Implementing Value Capture in Latin America Full 1

Policy Focus Report Lincoln Institute of Land Policy
Implementing Value Capture

in Latin America
Policies and Tools for Urban Development
M a r t i m O . S mo l k a
Implementing Value Capture in Latin America:
Martim O. Smolka
Policy Focus Report Series

The policy focus report series is published by the Lincoln Institute of Land Policy to address
timely public policy issues relating to land use, land markets, and property taxation. Each report
is designed to bridge 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 planning and management; 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 education 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 plusvalas) 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:
In Curitiba, Brazil, the
113 Brattle Street
taller building 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: help@lincolninst.edu 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 design.
Policy Focus Report/Code PF035 Gislene Pereira
...................
Contents
2 Executive Summary
4 Chapter 1: Latin American Urbanization 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 Infrastructure
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 Lands
20 Selected Value Capture Tools
21 Chapter 3: The Property Tax and Betterment Contributions

21 The Property Tax
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 Redevelopment Projects

46 Privatizing Public Land for Redevelopment: Puerto Madero, Buenos Aires
47 Public Acquisition of Private Land: Nuevo Usme, Bogot
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
s m o l k a I m p l e m e n t i n g V a l u e C a p t u r e i n L a t i n A m e r ic a 1
...................
Executive Summary
alvaro Uribe
U
Faria Lima Avenue in rbanization in Latin America by actions other than the landowners,
So Paulo, Brazil, has
is associated with strong pressure such as public investments in infrastructure
been redeveloped with
funds obtained from
for the supply of serviced land, or administrative changes in land use norms
additional building rights resulting in significant changes and regulations. The region has a long his-
auctioned in the stock in 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 plusvalas) generated to their local needs.
2 p o l ic y f o c u s r e p o r t L i n c o l n I n s t i t u t e o f L a n d P o l i c y
...................
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 urban planning 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 nature of varied valuecap-
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 toolscan 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 Bogot Promote Greater Public Understanding
and CEPACs in So Paulo have generated and Participation: Land value increments
revenues in excess of a billion dollars for those are captured more successfully from landowners
cities. 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.
...................
Chapter 1
Latin American Urbanization
and the Case for Value Capture
Alvaro Uribe
U
High-density rbanization in Latin American public interventions reinforced strong land-
development in has produced a formidable set owning interests. When fiscal and human
the Barra da
of urban problems ranging from resources are relatively scarce, the provision
Tijuca area of Rio
vast, often illegally occupied areas of urban infrastructure and services in those
de Janeiro was
built in the 1970s with minimal urban services to rampant dis- areas that can support higher densities creates
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 plan 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 poverty, 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 well-positioned stake-
market, and windfalls resulting largely from holders (Smolka 2011).
...................
U n e ar n e d I n c o m e fro m Box 1.1

P ubli c ly P ro m ot e d Barra da Tijuca, Rio de Janeiro
U rba n i z atio n
T
The expectation that land may be designated he Barra da Tijuca area, covering 82 square kilometers (km)
for future urban uses or redevelopment can of developable land, provided an opportunity for extension
produce significant land price hikes, even of the citys 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 km including a 20 km beachfront and 122.50 km
borhood of Rio de Janeiro in the 1970s illus- of developable land.
trates the impact of selective investment on
Expensive public transit lines were announced in 1967 to open
land value increments (box 1.1).
this area for expansion in response to pressure from developers
Over and above the unearned income
for more attractive, buildable areas. In 1969 the city hired Lucio
accrued to a privileged few, which could
Costa, the urban planner responsible for Brasilias master plan in
otherwise be used to fund public investments,
the 1950s, and his proposal for this neighborhood was approved
unaccounted-for social costs often result
in the same year. Direct access through tunnels and an elevated
from biased public decision making. The
expressway built in 1974, together with the master plan, were
political economy of Latin American urban-
associated with an increase in land value of 1,900 percent from
ization offers many examples of question-
1972 to 1975. In the same period, land prices in most other
able (inefficient, unequal, unsustainable)
high-valued areas of Rio appreciated about 435 percent (Vetter,
public decisions regarding the spatial alloca-
Massena, and Rodrgues 1979).
tion of investments in urban infrastructure
and services and the use of arbitrary land The plans 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 plans have been imple- acquisitions are still under legal investigation.
mented around the petrochemical complex
Source: Original Plan from the Municipal Archive of Rio de Janeiro

in Itabora, near Rio de Janeiro, to capture
part of the enormous increment in land
value generated by extensive public invest-
ment that could help finance much-needed
urban infrastructure (box 1.2). Moreover, an
effective urban planning and financing policy
has not yet been proposed to prevent the
growth of informal settlements amidst a
booming real estate market fueled by high
concentrations of public and private invest-
ment (Salandia 2012).

