f d j

Costs of Redevelopment $$$

m2

m2 $

Area Initial Value Urban Norms Area Final Value

Source: Created by Maria Cristina Rojas Eberhard (2011).

smolka � Implementing Value Capture in Latin America 49 ......

or expropriation, and allowed readjustment capture tools, including land readjustment of plots after urban infrastructure and ser- and betterment contributions (Rojas Eber- vices were implemented. The urbanization hard and Rave 2013). The project is man- agency Metrovivienda, for instance, buys aged by a specially created independent and urbanizes land and then contracts or entity, and reluctant owners are either sells the land to private builders of social required to sell or are subject to adminis- housing as a tool to keep final prices afford- trative expropriation. Although cities like able. Law 388 of 1997 later introduced a Bogotá and Medellín have initiated many mandate for land readjustment to either partial plans, cases of fully embedding land obtain a better overall configuration of the readjustment principles are less common. individual properties or to ensure a just Some places include a redefinition of land redistribution of benefits and costs. use configuration, if not by shape of the Landowners holding a minimum of 51 original plots then by the assignment of percent of the area can submit a proposed different densities. land use plan if it meets the parameters of The Simesa project in Medellín illustrates a partial plan—an intermediate planning the redevelopment of the site of a former instrument between a full areawide master steel mill and other smaller into a plan and a smaller neighborhood or block fully self-funded, high-end residential com- plan. It adjusts broad city guidelines to lower- plex (figure 5.2). In the area of about 30 scale conditions and relies on various value hectares, one original industry still owns

Figure 5.2 Proposed Land Readjustment Plan for Simesa Project in Medellín, Colombia

Source: Rojas Eberhard and Rave (2013).

50 policy focus report � Lincoln Institute of Land Policy ......

An aerial view of the Simesa project in Medellín, Colombia, shows the site under construction in 2011.

© V One of the former steel

alores mills on the site in 2006 has been demolished

SIMESA as part of the redevelopment. © V alores

46 percent of the land, three other com- ments among SIMESA panies own another 49 percent, and 18 the participating businesses own the remaining 5 percent, landowners by each with a plot of less than 1,250 m2. informing them about the partial plans and The area was readjusted to accommodate the procedure for sharing costs and benefits. 37 units on 13 plots and set aside 37 per- In cases where a significant component cent of the land for parks, green zones, of the land is devoted to social housing, and streets. In the remaining area, an buyers often cannot afford the full cost of occupation rate of 80 percent was imposed the construction, let alone the urbanization on each plot to be used for residential and costs. The land for public uses and social commercial uses. housing would then typically be acquired The full amount of the urbanization by a public entity at the price set prior to costs for the area corresponded to about 23 announcement of the project. These new percent of the total value, and it was fully uses may allow for some shared benefits, funded or recovered from the building sales but normally do not cover all urbanization revenues at the same time that land value costs. However, the net costs of these inter- increased about 19 percent (Rojas Eberhard ventions on the site are often less than if and Rave 2013). This is a particularly inter- they were developed elsewhere. esting case since a phased-in timeframe was An example is the Pajarito Partial Plan in negotiated for the relocation of the depart- the expansion zone of Medellín. It involves ing factories simultaneously with the rede- the assembly of 38 plots from 36 landowners sign of the area to accommodate new resi- in an area of 230 hectares. Nearly 87 per- dential and commercial uses. The public cent of the plots are privately owned and administration thus played an important 18 percent of them are already developed. role by enforcing the fundamental urban Thirty percent of the area will be occupied design, land use norms, and land sharing and 36 percent will be protected for environ- schemes. It also ensured equitable adjust- mental purposes. Thus, of the original 230

smolka � Implementing Value Capture in Latin America 51 ......

hectares, only 6.3 hectares remain for resi- ing should come from the incremental value dential and other new uses, once the pre- stimulated by the public investments, zoning, designated areas are netted out. The project and other land use changes (Sandroni 2010). is designed to provide social housing in In its original formulation the public high-density, eight-story buildings holding would retain a certain percentage (usually 100 to 238 housing units. The urban infra- around 50 percent) of the land value incre- structure and services costs amounted to ment (Sandroni 2010). Unlike in linkage about US$45 million. The municipality operations, the value that is captured is acquired 80 percent of the land through reverted into the defined area in the form voluntary sales at prices not incorporating of investments in social housing and related future land value expectations and sold infrastructure and services. Each of the urban the final units at prices that recovered all operations currently underway in the city urbanization costs (Rojas Eberhard and of São Paulo has its own footprint design, Rave 2013). objective, and strategy, and relies on differ- Although the principles behind using ent formulas and parameters to self-finance land readjustment to provide self-financed its implementation (figure 5.3). access to serviced land for the urban poor seem feasible, projects have not been easy Other Examples to implement. This is apparently due to the Other types of public-private development stress imposed on the one hand by the need projects focus on the redevelopment of for subsidies to cover lower-income housing degraded, deteriorated, abandoned, or simply prices, and on the other by the reluctance vacant areas owned by diverse owners who of landowners to participate in projects de- are invited or brought together (by voluntary signed to address low-income social policies. or mandatory means) to agree on the terms Attempts to rely on land readjustment for an urban regeneration project in which principles in the reconstruction effort after they may or may not participate in the the Chilean in 2010 exposed the conception, design, and execution. The distrust of private individual landowners terms may include “readjusting” their toward cooperative market-oriented respective parcels of land, some sharing solutions (Hong and Brain 2012). of the project proceeds, and direct appor- tioning of the necessary investment Urban Operations in Brazil capital for the enterprise. An urban operation (Operación Urbanística, Examples include the Eixo Tamanduathey UO) is defined by the Brazilian Statute of redevelopment of a deactivated industrial the City as a tool to promote the restructur- area on over 900 hectares in the municipal- ing of large areas of the city through land- ity of Santo André in the São Paulo metro- based incentives offered to public-private politan area (Figueiredo 2005); and the partnerships including local public authorities, Santa Fe redevelopment of a former developers, landowners, and other stake- mine into a new business center next to a holders as independent investors (Montan- park built on a converted garbage dump in don and de Souza 2007). In practical terms, Mexico City. In the Mexico case, a public it is a significant intervention that requires trust, SERVIMET (Servicios Metropolitanos del infrastructure and urban improvements, Gobierno del Distrito Federal), was established such as avenues, drainage, public spaces and in the late 1990s and the plan was defined facilities, and other investments. The fund- in 1997 to dispose of the public land in ways

