Value Capture and the Role of Land in the Equality of Opportunities

São Paulo has developed a unique instrument for capturing land value: charging for the right to build. This instrument has been evolving since mid-1970s and is now firmly established in the city. To make it work, São Paulo’s zoning uses two floor area ratios (FAR): a maximum ratio (as in any city that has zoning), and a basic ratio. The innovation is having a basic FAR: any building that goes beyond the basic FAR has to buy construction rights. The current zoning law (2014) was able to set the basic FAR at one (1) for the entire city. With such a basic ratio, the instrument is able to guarantee a level playing field on any land in the city.

There are two ways for pricing rights: using a formula based on the land’s price and land-use variables, or through an auction. The auction mechanism is very attractive, since it lets the market define the price, a typical problem in value-capture mechanisms. Two case studies are examined herein, which used the auction mechanism in São Paulo and revealed that it could be a powerful way of making São Paulo a more equitable city. However, the way that the revenue was actually disbursed did not guarantee maximum equity.