Multipli e r Eff e c ts of
Land Use Changes
The stakes are high when it comes to the Proposed Master Plan of Barra da Tijuca by Lucio Costa, 1969
land value increments resulting from public
...................
intervention, whether in large complex designated for urban uses to its pre-existing
developments such as Itabora or in smaller rural (agricultural) use value at the urban
areas. The so-called urban multiplierthe fringeis 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-
Itabora Petrochemical Complex, Rio de Janeiro borhood (Barcia and Ortiz 1996). Compar-
ing average or median values per square
A s a consequence of the discovery and exploitation of the

pre-salt layer of oil reserves off the coast of Rio de Janeiro,
in 2006 Brazilian Petrobras announced the construction of a petro-
meter of property transactions over 10,000
m2 with those of plots from 250 to 600 m2
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 municipality of Itabora (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 Rios 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 ofover 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 Rios 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 zoning regulations)
land in a subdivision that previously sold for about US$14/m2 has
that constitute important sources of windfalls
quadrupled in price to US$55/m2. At the same time, slums are
for well-placed landowners. Allowing for
now rampant in this otherwise high-end real estate market where,
higher densities (floor area ratios or FARs)
according to the Regional Council of Realtors of the State of Rio
or changing zoning from residential to com-
de Janeiro, properties have appreciated over 70 percent from
mercial uses generates handsome increments,
2009 to 2012. There is little evidence, however, that Itabora is
albeit usually lower (in relative terms) com-
developing a financial strategy to capture this increased value
pared to rural to urban land use conversions
and implement plans for a pleasant, sustainable, and socially
where the base value is low (table 1.1). Reli-
equitable urban environment.
able data on the effects of changing norms
on land prices are difficult to obtain, and
Table 1.1 few studies are available.
Effects of Administrative Land Use Changes on Land Prices Bank transactions on changes in land
(Stylized Facts)
use from residential to commercial in Colo-
Price Price Windfall
nia San Benito in San Salvador, El Salvador,
Type of Land before Change Increment after Change on 5,000 m2
Use Change (US$/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
Building Norms 100 80 180 400,000 US$407/m2 in 2004. Similarly, information
Zoning drawn from a developers data bank on
200 100 400 1,000,000
Regulations property transactions in Bogot suggested
Source: Prepared by the author. changes ranging from 59 to 151 percent,
...................
depending on the neighborhood (Borrero increment, supporting Donald Shoups

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 public infrastructure that
percent when converting single-story homes increases the value of serviced land by more
into residential buildings of five or six stories, than the cost of the infrastructure itself ?
and additional increments of 40 percent Given Latin Americas chronically insuffi-
for eight-to-twelve-story buildings. cient supply of serviced land, high levels of
urban poverty, and the lag between the tax
W i n d falls fro m base and social needs, the land value incre-
I n v e st m e n ts i n U rba n ment could provide a substantial source of
I n frastru c tur e 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 water, 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$35/m2, depending on
the lower density in the outer rings allows topographical conditions, quality of the in-
individuals to install alternative sewerage frastructure, and scale of the project. These
facilities more easily than to access water prices and costs demonstrate the potential
supplies or build roads. for the use of land value increments to fund
The investment cost to provide services public investments even in the lower end
is much lower than the resulting land value of the land market (Bouillon 2012).
Table 1.2
Land Price Increments (US$/m2) Related to Plot Location in Brazilian Municipalities,
2001
Distance to Central Business District Investment Cost
of Service Provision
Increment for 510 km 1520 km 2530 km for 1000 m
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).
...................
T h e P ri n c ipl e s of The notion is that benefits provided by

Valu e Captur e 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 plusvalas) generated by actions accumulate wealth that does not result from
other than the landowners 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 landownerfor 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 landowners effort
Changes in building rights
Public works investments
a b c d
A B C D
Landowners effort
Overall land value increments
Land value increments other than the landowners
Land value increments from public actions
Land value increments from public investments
Source: Adapted from Furtado, Biassotto, and Maleronka (2012).
...................
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 governments 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 taxes, 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 gated community 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 externalities 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
...................
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. Paran, 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 bythe gated communitys fiscal instruments.
overall value in the city as a whole. This trend has been coupled with the
growing presence of private investors eager
T h e Growi n g P opularit y to promote specific land development proj-
of Valu e Captur e P oli c i e s ects. While developers would always prefer
a n d T ools 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 planners toolbox. capture tools useful as a strategy to make
large-scale urban development more viable,
Decentralization or as a guarantee of the sustainability 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 So Paulo in particular.
greater fiscal autonomy and more respon-
sibility for service provisionencourages 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
...................
Many citizens
participated in Brazils
third Conference of
the Cities in 2007.
Ministry of the Cities, Brasilia