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that would fund the urban infrastruc- Figure 5.3 ture and services. The project was Urban Operations in São Paulo, Brazil, 2012 discontinued in 2003 following pub- lic disclosures of political influence and misconduct. Rents per square meter are now about US$20, similar to the city’s high-valued Lomas de Chapultepec area, but the redevelop- ment is imposing significant costs on Tietê River Ecological Park the city to address the traffic conges- tion it generated.

Auctioning Additional Building Rights: CEPACs in Brazil Given the difficulties in aluingv a change in building rights, an inge- nious solution relies on what develop- ers are actually willing to pay (or bid) under competitive market conditions. The city of São Paulo first introduced Certificates of Additional Potential Guarapiranga Construction Bonds (CEPACs) in Reservoir 1995 to simulate the bidding process Billings Reservoir through which urban land prices are ultimately determined. The main idea is that the new development potential, such as for different types of uses and additional buildings, created by rezoning and public investments in a well-defined Current area should not be available for free, Proposed as in the past, but auctioned among Planned those interested in taking advantage Expansion area of the future economic benefits re- 0 2 5 10 km sulting from the public interventions. The municipality issues the CEPAC bonds corresponding to these build- Source: Municipal Secretariat for Urban Development, São Paulo. ing rights for purchase by competing devel- opers through public electronic auctions master plan, authorizes the auctions, and regulated by the Comissão de Valores monitors any initiative to change the plan. Mobiliários (CVM, the Brazilian equivalent The mechanism has become the most origi- of the U.S. Securities and Exchange Com- nal and effective instrument to mobilize land mission). CVM registers the urban opera- value increment generated by large-scale tion to which the CEPACs are linked in the urban projects.

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Selling CEPACs at public auction on the of the financial instruments traded along stock exchange resolves the problem that with stocks and mutual funds. previously inhibited the sale of development The license to build over and above the rights by providing a regulated, transparent, basic FAR within the defined area requires and reasonable way to determine their value payment in CEPACs based on the number (Sandroni 2010). The financial regulations of additional square meters the developer also require significant transparency in a applies for. Usually one CEPAC is needed public auction, and all relevant documents for each square meter of building rights, but are available on the Internet. São Paulo’s since neighborhoods or zones within the site stock exchange website lists CEPACs as one may differ in quality, adjustments are made within a range from 2 to 0.5 m2 for more or less desirable locations. The urban opera- tion generally involves rezoning and associ- Table 5.1 Public and Private Auctions of CEPACs in Faria Lima UO, ated urban infrastructure updating that in São Paulo, 2004–2010 turn supports a given volume of buildings # CEPACs # CEPACs according to the plan. The prefixed number Year and Type Offered Sold Price (US$) Income (US$) of building rights may be auctioned in 2004 small offerings over time or in a single sale. Public 90,000 9,091 550 5,000,050 The city of São Paulo has been offering Private na 24,991 550 13,745,050 periodic auctions as a market control strat- 2005 egy to enhance the value of the bids. In the seven auctions held for the Faria Lima Public 0 UO from 2004 to 2010, the winning bids Private na 9,778 550 5,377,900 raised between US$550 and US$2,000 per 2006 CEPAC for 682,669 offered and 638,074 Public 10,000 2,729 550 1,500,950 actually bought, raising a total of US$723 Private na 6,241 550 3,432,550 million (table 5.1). Since a vigorous demand- 2007 driven market existed for the area, with Public 156,730 156,730 620 97,172,600 some bids being negotiated up to US$3,500 per CEPAC, the mayor requested the City Private na 72,942 620 45,224,040 Council to release an additional 350,000 m2 2008 in the area to be covered by 500,000 CEPACs. Public 83,788 83,788 769 64,432,972 The recently elected mayor subsequently Private na 2,500 863 2,156,250 froze the request, arguing that the area 2009 was already too congested. Public 100,000 55,612 850 47,270,200 Five auctions for the Agua Espraiada UO Public 30,000 1,521 858 1,304,258 from 2004 to 2012 raised from US$172 to US$636 per CEPAC for more than 3 million Public 120,000 120,000 2,100 252,000,000 offered, generating nearly US$1.5 billion 2010 (table 5.2). The 2012 auction alone added Public 92,151 92,151 2,000 184,302,000 US$866 million to public coffers, on top Total 682,669 638,074 722,918,820 of results from previous auctions (Sandroni Notes: Private auctions are promoted occasionally by the city as an alternative form of payment 2013). More than one public auction may to the contractors it hires for public works projects in urban operations. The number of CEPACs offered in private auctions is not available (na). take place between the dates of authorized Source: Sandroni (2012). CVM distributions; thus, the figures for

