Secure
Tenure
Production:
A Land
Parais6polis,
Sio
Dispute Resolution
Paulo, Brazil
Process
for
by
Alyce M. Russo
A.B., Government and Economics
Georgetown University
(1984)
Submitted to the Department of Urban Studies and Planning
in Partial Fulfillment of the Requirements for the Degrees of
Master of City Planning
and
Master of Science in Engineering
at the Massachusetts Institute of Technology
January 1989
© Alyce M. Russo 1989
The author hereby grants to MIT permission to reproduce
and to distribute copies of this thesis document in whole or in part.
Signature of Author
Alyce M. Russo
Department of Urban Studies and Planning
January, 1989
Certified by
Professor Lawrence Susskind
Department of Urban Studies and Planning
Thesis Supervisor
Accepted by
Doniald l.
_,w,,-
Schon
Chair, Master of City Planning Program
7Departpent of Urban Studies and Planning
Accepted by
Ole S. Madsen
Chairman, Committee on Graduate Students
Civil Engineering Department
MAM U~iTJ i#67f7Uic
FEB 2 3 1989
U8MA1
Acknowledgments
I would like to thank the Lincoln Institute of Land Policy for funding my
Special thanks to Benjamin
research trip to Brazil over the summer of 1988.
this work would add to the
that
foresight
his
for
Research,
of
Director
Chinitz,
knowledge base of land tenure in developing countries.
Many thanks to my thesis advisors, Professor Lawrence Susskind,
They have not only
Professor James Paddock and Professor William Doebele.
introduced me to new ideas but also have exhibited a tremendous amount of
patience with my application of these ideas to land tenure.
Thanks to Shlomo Angel for introducing me to the idea of Land Sharing
through the MIT, SIGUS workshop.
Many thanks to the many Brazilian public officials, academics, and
private individuals who shared not only information but, more importantly,
In particular, I
their thoughts and perspectives on a very sensitive issue.
would like to thank...
Isaura Campana, as she was the first person I met who was directly
She received me, both personally and
involved with the case study area.
Her confidence and enthusiasm in her work maintained my
professionally.
spirit during the research and is something to be admired.
Marcos Gongalves for his time and patience in sharing his experience
and knowledge of low-income housing construction in Brazil.
Their openness, trust and
The residents of the favela of Parais6polis.
I hope there are more
complete.
more
hospitality have made this research
future.
the
in
avenues for communication
Celso and Betty Oliveira for their friendship, discussions, Portuguese
practice, and hospitality during the closing moments of the thesis.
Mane Alves, my inquisitive MIT colleague, good friend, and housing
Thanks to you I have been able to investigate new ideas and seek out
explorer.
To the never ending search for knowledge and "the
innovative projects.
housing
solution"!
To Lucila and Alvaro Borges, my family away from home.
If it were not
for our meeting 10 years ago I would not have found my way to Brazil (so
many times).
To my father, whose knowledge of housing, construction and finance
has been invaluable, and whose support and encouragement of my ideas has
given me confidence to pursue my goals.
To Steven Schall, my colleague, my editor, my friend and now my
husband,
your patience
and support to the bitter end is unbelievable.
2
Abstract
A Land
Secure Tenure Production:
Parais6polis, Sio Paulo, Brazil
Dispute Resolution
Process for
by Alyce M. Russo
Submitted to the Department of Urban Studies and Planning in Partial
Fulfillment for the Degrees of Master of City Planning and Master of Science
in Engineering
The problem of insecure land tenure in developing countries merits attention
for several reasons.
People's lives are disrupted, whether they be squatters
facing eviction or land owners unable to assert their right of ownership.
Property values, as a result of the insecurity, do not reflect the highest and
best use of the land. The judicial system is burdened (as are the litigants) with
years of court battles in an effort to prove land ownership. Cities are faced
with underinvestment in housing on the part of the land owners and squatters
due to insecure tenure. While tenure security alone may not generate
development, it is a prerequisite for most housing investment. Thus, improved
land tenure security in developing countries is crucial to any overall housing
improvement.
Some attention has been given to solving land tenure disputes in the
developing world.
Angel and Boonyabancha have developed and implemented
land sharing schemes to resolve disputes over public land in Thailand. In Sio
Paulo, Brazil, the municipal government has enacted a law that allows a
change zoning to developers who contribute to a fund for the rehousing of
favelas. But to date, an outline of the process for resolving land tenure
disputes, as well as a financial tool to facilitate the search for a feasible
solution, has not been addressed.