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 Pinochets 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 (Cceres and
by proponents of mainstream economics Sabatini 2002).
...................
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
publicinterventions, 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
vateland market and better coordination done in Latin America and the need for
between real estate andpublic 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
Vancouver 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
thoritys 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.
...................
chapter 2
International and Latin American
Experiences
V
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-
onstrated 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, bridges,
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; Muoz Gielen 2010; Alterman 1607 in Mexico (Reyes 1980).
2012; Ingram and Hong 2012; Walters 2012; England used valorization around the
Furtado and Acosta 2013). year 1650 to build canals along the Lea
and Thames Rivers, and in 1801 the House The Bridge of the
Commons was built
Histori c al P r e c e d e n ts of Lords authorized a betterment levy for
in 1809 in Bogot,
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 parks, form of betterment
documented as early as the Roman Empire, roads, and bridges, and a special type of contribution.
kamilokardona/wikimedia commons
...................
valorization was also used after World War I 5 percent of the revenues in 48 counties.
to reconstruct the country. In Italy it was In the states 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). Taiwan 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 United States and Canada have actually
Chinas 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 E n abli n g L e g islatio n
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 Englands right Latin America are found in Colombias Law
to tax the increase in value caused by the 388 of 1997 (Ley 388 de 1997) and Brazils
rezoning of land and Frances Plafond Lgal Statute of the City of 2001 (Estatuto da Cidade).
de Densit, 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 land reform of the Constitution in 1988 and
needed for infrastructure, pay the related other initiatives.
costs for service provision, and pay the Colombias Law 388, in Article 73,
overhead costs and a profit margin introduces the notion that public actions
(Muoz 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 (plusvalas). The laws 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 20052006, of land occupation. Article 79 states that
with the fees accounting for more than local or district councils may share from
...................
Martim O. Smolka
Varied types of
buildings illustrate
changing land uses
over time in Rambla
Mahatma Gandhi,
Montevideo,
Uruguay.
30 to 50 percent of the plusvalas. 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
Brazils 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. Uruguays 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.
...................
Eduardo Reese
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-
tion of new land
15 percent of the increment resulting from contrast, has collected US$4.5 million, or
development laws 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 Ecuadors 2010 COOTAD (Cdigo
Argentina. the land value appreciation resulting from Orgnico de Organizacin Territorial, Autonoma
public actions since the 15 percent figure y Descentralizacin) 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 plusvalas 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 Crdoba, Moreno, Morn, 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 concrete 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 shopping center 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
...................
social housing. These areas are over and lation was to be regulated by the Law on
above the regular obligatory cessions of the Plusvalas Tax and Improvements Fees,
land for preservation, streets, 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 Urbanizacin
tax on vacant land; a special contribution Las Mercedes a charge of 5 percent of
on plots benefiting from zoning changes; plusvalas; 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 plusvalas, although in essence
Sula, and in 1987 to all municipalities it is a betterment contribution that has
(Kehew 2002). Costa Ricas Urban Planning not been fully implemented countrywide
Law No. 4240 of 1969 allowed for better- (Perl 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. Nicaraguas 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 plusvalas 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.
...................
A ppli c atio n s 388 of 1997. Under this powerful provision

to P ubli c L a n d s 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 eminent domain, 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 Bogot 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 propertys most recent acquisition.
If that occurred within the same year, the Land Banking
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 lease 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
...................
Claudio Acioly
Many sections of
Brazils 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
(Jimnez 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 history 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,
...................
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
concession of a commercial marine park 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 companys prof- ties that defy classification. The Colombian
its, the municipality receives CACELs an- Participacin in Plusvalas, 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
...................
chapter 3
The Property Tax and
Betterment Contributions
Borrero Ochoa y Asociados Ltda., Bogot