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US$ per CEPAC refer to the average value Table 5.2 obtained in all auctions. In addition, a CEPACs Authorized for the Agua Espraiada UO, considerable number of CEPACs are still in São Paulo, through January 31, 2013 circulation because they have not yet been Authorized US$ per CEPAC Distributions by CVM CEPACs US$ (average) used in a license application. As of January 31, 2013, the city still had nearly 360,000 14/7/2004 299,368 51,404,360 172 CEPACs available to offer in auctions. 10/1/2007 317,781 65,304,996 206 Although the most successful and longest 23/12/2008 186,740 103,640,520 555 standing cases are found in São Paulo, other 5/9/2008 1,099,880 386,461,945 351 Brazilian cities have issued CEPACs. For 9/2/2012 1,360,338 865,676,658 636 instance, all the building rights issued for Total 3,263,907 1,447,488,659 443 the Porto Maravilha revitalization project Private Offers 127,092 25,664,266 202 in Rio de Janeiro’s old port area were bid by a single buyer, the Real Estate Develop- Grand Total 3,390,999 1,473,152,925 434 ment Fund created by Caixa Econômica Used for a License / –2,333,897 Completed Projects Federal (CEF), the Brazilian social and housing bank with funds it manages Remaining in Circulation 1,057,102 from the workers’ pension funds. Law 101 Total CEPACs 3,750,000 of November 23, 2009 had authorized Balance 359,001 issuing 6,436,722 CEPACs for a total of Note: CVM is the Brazilian equivalent of the U.S. Securities and Exchange Commission. 4,089,502 m2 of additional building rights Source: Municipality of São Paulo, Secretariat of Urban Development.

The bridge and other developments in the Agua Espraiada UO in São Paulo, Brazil, were funded by the auctioning of CEPACs. © martim Auga Espraiada,

Sao Paolo O. smolka

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A new and for US$1.75 billion. The municipality of investment, a municipal decree in 2012 parkland in the Linha Rio de Janeiro thus obtained a substantial authorized the release of 4,830,000 Verde UO in Curitiba, amount upfront to cover the costs of CEPACs with a minimum initial price of Brazil, were partially funded by CEPACs. re-urbanizing that area. US$100 per CEPAC. The first auction in Since CEPACs can be freely negotiated the São Paulo stock market in June 2012 in a secondary market, CEF is expected to attracted 18 bidders for the 141,588 bonds auction its supply of the bonds over time to offered. A group of three bidders associated other parties. In October 2012 alone, CEF with the development of a shopping center sold about 26,000 CEPACs (out of 100,000 acquired 70 percent of the CEPACs. offered) at a base price of US$575, obtaining Although Curitiba’s mayor’s office ex- US$30 million in an operation that achieved pected to collect US$30 million, the auction a 100 percent gain over the original acqui- resulted in only US$14.2 million, since all sition price per CEPAC. the CEPACs traded at the minimum legal CEPACs are also being used to parti- value of US$100 (Gazeta do Povo 2012). ally fund the Linha Verde UO in Curitiba Though low, this price was close to what (Soffiatti 2012). This project involves the had been estimated for the market value conversion of a major national highway, by a private consultant hired to do the now engulfed by city expansion and cutting feasibility study on the use of CEPACs across 22 neighborhoods, into an urban in this peripherally located project. avenue with the extension of a bus rapid The CEPAC instrument offers both transit line, new green areas, and higher- innovative characteristics and some negative density land uses. For this $600 million aspects. On the positive side:

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1. It addresses the difficult issue of assessing nation of lower payment capacity and the market value of the increment resulting perceived negative externalities may from the public interventions and reduces decrease bids below the threshold costs the traditional transaction costs involved for public investment. The need to add in negotiating the relevant impacts of a subsidy for low-income housing may the project on individual properties. introduce further complications into the 2. It is accepted by developers who under- auction process (Whitaker Ferreira 2012). stand the benefit of having all revenues 3. If the municipal development agency invested in the same area. By law the decides that social housing will lower de- revenues from CEPAC auctions are kept mand and it wants to maximize overall in a separate account and can be used auction prices, then it will be more likely only in the same UO where they were to promote , resulting in generated. more intra-urban differentiation and so- 3. It creates a self-fulfilling public investment cial segregation. A more realistic reaction opportunity: the higher the expectation to this allegation would argue that if these of the benefits of the intervention, the projects are implemented anyway they higher the bids and consequently the rev- should be funded by the direct beneficia- enues to insure its effective implementation ries rather than all citizens or taxpayers. (and vice versa). Thus, CEPACs actually draw strength from the speculative land The test for these pros and cons is whether process because higher bidding in the the urban operation precedes the use of secondary market signals action in the CEPACs or whether the opportunity to use primary market, thus increasing the this instrument negatively affects the nature amount of value captured. of the subsequent development. Maricato and Ferreira (2002) argue that such value On the other hand: capture instruments are in themselves neu- 1. A relatively sophisticated capital market tral so they can be used to create a more environment is required to support the democratic and equitable city, or to do the credibility of the CEPAC bonds and the opposite. How they are used, therefore, will process for their access and disposal, thus depend in large part on the decisions of the limiting their use in less-developed areas. elected representatives and appointed policy 2. Although there is nothing implicit in the makers. Will they seek more social objec- tool that prevents its use in low-income tives or try to maximize auction prices? areas and for social housing, the combi-