In this thesis, Secure Tenure Production (STEP) is proposed as a method of
resolving land tenure disputes in a case study area in Sio Paulo (privatelyowned land). STEP is most clearly characterized by a negotiation process that
utilizes cross-subsidies to produce a win/win consensus resulting in secure
tenure. STEP, the process and the physical outcome, draws on the traditional
use of land sharing, transfer of development rights, inclusionary zoning,
linkage and land readjustment. Building on the land sharing work of Angel
and Boonyabancha, and the negotiation theories and achievements of
Cruikshank and Susskind, I have formulated STEP to include all the
stakeholders and their interests into a fair, efficient, wise, and stable dispute
consensus-building process and outcome. The STEP process is integrative
bargaining, not distributive,
and represents an alternative to a zero-sum
game.
This thesis will utilize the case study of a disputed, privately-owned parcel of
land in the favela of Parais6polis to illustrate the STEP dispute resolution
process. The process also integrates a financial model to aid in the search for
3
a feasible win/win solution. In regard to the financial model, I not only argue
for the need to integrate one into the process, but also that a specific method
of financial evaluation--the Valuation by Components Method (VC).
This thesis offers .. solution to a
in the favela of Parais6polis in Sdo
solution, though, is the contribution
the proposed process and financial
case study of disputed privately-owned land
Paulo. More important than the proposed
to the study of land tenure disputes that
methodology provide.
Thesis Supervisor:
Lawrence Susskind
Title: Professor of Urban Studies and Planning
4
Table
Secure Tenure Production:
of
Contents
A Land Dispute Resolution Process for
Parais6polis, Slo Paulo, Brazil
CHAPTER ONE: Introduction......................................................................................
8
Introduction of The Case Study....................................................20
CHAPTER TWO:
Sources of Tenure insecurity
Existing Solutions to Land Insecurity
Institutional Problems of Resolving Tenure
The Case Study of Parais6polis
BATNA
Stakeholders:
CHAPTER THREE:
Characteristics,
BATNAs,
Interests
and Fears
Elements of Secure Tenure Production..................................62
Considerations
Criteria for a "Good Outcome"
Intermediary
Satisfying Interests and Fears
Negotiation Tasks--The Case Study of Parais6polis.................92
CHAPTER FOUR:
Hypothetical Conflict
Prenegotiation
Representation
Fact Finding and Inventing
CHAPTER FIVE:
Options
The Role of a Financial Model
in Packaging a STEP Consensus............................................
A Knowledge-Building and Communication
What a Financial Model Needs To Do
Options for Securing
109
Tool
Tenure Production
Defining the Components of the Projects
Obtaining the Information Related to Outflows and Inflows
Risk Analysis
Feasibility
Formalizing
the
Agreement
CH APTER SIX : Conclusion............................................................................................166
Advice for Implementation of Elimination of Insecurity
General Advice to Each of the Stakeholders
Criticisms of Secure Tenure Production
Areas for Further Research
Applicability to Other Tenure Disputes in Brazil and Other Developing
Countries
Appendix
:
Description of the Financial Model and Simulation Results.........178
5
List of Maps and Tables
MAPS
#1:
#2:
#3:
#4:
#5:
#6:
Greater Sio Paulo Area
Municipality of Slo Paulo and Case Study Area
Location of Favelas in the Neighborhood of Parais6polis
Open Spaces in the City of Slo Paulo
Favela of Parais6polis
Land Use Tracts in Area of Parais6polis
TABLES
#1:
Annual Growth Rate in Municipal Population and in Favela Population
#2:
#3:
Distribution of Favelas on Private and Public Land
Population Growth in the Area of Parais6polis
#4:
Family Income Distribution:
#5:
#6:
Change in Land Uses (1980-1984) for Parais6polis and Environs
Satisfying Stakeholders' Interests and Fears
Parais6polis and Greater S~o Paulo, 1983
#7:
Net Present Values of Options for Owner, Lender, Favelados, and
Government
#8:
Risks and Who Bears the Risks
#9:
Net Present Values During the Development Phase
#10:
#11:
#12:
#13:
#14:
Highest Expected Negotiation Value
Sensitivity Analysis
Land Values in the Area of Parais6polis
Effective FAR's (Floor-to-Area Ratio)
Apartment Sales Prices in Area of Parais6polis
#15:
Net Present Value During the Development Phase
#16:
VC Results of Financing Simulation for Owner/Developer
#17:
VC Results of Financing Simulation for Owner/Developer
#18:
#19:
Present Value for Lender, Financing Combinations
Highest VC for Each Option, Function of Financing
6
7
CHAPTER ONE:
Introduction
In developing countries, government,
insecure about land tenure.
invasions.
squatters and developers
are all
Insecurity results from actual or threatened
Insecurity is also created when private land owners illegally
subdivide their land--without requesting approval--and then sell parcels to
unsuspecting individuals.
The same plot of land is sometimes sold to several
investors, each of whom thinks he is the sole owner.