P
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 Bogot, Colombia,
land values or on increments to that the charge on additional building rights is a north-south
route passing through
those values due to changed condi- (OODC) is not a tax but rather a charge
residential and commer-
tions 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 owners assets work collected about
for public works, transportation, and other but a public good 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
T h e P rop e rt y Ta x 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
...................
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 land value tax 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, Bogots 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 rental value
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 Florin 2011). in Baja California in Mexico, especially
in Mexicali (Perl Cohen and Zamorano
Land Value Taxation 1999). In a recent study, Lpez Padilla and
The land value tax presents, in theory, many Gmez 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
...................
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 B e tt e r m e n t Co n tributio n s
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 Bogot, 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 flood and drainage
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, So 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
...................
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 road pavement responsible for 45 percent of all local public
programs have been promoted since 1927 expenditures in Medelln; in the early 1980s,
and have been defined under law since 30 percent of Calis expenditures; and in
1953 (Cceres and Sabatini 2002). 1993, 24 percent of Bogots local revenues
(Furtado 2000; Jaramillo 1998). After peri-
Significant Variations in Performance ods of neglect in Bogot its use resurged in
In spite of the betterment levys 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 (Prez Torres and Acosta projects and collected almost US$200 per
Pea 2012); in Brazil in 2011 it represented capita, much higher than Bogots US$150
in the same period. Cuencas US$25 per
Table 3.1 capita fees collected in the single year of
Charges Collected from Public Works Programs Funded 2010 (totaling US$12.4 million) also far
by Betterment Contributions in Bogot, 19932013 surpassed those of Bogot in any single
Programs Year of Approval Date of Charge US$ (TRM) year. Cuenca also excelled in terms of per-
Basic Valorization 1993 1993 106,160,600 formance, with 90 percent of households
across the City
Subtotal 106,160,600 making their contributions in less than four
years, 95 percent of the projects collecting
Forming the 1995 19961998 351,928,000 60 percent in betterment contributions, and
City Program
2001 2002 55,931,000
only 3 percent of contributors found to be
(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 statesCoahuila, Estado de Mxico, Sonora,
Subtotal 1,072,000,000 and Zacatecasaccount for 86 percent
Agreement Ring Road #1 Charges in 2012 220,000,000 of total national revenues from betterment
451 of 2010 contributions (Prez Torres and Acosta
(Master Plan,
Pea 2012). In Ecuador, 74 percent of all
Zone North)
Note: TRM represents the conversion rate from Pesos to US$ (millions) at the respective market
betterment contributions are collected in
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
...................
Diego Erba
30 percent of the population (Rodrguez Brazilian municipalities did the betterment Parque de la Madre in
and Aulestia 2013). contribution represent more than 10 percent Cuenca, Ecuador, was
funded by about US$5
Pereira (2012) shows for Brazil that of all tributes on properties.
million in betterment
although the betterment contribution in Whereas municipal size is an important contributions.
the 20002010 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 Maranho, 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 capitaabout 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, So Jose dos Pinhais, in the share declines as population increases. Over
state of Paran (the sixth richest in Brazil), the 20002010 decade, no city in Brazil col-
with a per capita GDP of about $13,000, lected as much as Bogot 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 Paran 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 citys size or wealth, suggesting that politics
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.
...................
Figure 3.1
Total Revenues from Betterment Contributions in Brazilian Municipalities, 20002010
No revenue
US$06,700
US$6,70170,127
US$70,12815,276,430
Notes: 2,890 Brazilianmunicipalities (52.5 percent of all municipalities) collected some revenue from betterment contributions.
The revenues were converted annually to US$. 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 Colombias Law 25
...................
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 (Garca 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.
Martim O. Smolka
...................
value increases. For example, in a small city impacts of Bogots 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 So Paulos 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 pollution 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 Bogots TransMilenio Bus Rapid Transit (BRT) System and Property Values
Study Method or Measurement Result
Rodrguez and Rents on 494 multifamily residential 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 walking time closer to a BRT station.
Muoz-Raskin Values of 130,692 new multifamily properties provided by Properties within the immediate proximity of feeder lines
(2006) the Bogot Department of Housing and Control from 2001 (05 minute walk) were valued higher than those requiring
to 2004. a 510 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-Lpez 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.
Rodrguez 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 Rodrguez and Mojica (2008).
...................
Borrero Ochoa y Asociados Ltda., Bogot