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chapter 6 Conclusions and Recommendations © M inistr y of

the C ities , B rasilia

Officials and other alue capture policies and tools are tion and timing of public works directly participants gather in undeniably arousing new interest with those private landowners or developers Brasilia to launch Brazil’s and becoming more acceptable in who seek access to urban services or want first Conference of the Latin America. Initiatives to under- to develop new land uses beyond baseline Cities in 2003. standV and experiment with the basic economic norms and regulations. Changing the distri- principles behind value capture have grown bution of social costs and private benefits is in both number and creativity, and value also being addressed through new legislation, capture tools are being used in combination policy design, and implementation. Improved with traditional practices in many cases. understanding of the link between public Public authorities are realizing that they intervention and increased land value is can raise contributions for the public good conducive to building fiscal and planning from the beneficiaries of their administra- cultures that will strengthen property tax- tive decisions. They can negotiate or charge es, local revenues, and urban management for changes in land use rights or in the loca- in general.

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Key Findings and Lessons have been designed to capture changes in The growing familiarity with and use of land value increments resulting from public value capture in Latin America is supported works and administrative actions. Rather by broader dissemination of longstanding than reinventing the wheel, many places practices in several countries and by the are implementing changes that reflect the need to find new revenue sources to address consolidation and systematization of estab- current fiscal and urban planning challenges. lished principles about value capture to National legislation, as in Brazil and Colom- meet local needs (table 6.1). bia, and a variety of municipal initiatives, as In many places urban development in Córdoba, Argentina, and Cuenca, Ecuador, projects have produced financial windfalls

Table 6.1 Choosing the Appropriate Value Capture Tool Process for Pre-Existing Tool Incidence Context Capturing Value Advantages Cautions Capacity Public Land ESC Land needed Confiscation of Public investments Arbitrary decisions Legitimate Procurement for new public changes in land made prior to from unprepared public utilities projects, such value from prior development courts to participate as low-income use in the process housing Property or EMC Properties Rate imposed Universality and Land vs. building Continuous Land Value Tax benefiting on land value regularity component of updating of from citywide component property value value maps and improvements cadastres Exactions NSV Public concessions In-kind or monetary Flexibility allowing Manipulation Access to on new compensation for unanticipated or stakeholder information about developments developments influence private gains and public impacts Betterment EMC Provision of local Cost recovery Beneficiaries invest Accurate Capacity of Contribution public works or sharing in the project assessment of beneficiaries potential benefits to participate and pay Transfer of ESC Public interest Compensation Building rights Accuracy of Availability of Development in designated with rights given in used as currency conversion rates building rights in Rights property other properties to fund public for development the transfer areas projects rights Land NMV Urbanization of Sale of shares in Funding of Obstructions Power to negotiate Readjustment a new area or the redeveloped new urban from unwilling with all affected reconfiguring of land infrastructure landowners participants existing parcels Charges for NSC Single building Land assessment Compensation Allegations of Land monitoring Building Rights license techniques to the public acquired rights and cadastral for existing systems infrastructure CEPACs NMC New or Public auction Transparency Market volatility; Public credibility redeveloped and accuracy in gentrification and capacity projects with transactions and for financial broader urban assessments management impacts Key to Incidence: First letter: E–Improvement to existing land uses; N–Promotion of a new land use Second letter: S–Single project or property; M–Multiple projects or properties Third letter: V–Voluntary or negotiated; C–Compulsory