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 (Rodrguez and Targa 2004; those within a block or with other unique 15 in a high-income area
of Bogot was funded by
Flores 2011). attributes.
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).
...................
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 5080 percent influence
zone received 24.5 percent, and those in the
80100 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 Crdoba 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
...................
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 Paran-Urbano programs in the state services later.
of Paran, 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 banks credit line. This program resulted a contributory tool to finance public works
in an increase in municipal contributions of inthe 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, thestrat-
investment in public works. egy of attracting some public intervention
to ones 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 theoccu-
for the cost of upgrading or regularization pants, for example, but to justify evictions
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.
...................
chapter 4
Exactions and Charges for
Building Rights
A
ctions taken by local planning E x a c tio n s
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
direct or indirect land value increments for compelled to make cash or in-kind contri-
Boulevard Los Prceres
in Guatemala City was
a single plot or a group of plots. Capturing butions to obtain special approvals or per-
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 So 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
...................
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 downtown 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 traffic congestion, 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 Crdoba, 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-
developers 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
...................
then soliciting, negotiating, or de-

Catalina Mollinati
manding from them some infrastruc-

ture works or improvements in the
area of the city where the authorized
development takes place.
The city of Crdoba, through Articles 180

to 188 of its provinces 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 certificate for the building
(a requirement for its registration), the
specific public works improvements must
be finalized.
An ordinance from the citys 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 Crdoba, 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 Crdoba 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- Suqua River actually proposed a reduction
rize developments within the legal of the total area to be built from 12,000 to
framework or exempt them of com- 11,000 m2, lowering the FAR from 4.5 to
pliance with existing land use norms, 4.1. However, the project created a new
...................
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- So 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-
C h ar g e s for trates how authorities with sufficient politi-
B uil d i n g R i g h ts 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 Brazils 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 Chicago. 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 Lgal de Densit, 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
...................
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, affordable housing 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 Boston and San Fran- other changes. The operations generated
cisco as in So 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 Quertaro, 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 Uruguays integrated action program estimation of the value of additional build-
(Programa de Actuacin Integrada). ing rights and the diversion of the funds
In the case of So 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 So 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). So 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 citys
secretariat of urban development through Participacin en Plusvalas
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 Participacin en Plusvalas 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,
...................
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 Bogot, 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 instruments 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
T h e U s e of O O DC i n B ra z il (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 landowners 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
...................
Alvaro Uribe
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
promote transit-oriented
parable. In theory, the value of land developed would be paying the equivalent of two more
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 being 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 highest and best use for nearby is used by cities such as Blumenau, Curitiba,
plots. Higher density is not always more Porto Alegre, Salvador, and So 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-
...................
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 Goinia 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 Brazils 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 citys 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)
...................
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 So 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. So Paulo and Rio de Janeiro
In Curitiba, for example, in spite of the To implement OODC in the municipality
OODCs longstanding presence, the aver- of So 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 So 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 Curitibas population the FAR could then be lower than, equal to,
is only about one-third that of So 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 So Paulo, 20022004
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 So Paulo municipal data.
...................
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
L and value increments are generated

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.
Martim O. Smolka
This limitation is not a taking, as often sug-
gested. Technically a taking occurs when a
change in the norms and regulations leaves
a property with no possibility of economic
usefor 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
property is the fruit of a life struggle! However, this zoning regulation did not
now to be used only for forest conservation,
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.
Martim O. Smolka
Signs adorn a multifamily property

in Rio de Janeiro with APAC protection.
The owners are protesting that it
cannot be demolished so they could
build a larger structure.
...................
Figure 4.1
Comparison of Revenues from OODC and the Property Tax in So Paulo, 20022011
250 10.00%
8.9%
9.00%
Residential Use
200 Non Residential Use 8.00%
Total OODC
7.00%
OODC/IPTU
US$ Milions
150 5.0% 6.00%