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from public interventions that increased budgets for other social sectors (e.g., educa- land values that formerly were appropriated tion, health, and housing) that in the past by the benefitted landowners, but now are would have been sacrificed because of over- being shared with the public. Although the all constraints on public expenditures. dollar value of these captured resources has Contrary to conventional wisdom or often been small, the potential for growth objections raised by opponents, the legal is significant, as illustrated in the cases of framework regarding value capture ap- Bogotá’s betterment contributions or São proaches in most countries is not particularly Paulo’s auctioning of building rights through constraining. In many instances current CEPACs. More accurate indicators of suc- legislation followed rather than preceded cess than the share of overall revenues may successful cases of value capture implemen- be either the magnitude of proceeds from tation, demonstrating that existing instru- value capture mechanisms compared to ments can be adapted to new circumstances direct local investment costs for urban infra- without having to wait for national legislation structure, social housing, and other local to be put in place first. Examples of this services, or the role these proceeds play in process include separating building rights promoting private investments by funding from land rights and thus allowing for charges compensation for special projects, urban for building rights in Brazil; the adoption operations, partial plans, or other incentive of the compensatory price mechanism in programs. Montevideo, Uruguay, seven years ahead The betterment instrument has been of national legislation; and increased accep- applied successfully, even in places with tance by private investors of exactions in apparent technical or administrative con- Guatemala and Argentina. straints, to support a variety of local invest- Effective implementation remains the ments, especially those associated with trans- primary challenge, according to the results portation. According to García Bolivar obtained in two Lincoln Institute surveys of (2012), director of the Valorization Fund public officials and others involved with - (FONVAL) of Medellín, “More than 50 ban management and public finance in the percent of Medellín’s main road grid was region. The online questionnaires sought to paid for with betterment levies” (figure 6.1). elicit respondents’ views about the prospects In Mexico, although betterment contribu- for designing, institutionalizing, and imple- tions represented only .11 percent of public menting two emblematic value capture in- revenues, they covered 1.53 percent of all struments—betterment contributions and public works. In the municipality of Cuenca, charges for additional building rights. The Ecuador, nearly US$106 million collected results revealed that value capture is still as betterment contributions resulted in viewed primarily as a tool to promote equity paving 270 km of roads. These examples in cities, rather than as a way to improve counter the argument that the revenues municipal fiscal autonomy and urban from value capture policies may not be development in general (Smolka 2012). worth the effort. Another result, confirmed by other Value capture instruments that charge research for this report, is that the impact for building rights have provided partial or of successful value capture policies on real full funding for major urban redevelopment estate development has been minimally projects in many cities. As a result, resources disruptive, and that willingness to pay is can be transferred from public infrastructure directly associated with the perception of

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Figure 6.1 Roadways Funded by Betterment Contributions in Medellín, Colombia, 1938–2000

Sites of interest Constructed roadways

Source: Mayor’s Office of Medellín.

received benefits. This important finding property development and enlisting the applies both to charges for building rights support of developers who recognize that for developers and to cost-sharing for some value capture provisions were actually individual taxpayers of public investments improving their business opportunities. benefiting their affected properties. Changing from the prevailing compla- Experience counts. The number and cency toward property development, quality of value capture experiences in a whereby individual landowners capitalize country or municipality tend to be synergis- unearned income from public investments, tic and cumulative. That is, success with one into a new regime, in which private benefits type of instrument leads to additional initia- are balanced with social costs, involves a tives and the use of other instruments. It is painstaking cultural shift that may take a not by chance that some countries, notably long time and is expected to face significant Brazil and Colombia, have been cited more resistance. Special care should be given to often than others due to their experiences in the appropriate and consistent use of value using different applications and their many capture instruments and other elements in experiments with value capture tools. There the planning toolbox. is even some evidence of jurisdictions effec- Resistance to value capture policies and tively changing the “rules of the ” for the use of related tools needs to be overcome

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in three ways: ideology, interests, and igno- high levels of uncertainty and risk when any rance. First, regarding ideology, ensure that charges or other types of regulations are the alleged additional public involvement in proposed that may affect existing or new the market, as implied by basic value land uses. While value capture charges in capture principles, can actually improve theory are neutral regarding land use and conditions for new business opportunities should fall entirely on landowners, in prac- and for the community as a whole. Second, tice successful implementation demands recognize that interests other than those of management skills to deal with many com- landowners have a legitimate stake in urban plex factors and diverse stakeholders. In development. Third, counter ignorance with addition it requires proper understanding sound knowledge that charges on land of land market conditions, comprehensive values are not inflationary but in fact are property monitoring systems, a fluid dia- capitalized in lower market prices; that rights logue among fiscal, planning, and judicial are acquired only when a license is requested entities, and the political resolve of local to promote a land use change; and that the government leaders. Key steps are to: rights of property do not necessarily include • Ensure the proper timing of any proposed the right to the intrinsic land value or change from a traditional regulatory unearned increments in value. regime into one contemplating value capture tools that are appropriate to Value capture: It should be done, existing real estate market conditions. • Recognize that trial-and-error is part of it can be done, it has been done . . . the process of refining and institutional- and it may be done better. izing any policy tool, including value capture, and that there is no one-size- fits-all solution. Recommendations • Prioritize the public control of building These conclusions point to steps that can rights and land uses rather than focus on be taken in three spheres: learning from state ownership of land as elements of varied experiences with the implementation a value capture strategy. of value capture policies and tools; increas- • Maintain updated cadastres, valuation ing knowledge about the complex nature maps, and land and housing price records of varied value capture approaches; and to generate the data needed to assess the promoting greater understanding among impact and equitable sharing of changes public officials and citizens about how value in land values. capture tools can be used to benefit their • Ensure administrative continuity in the communities. implementation of value capture policies over time, especially for large-scale projects, Learn from Implementation to facilitate a less volatile environment Experiences that is more compatible with the matura- The city’s is the cumula- tion of long-term impacts. tive result of multiple land use decisions em- • Encourage direct negotiations between bodied in infrastructure and buildings that public officials and the private developers affect other uses over long periods of time. who will benefit from specific public Planners and developers thus operate under interventions.