4.8% 5.00%
100 3.7% 3.7% 4.00%
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, slum 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 So Paulo case relative to Rio de
Janeiro suggests that proper care in timing T ra n sf e r of
may be critical for changing the regulatory D e v e lop m e n t R i g h ts
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 So Paulos 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
...................
building rights within certain areas, as when The feasibility of this scheme was
constraints are specific for FARs on single grounded in the citys 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-
New transportation
sit, 50 percent of the cost (US$9.8 million) opers a charge for the additional building
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.
Cristine Rochol / Porto Alegre Municipal Government
...................
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 Amrico 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, Parans 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 collateral. 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.
...................
chapter 5
Value Capture Tools for Large
Urban Redevelopment Projects
Alvaro Uribe
M
any cities in Latin America their serviced land to recover their own Puerto Madero in
have initiated large-scale re- investments. Buenos Aires, Argentina,
was redeveloped on
development projects in newly Urban reforms, like those initiated in
public land in the old
incorporated yet nonurbanized Paris by Baron Haussmann, were also intro- port district to stimulate
peripheral 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 Brunners 1930 plan for Santiago,
instruments have been devised to defray Chile, as well as in New Towns schemes for
some of the costs incurred. These initiatives Caracas, Venezuela, and So 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
...................
Martim O. Smolka
Renovated warehouses
along the harbor
canal 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
P ri vati z i n g P ubli c around US$230 million worth of land
L a n d for R e d e v e lop m e n t : a value resulting from the internalization
P u e rto Ma d e ro , of externalities created by the project. The
B u e n os A ir e s proceeds funded public works worth US$113
The emblematic case of Puerto Madero in million and an overhead for management
Buenos Aires comprised the urban renewal 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 Ports (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$150300,
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 citys 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
...................
stimulated development in the central city Usme is an area located in the southeast-
as intended. In 2011 the corporation trans- ern sector of Bogot, 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 citys master plan
US$30 million. All in all, the project is con- allocated another 800 hectares for urban
sidered to be a creative innovation in urban expansion and set up Operacin Urbanstica
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-
P ubli c A c q uisitio n ares of land will be allocated for commer-
of P ri vat e L a n d : cial and agro-industrial uses. The OUNU
Nu e v o U s m e , B o g ot 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;
...................
Martim O. Smolka
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 Bogot, Colombia,
land for the project instead of having it in the corresponding partial plan.
was designed to provide
expropriated; and the use of Participatin in Given the projects magnitude, extended
affordable housing and
other services by using Plusvalas 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
...................
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-
L a n d R e a d just m e n t 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 risk.
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 damnagement concert
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).
...................
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 Bogot and Medelln 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 Medelln illustrates
a partial planan intermediate planning the redevelopment of the site of a former
instrument between a full areawide master steel mill and other smaller factories 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 Medelln, Colombia
Source: Rojas Eberhard and Rave (2013).
...................
An aerial view of
the Simesa project in
Medelln, Colombia,
shows the site under
construction in 2011.
One of the former steel
Valores SIMESA
mills on the site in 2006
has been demolished
as part of the
redevelopment.
Valores SIMESA
46 percent of the land, three other comments among
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 Medelln. 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
...................
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 So 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 earthquake 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 (Operacin Urbanstica, 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 Andr in the So 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 sand
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
...................
that would fund the urban infrastruc- Figure 5.3

ture and services. The project was Urban Operations in So 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 citys high-valued Lomas de
Chapultepec area, but the redevelop-
ment is imposing significant costs on Tiet River Ecological Park
the city to address the traffic conges-

tion it generated.
A u c tio n i n g A d d itio n al
B uil d i n g R i g h ts :
CE PA Cs i n B ra z il
Given the difficulties in valuing 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 So Paulo first introduced
Certificates of Additional Potential
Guarapiranga
Construction Bonds (CEPACs) in Reservoir
Billings Reservoir
1995 to simulate the bidding process
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, So Paulo.
ing rights for purchase by competing devel-

opers through public electronic auctions master plan, authorizes the auctions, and
regulated by the Comisso de Valores monitors any initiative to change the plan.
Mobilirios (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.
...................
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. So Paulos 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-
Table 5.1
tion generally involves rezoning and associ-
Public and Private Auctions of CEPACs in Faria Lima UO, ated urban infrastructure updating that in
So Paulo, 20042010 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 So 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$866 million to public coffers, on top
Total 682,669 638,074 722,918,820 of results from previous auctions (Sandroni
Notes: Private auctions are promoted occasionally by the city as an alternative form of payment 2013). More than one public auction may
to the contractors it hires for public works projects in urban operations. The number of CEPACs
offered in private auctions is not available (na). take place between the dates of authorized
Source: Sandroni (2012). CVM distributions; thus, the figures for
...................
US$ 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 So 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
14/7/2004 299,368 51,404,360 172
31, 2013, the city still had nearly 360,000
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 So 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 Janeiros old port area were bid
Grand Total 3,390,999 1,473,152,925 434
by a single buyer, the Real Estate Develop-
ment Fund created by Caixa Econmica Used for a License / 2,333,897
Completed Projects
Federal (CEF), the Brazilian social and
Remaining in Circulation 1,057,102
housing bank with funds it manages
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.
Source: Municipality of So Paulo, Secretariat of Urban Development.
4,089,502 m2 of additional building rights
The bridge and other developments in the