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• Generate a willingness to pay when Promote Greater Public the benefit is perceived to be associated Understanding and Participation directly with the solution of a locally Land value increments are captured more recognized problem. successfully from landowners and other • Create a win-win situation resulting in stakeholders who perceive they are receiv- significant land value increments being ing greater benefits from a public interven- returned to a well-defined area as a tion than those accruing from business as result of public intervention. usual. Furthermore, value capture tools are more likely to succeed when used to solve a Increase Knowledge about locally recognized problem. These steps can Theory and Practice help to increase the chances of acceptance Conducting research, documenting and and success. disseminating implementation experiences, • Document and publicize successful dem- and providing evidence about how value onstration projects, especially in countries capture policies work on the ground are es- where similar initiatives have been imple- sential to overcome the disjunction between mented, and explain the implications rhetoric and practice and to change the of increased social costs and lost oppor- behavior and attitudes of public officials, tunities when the potential value is not landowners, and the community at large. captured. A number of practical considerations and • Acknowledge that value capture is not procedures can lead to more successful simply a potential new revenue source results. but a tool to mitigate urban land market • Assist public officials and decision makers imperfections and facilitate urban in understanding that existing legal planning and development. frameworks often are less restrictive than • Illustrate how value capture has fostered may be assumed. investments in urban infrastructure and • Relate value capture to fundamental services and improved both local projects principles of economic theory and good and large-scale developments. practices in public finance. • Emphasize that value capture policies • Document how value capture has fos- can reduce speculation and corruption tered investments in urban infrastructure practices because land transactions are and services and improved land use made more transparent and land value development. increments are less volatile. • Shift the debate on value capture from ideological and social justice rhetoric to a more technical and practical context, grounded in evidence that it not only can be done, but has been done.

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Furtado, Fernanda. 2000. Colombia. In Land value Gazeta do Povo. 2012. Curitiba, Brazil: Edição Lawhon, Larry L. 2003. Development impact taxation around the world, third ed., Robert V. Andel- XXX. December 13. www.iba.com.br fee use by local governments. Municipal Year Book. son, 97–110. New York, NY: Wiley-Blackwell. Washington, DC: International City Management Gazeta do Povo. 2013. Curitiba, Brazil: Edição Association. Furtado, Fernanda, and Claudia Acosta. 2013. 30.412, February 23. www.iba.com.br Recuperación de plusvalías urbanas en Brasil, López Padilla, Ismael, and Salvador Gómez Colombia y otros países de América Latina: George, Henry. 1992. Progress and poverty. New Rocha. 2013. La base seulo del impuesto a la Legislación, instrumentos e implementación. York, NY: Schalkenbach . propiedad. Presented at the Foro Latinoamericano Working Paper. Cambridge, MA: Lincoln sobre Instrumentos Notables de Intervención Institute of Land Policy. 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Cambridge, MA: Lincoln Jaramillo González, Samuel. 1994. Hacia una Martim O. Smolka. 2003. Using value capture to Institute of Land Policy. teória de la renta del suelo urbano. Bogotá, Colombia: benefit the poor: The Usme project in Colombia. Ediciónes Uniandes. Land Lines 15(3): 15–17. García Bolivar, Luis Alberto. 2012. La contribu- cion de valorización en la ciudad de Medellín. Jaramillo González, Samuel. 1998. Considera- Maleronka, Camila, and Fernanda Furtado. Paper presented at the Simposio técnicas y mod- ciones teóricas sobre la participación de los muni- 2013. El otorgamiento oneroso del derecho de elos sobre contribución de valorización: Experi- cipios en las plusvalías urbanas. Desarrollo Urbano construir (OODC): La experiencia de São Paulo encia nacional e internacional, Instituto de en Cifras 4:164–176. en la gestión pública de edificabilidades. 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Sandroni, Paulo Henrique. 2010. A new financial Smolka, Martim O. 2012. A new look at value Vainer, Carlos. 2000. Os liberais tambem fazem instrument of value capture in São Paulo: Cer- capture in Latin America. Land Lines 24(3): planejamento urbano? In Cidade do Pensamento tificates of additional construction. In Municipal 10–15. Unico: Demanchando Consensos, eds. O. Arantes, revenues and land policies, eds. Gregory K. Ingram C. Vainer, e E. Maricato, 75–104. Rio de Janeiro, and Yu-Hung Hong, 218–240. Cambridge, MA: Smolka, Martim O., and David Amborski. 2007. Brasil: Editora Vozes. Lincoln Institute of Land Policy. Value capture for urban development: An inter- American comparison. Working Paper. Cambridge, Verajano Alvarado, María Clara, ed. 2007. Sandroni, Paulo Henrique. 2011. Urban value USA: Lincoln Institute of Land Policy. Movilización social de la valorización de la tierra: capture in São Paulo using a two-part approach: Casos latinoamerican. CD-ROM. 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a cknowledgments

Special thanks to the following Lincoln Beatriz Cuenya, director, Centre of Urban and Juan Felipe Pinilla, independent consultant and Institute of Land Policy staff for very helpful Regional Studies, National Scientific and Technical researcher on land policy, property, and urban law comments on earlier versions: Gregory K. Research Council (CEUR-CONICET), Buenos Aires, issues, Bogotá, Colombia Argentina Ingram, president and CEO; Joan Youngman, Eglaisa M. Pontes Cunha, educator and capacity senior fellow and chair of the Department of Roberto Eibenshultz, professor and researcher, building manager, Ministry of the Cities, Brasilia, Valuation and Taxation; and Anna Sant’Anna, National Metropolitan Autonomous University Brazil of Mexico (UNAM), Mexico DF, Mexico senior research associate in the Program on Sonia Rabello de Castro, professor and researcher, Latin America and the Caribbean. Particular Diego Erba, fellow, Program on Latin America Law School of the State University of Rio de Janeiro, appreciation is given to Ann LeRoyer, former and the Caribbean, Lincoln Institute of Land Policy Brazil senior editor and director of publications, for Ramon Esteban, city councilor; former secretary Eduardo Ramírez Favela, former president, CABIN her editing work and for managing the design of planning, Municipality of San Fernando, Province (Commission for the Assessment of National and production of this report. of Buenos Aires, Argentina Assets), in association with the Santa Fe project, Mexico DF, Mexico Alfredo Garay, professor, School of , In addition, gratitude to David Vetter of Vetter Design, and Urban Planning, University of Buenos Beatriz Rave, and general manager, Consultoría Económica Ltda., based in Rio de Aires, Argentina Housing Authority for Antioquia Province, (Empresa Janeiro, Brazil, for his insightful review of the de Vivienda de Antioquia VIVA), Medellín, Colombia full draft; and to Fernanda Furtado, professor Silvia García Vettorazzi, architect and vice-director, Urbanística Worshop, Guatemala City, Eduardo Reese, professor of urban management and researcher in the School of Architecture Guatemala and planning, Conurbano Institute, General and at the Fluminense Federal Sarmiento National University, Buenos Aires, University, Niterói, State of Rio de Janeiro, Cynthia Goytia, economist, professor and director, Argentina Masters in Urban Economics, Torcuato Di Tella Brazil, for suggestions when the project University, Buenos Aires, Argentina Vera Rezende, professor and researcher on urban was in its early stages. planning, School of Architecture and Urbanism, Alfonso Iracheta Cenecorta, coordinator, Program Fluminense Federal University, Niterói, State of This report also benefitted from numerous on Urban and , Colegio Rio de Janeiro, Brazil insights and specific inputs from experts Mexiquense, Toluca, Mexico throughout Latin America who are directly Daniel Rodríguez, director, Carolina Transportation Ignacio Carlos Kunz Bolaños, researcher, National Program; and associate professor, Department involved with the implementation of value Autonomous University of Mexico (UNAM), of City and Regional Planning, University of North capture tools. Deep appreciation is extended Consultant, Querétaro, Mexico Carolina at Chapel Hill to all those listed below who provided timely André Kwak, manager, São Paulo Vanessa Rodríguez, independent consultant, updates on local issues and practices; Urbanismo, Municipality of São Paulo, Brazil Quito, Ecuador critical clarifications of how value capture Heliana Lombardi Artigiani, architect and assessor, María Cristina Rojas Eberhard, independent instruments operate and their impacts in Secretariat of Urban Development, Municipality of different jurisdictions; and many of the consultant for various Colombian public institutions, São Paulo, Brazil Bogotá graphic illustrations and photographs. The Maria Mercedes Maldonado, professor, National author, however, is fully responsible for any Paulo Sandroni, private consultant; professor, University of Colombia; and Secretary of Housing, Getulio Vargas Foundation, São Paulo, Brazil remaining misinterpretations, errors, and Bogotá, Colombia omissions. Martha Siniacoff, director of cadastre and Camila Maleronka, architect, public administrator, assessments, Municipality of Montevideo, Uruguay São Paulo Urbanismo, São Paulo, Brazil Claudio Acioly Jr., head, Capacity Development Unit, Nadia Somekh, director, Department of Historic UN-HABITAT, Nairobi, Kenya Allan Mazariegos, architect, Department of Public Heritage; president, Municipal Council of Historic, Works, Municipality of Guatemala City, Guatemala Hernando Arenas, geographer and urban planner, Cultural and Environmental Heritage, Municipality Institute of Urban Development, Bogotá, Colombia Iris Elizabeth Medina Torres, specialist in planning, of São Paulo, Brazil Municipality of Lima, Peru Zulma Bolivar, architect and planner; president Alvaro Uribe, architect, planner, and professor, of the Urbanism Metropolitan Institute (IMUTC), Carlos Mendive, economist, University of the University of Panama; member of the advisory Caracas, Venezuela Republic, Montevideo, Uruguay council, Panama Ministry of Housing Oscar Armando Borrero Ochoa, economist and Catalina Molinatti, independent consultant for Néia Uzon, independent consultant, Porto Alegre, professor, National University of Colombia, Bogotá; several Argentinean local governments; formerly Brazil and private consultant, Borrero Ochoa & Asociados, developed land value capture instruments, Luis Fernando Valverde Salandia, architect, Bogotá, Colombia Municipality of Córdoba, Argentina Secretariat for Housing, Municipality of Rio de Gonzalo Cáceres, professor, Institute of Urban Carlos Morales Schechinger, senior expert on urban Janeiro, Brazil and Territorial Studies, Catholic University of Chile, and policies, Institute for Housing Maria Clara Vejarano, professor and researcher, Santiago and Urban (IHS), Erasmus National University of Colombia, Bogotá; and University, Rotterdam, The Netherlands Rosemary Campans, architect-urbanist, Municipal doctoral candidate, Federal University of Rio de Urbanism Institute, Rio de Janeiro, Brazil Angel Ricardo Núñez Fernández, United Nations Janeiro, Brazil Development Program, Havana, Cuba Rosario Casanova, engineer, University of the Stella Zuccolini, architect and planner, Housing Republic, Montevideo, Uruguay Gislene Pereira, professor and director, Laboratory and Urban Planning Ministry, Montevideo, Uruguay of Housing and Urban Development, Federal Luiz Fernando Chulipa Möller, consultant in property University of Paraná, Brazil assessment and taxation, Porto Alegre, Brazil