Agua Espraiada UO in So Paulo, Brazil, were
funded by the auctioning of CEPACs.
martim O. smolka
Auga Espraiada,
Sao Paolo
...................
Cesar Brustolin
A new highway 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 So 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 Curitibas mayors 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:
...................
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 gentrification, 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-
...................
chapter 6
Conclusions and Recommendations
Ministry of the Cities, Brasilia
V
Officials and other alue capture policies and tools are tionand timing of public works directly
participants gather in undeniably arousing new interest with those private landowners or developers
Brasilia to launch Brazils 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.
stand 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 linkbetween public
Public authorities are realizingthat 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.
...................
K e y F i n d i n g s a n d L e sso n s 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 Crdoba, 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: EImprovement to existing land uses; NPromotion of a new land use
Second letter: SSingle project or property; MMultiple projects or properties
Third letter: VVoluntary or negotiated; CCompulsory
...................
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-
Bogots betterment contributions or So proaches in most countries is not particularly
Paulos 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 Garca Bolivar obtained in two Lincoln Institute surveys of
(2012), director of the Valorization Fund public officials and others involved with ur-
(FONVAL) of Medelln, More than 50 ban management and public finance in the
percent of Medellns 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 strumentsbetterment 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
...................
Figure 6.1
Roadways Funded by Betterment Contributions in Medelln, Colombia, 19382000
Sites of interest
Constructed roadways
Source: Mayors Office of Medelln.
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 game for the use of related tools needs to be overcome
...................
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.
R e c o m m e n d atio n s 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 valuecapture 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 toolscan 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 citys built environment 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.
...................
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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acknowledgments
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
Research Council (CEUR-CONICET), Buenos Aires, issues, Bogot, Colombia
comments on earlier versions: Gregory K.
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 SantAnna, 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 Ramrez 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 Architecture,
In addition, gratitude to David Vetter of Vetter Design, and Urban Planning, University of Buenos Beatriz Rave, architect and general manager,
Consultora Econmica 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), Medelln, Colombia
Silvia Garca Vettorazzi, architect and vice-director,
full draft; and to Fernanda Furtado, professor
Urbanstica Public Space Worshop, Guatemala City, Eduardo Reese, professor of urban management
and researcher in the School of Architecture Guatemala and planning, Conurbano Institute, General
and Urbanism at the Fluminense Federal Sarmiento National University, Buenos Aires,
Cynthia Goytia, economist, professor and director,
University, Niteri, State of Rio de Janeiro, 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, Niteri, State of
This report also benefitted from numerous on Urban and Environmental Studies, Colegio Rio de Janeiro, Brazil
insights and specific inputs from experts Mexiquense, Toluca, Mexico
Daniel Rodrguez, director, Carolina Transportation
throughout Latin America who are directly Ignacio Carlos Kunz Bolaos, 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, Quertaro, Mexico Carolina at Chapel Hill
to all those listed below who provided timely Andr Kwak, urban studies manager, So Paulo Vanessa Rodrguez, independent consultant,
updates on local issues and practices; Urbanismo, Municipality of So Paulo, Brazil Quito, Ecuador
critical clarifications of how value capture Heliana Lombardi Artigiani, architect and assessor,
instruments operate and their impacts in Mara Cristina Rojas Eberhard, independent
Secretariat of Urban Development, Municipality of consultant for various Colombian public institutions,
different jurisdictions; and many of the So Paulo, Brazil Bogot
graphic illustrations and photographs. The
Maria Mercedes Maldonado, professor, National Paulo Sandroni, private consultant; professor,
author, however, is fully responsible for any University of Colombia; and Secretary of Housing, Getulio Vargas Foundation, So Paulo, Brazil
remaining misinterpretations, errors, and Bogot, Colombia
omissions. Martha Siniacoff, director of cadastre and
Camila Maleronka, architect, public administrator, assessments, Municipality of Montevideo, Uruguay
So Paulo Urbanismo, So 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 Cultural and Environmental Heritage, Municipality
Hernando Arenas, geographer and urban planner,
Institute of Urban Development, Bogot, Colombia Iris Elizabeth Medina Torres, specialist in planning, of So Paulo, Brazil
Municipality of Lima, Peru Alvaro Uribe, architect, planner, and professor,
Zulma Bolivar, architect and planner; president
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 Nia Uzon, independent consultant, Porto Alegre,
professor, National University of Colombia, Bogot; several Argentinean local governments; formerly Brazil
and private consultant, Borrero Ochoa & Asociados, developed land value capture instruments, Luis Fernando Valverde Salandia, architect,
Bogot, Colombia Municipality of Crdoba, Argentina Secretariat for Housing, Municipality of Rio de
Gonzalo Cceres, professor, Institute of Urban Carlos Morales Schechinger, senior expert on urban Janeiro, Brazil
and Territorial Studies, Catholic University of Chile, land management and policies, Institute for Housing Maria Clara Vejarano, professor and researcher,
Santiago and Urban Development Studies (IHS), Erasmus National University of Colombia, Bogot; and
University, Rotterdam, The Netherlands doctoral candidate, Federal University of Rio de
Rosemary Campans, architect-urbanist, Municipal
Urbanism Institute, Rio de Janeiro, Brazil Angel Ricardo Nez Fernndez, United Nations Janeiro, Brazil
Development Program, Havana, Cuba Stella Zuccolini, architect and planner, Housing
Rosario Casanova, engineer, University of the
Republic, Montevideo, Uruguay Gislene Pereira, professor and director, Laboratory and Urban Planning Ministry, Montevideo, Uruguay
of Housing and Urban Development, Federal
Luiz Fernando Chulipa Mller, consultant in property University of Paran, Brazil
assessment and taxation, Porto Alegre, Brazil
A bout t h e A ut h or 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.
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Since 1995 he has led hundreds of research and educational pro- prices for bookstores, multiple-copy orders,
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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 P roject M anager & E ditor
including issues associated with the mobilization of land value Ann LeRoyer
increments to finance and promote urban development. D esign & P roduction
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P rinting
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Implementing Value Capture in Latin America
L
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 plusvalas) generated by actions other than the land-
owners, 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
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Policy Focus Report Lincoln Institute of Land Policy