68 policy focus report � Lincoln Institute of Land Policy About the Author Ordering Information To download a free copy of this report or Martim O. Smolka is senior fellow and director of the Program on to order copies of the printed report, visit Latin American and the Caribbean, and co-chairman of the Depart- www.lincolninst.edu and search by author or title. ment of at the Lincoln Institute of Land Policy. For additional information on discounted Since 1995 he has led hundreds of research and educational pro- prices for bookstores, multiple-copy orders, grams for high-level public officials, scholars, NGO leaders and other and shipping and handling costs, send your professionals. He has authored many publications on the functioning inquiry to [email protected]. of urban land markets, in particular informal land markets and their consequences related to regularization policies; on intra-urban structuring and the dynamics of property markets in Latin American Production Credits cities; and on improvements to existing property tax systems & Editor including issues associated with the mobilization of land value Ann LeRoyer increments to finance and promote urban development. Design & Production DG /NonprofitDesign.com He graduated in economics from the Pontifical Catholic University Printing of Rio de Janeiro in 1971, and received his MA and PhD degrees in Recycled Paper Printing, Boston from the University of Pennsylvania in 1980. He is a retired associate professor at the Urban and Regional Research and Planning Institute (IPPUR) at the Federal University of Rio de Janeiro. He co-founded and directed for two terms the Brazilian National 92% Association for Research and Graduate Studies on Urban and Regional Planning (ANPUR), and was a fellow at the Brazilian Cert no. SCS-COC-001366 National Council for Research. Contact: [email protected]

About the Lincoln Institute of Land Policy www.lincolninst.edu The Lincoln Institute of Land Policy is a leading for key issues concerning the use, regulation, and taxation of land. Providing high- quality education and research, the Institute strives to improve public dialogue and decisions about land policy. As a private operating foun- dation whose origins date to 1946, the Lincoln Institute seeks to inform decision making through education, research, policy evaluation, demon- stration projects, and the dissemination of information, policy analysis, and data through our publications, website, and other media. By bring- ing together scholars, practitioners, public officials, policy makers, journalists, and involved citizens, the Lincoln Institute integrates theory and practice and provides a nonpartisan forum for multidisciplinary perspectives on public policy concerning land, both in the United States and internationally. 113 Brattle Street Cambridge, MA 02138-3400 USA

Phone: 617-661-3016 or 800-LAND-USE (800-526-3873) Fax: 617-661-7235 or 800-LAND-944 (800-526-3944) Web: www.lincolninst.edu Email: [email protected] Implementing Value Capture in Latin America Policies and Tools for Urban Development

atin America has a long history with value capture policies to mobilize for the benefit of the community at large some or all of the land value increments (unearned income or plusvalías) generated by actions other than the land- Lowner’s, such as public investments in infrastructure or changes in administrative norms and regulations. Many countries, notably Brazil and Colombia, have passed explicit legislation regarding its use, but some jurisdictions have applied this potentially powerful financing mechanism to implement tools adapted to their local needs even without national legislation in place.

This discussion of the concept of value capture explains its justification and increasing popularity, provides a brief review of its antecedents in Latin America and elsewhere around the world, and illustrates three categories of tools: property taxation and betterment contributions; exactions and other direct negotiations for charges for building rights or for the transfer of development rights; and large-scale approaches such as development of public land through privatization or acquisition, land readjustment, and public auctions of bonds for purchasing building rights.

Effective implementation remains the primary challenge to the broader use of value capture, and this report recom- mends steps that can be taken to inform that process:

• Learn from Implementation Experiences: While value capture charges in theory are neutral regarding land use and should fall entirely on landowners, in practice successful implementation demands management skills to deal with many complex factors and diverse stakeholders. In addition it requires proper understanding of land market conditions, comprehensive property monitoring systems, a fluid dialogue among fiscal, planning, and judicial entities, and the political resolve of local government leaders.

• Increase Knowledge about Theory and Practice: Conducting research, documenting and disseminating implemen- tation experiences, and providing evidence about how value capture policies work on the ground are essential to overcome the disjunction between rhetoric and practice and to change the behavior and attitudes of public officials, landowners, and the community at large.

• Promote Greater Public Understanding and Participation: Land value increments are captured more successfully from landowners and other stakeholders who perceive they are receiving greater benefits from a public intervention than those accruing from business as usual. Furthermore, value capture tools are more likely to succeed when used to solve a locally recognized problem.

ISBN 978-1-55844-284-9

ISBN 978-1-55844-284-9 Policy Focus Report/Code PF035