Implementing Value Capture

Policy Focus Report Series

About This Report

Copyright 2013 by Lincoln Institute of Land Policy

13 Chapter 2: International and Latin American Experiences

21 Chapter 3: The Property Tax and Betterment Contributions

32 Chapter 4: Exactions and Charges for Building Rights

45 Chapter 5: Value Capture Tools for Large Urban Redevelopment Projects

58 Chapter 6: Conclusions and Recommendations

U n e ar n e d I n c o m e fro m Box 1.1

Source: Original Plan from the Municipal Archive of Rio de Janeiro

A s a consequence of the discovery and exploitation of the

depending on the neighborhood (Borrero increment, supporting Donald Shoups

+ Pavement 9.10 4.80 3.40 2.58

+ Sewerage 8.50 1.80 0.30 3.03

T h e P ri n c ipl e s of The notion is that benefits provided by

Value captured by the former landowner

Public works investments

Overall land value increments

Land value increments other than the landowners

Land value increments from public actions

Land value increments from public investments

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

Ministry of the Cities, Brasilia

Influence of Multilateral Agencies Pragmatic Considerations

30 to 50 percent of the plusvalas. The law In regard to administrative actions,

A ppli c atio n s 388 of 1997. Under this powerful provision

Borrero Ochoa y Asociados Ltda., Bogot

Considerations in the Application it manageable. In practice the estimation

of 1959 that authorizes adding up to independently of the project cost. Others,

Borrero Ochoa y Asociados Ltda., Bogot

These two methods are not very differ-

then soliciting, negotiating, or de-

manding from them some infrastruc-

The city of Crdoba, through Articles 180

L and value increments are generated

Signs adorn a multifamily property

150 5.0% 6.00%

Source: Maleronka and Furtado (2013).

Cristine Rochol / Porto Alegre Municipal Government

Area Initial Value Urban Norms Area Final Value

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

or expropriation, and allowed readjustment capture tools, including land readjustment

Source: Rojas Eberhard and Rave (2013).

that would fund the urban infrastruc- Figure 5.3

the city to address the traffic conges-

those interested in taking advantage Expansion area

of the future economic benefits re- 0 2 5 10 km

sulting from the public interventions.

ing rights for purchase by competing devel-

US$ per CEPAC refer to the average value Table 5.2

of November 23, 2009 had authorized Balance 359,001

The bridge and other developments in the

Ministry of the Cities, Brasilia

K e y F i n d i n g s a n d L e sso n s have been designed to capture changes in

Source: Mayors Office of Medelln.

Generate a willingness to pay when Promote Greater Public

National Council for Research. Contact: msmolka@lincolninst.edu

A bout t h e L i n c ol n I n stitut e of L a n d P oli c y

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