In some instances, the
state has permitted land to be settled without the necessary legal agreements.
Land tenure insecurity hinders investment.
While tenure security,
alone,
may not generate development, it is a prerequisite for most housing
investment.
1
Thus, improved land tenure security in developing countries is
crucial to any overall housing improvement.
As cities grow, land markets change.
As land occupied by non-owners
increases in value, land owners want their land back, so they can encourage
"higher" uses.
Occupants, however, rarely wish to leave.
occupants often feel they have a right to remain.
Indeed the
In some parts of the world,
the law may grant the occupants tenure if they have utilized the land for a
certain amount of time.
Whether the law offers such guarantees or not,
changes in land markets cause conflict.
1 Shlomo
Angel. "Land Tenure for the Urban Poor." The Human Settlements
Division, Asian Institute of Technology. Unpublished paper. (May 1987).
8
In most land tenure conflicts, four outcomes are possible.
can intervene and remove people.
The government
Second, more powerful and wealthier
private land owners can evict the occupants, either by buying them off or by
Third, legal remedies can be sought, with one side winning and the
force.
other losing.
This involves a substantial expenditure of time and money.
Fourth, the government can appropriate the land (with compensation)
reassign it.
and
The first three outcomes imply that land tenure disputes are zero-
sum games in which one side must lose when the other wins.
The fourth
outcome, while not always financially viable, offers an alternative that holds
out the prospect of joint gains or integrative bargains.
Integrative bargaining provides
bargaining.
an alternative to zero-sum or distributive
All-gain solutions are possible if disputing parties focus on
interests, not positions, and devise "packages" that exploit their differences. 2
The goal is to increase the "size of the pie" over which the groups are
fighting.
When the pie is enlarged before it is divided, each person is better
off (or at least no one is worse off) after the division.
Bacow defines "better
off" in the following way:
Better thus can mean more, sooner, or with less risk. It can also mean
cheaper (which includes time of participants and the actual money
they may spend). 3
2 Roger
Fisher and William Ury. Getting to Yes: Negotiating Agreement
Without Giving In. (New York: Penguin Books, 1981)
3 Lawrence S. Bacow and Michael Wheeler.
Environmental Dispute Resolution.
(New York: Plenum Press, 1984), p. 27.
9
In disputes over the disposition of land, integrative bargaining is often
possible because parties value things,
components, differently.
"Land sharing" is an example of an integrative approach to resolving land
tenure
disputes.
Land sharing is a process by which a plot of land occupied by slum
dwellers is partitioned into two parts; one part is leased or sold to the
slum community to rehouse its members; the other part is returned to
the land owner who can develop it to his best possible advantage. 4
Rama IV is an example of a land sharing deal in Thailand.
Below is a
representation of the occupied area before land sharing.
4 Shlomo
Angel and Yap Kioe Sheng. "The Sengki Land-Sharing Project: A
Preliminary Evaluation." Report for UNCHS (HABITAT) Nairobi, Kenya (June
1988).
10
Diagram
1
Source: Angel and Boonyabancha. "Land Sharing as an Alternative to
Eviction: The Bangkok Experience". Unpublished paper, 1987.
After the negotiations the land was split between the owner and the
occupants.
The owner retained a high-valued commercial portion with
frontage along the main roads. The occupants were sold houses, at an
affordable below-market price, on the remaining portion of the land.
11
Diagram
Source:
2
Angel and Boonyabancha.
Land sharing has been traditionally defined in the above manner.
I will draw
from the land sharing experience in Thailand in order to devise a method of
resolving land tenure disputes using a negotiation process that produces a
consensus to achieve secure tenure.
as well as
In this thesis. I shall refer to the process
5
any resulting consensus as Secure Tenure Production (STEP).
In
negotiating secure tenure, land values of either the developed land or the land
for the occupants will always be a function of how much the land will
5 Henceforth,
Secure Tenure Production will be referred to as "STEP".
12
contribute to the potential value of any final development;
the value will not
necessarily reflect only the location and potential buildable area of the land.
Therefore, any process and consensus that can subsidize 6 the development of
an insecure parcel of land and increase the value of the settlement to all
parties can be considered a form of STEP.
An integral part of STEP is the use
of a change in zoning to help achieve a consensus.
STEP, the process and the
physical outcome, have drawn on the traditional use of land sharing, transfer
of development
rights,
inclusionary
STEP is most clearly characterized
zoning
linkage and land
by a consensus-building
utilizes cross-subsidies in order to produce a win/win solution.
readjustment.
process that
A STEP solution
can involve sharing the same parcel of land between the occupants
owner.
and the
It can involve relocating the occupants to a site that is more
acceptable to the occupants.
It can involve utilizing an increase in zoning in
the same location along with a transfer of development rights for other
parcels.
STEP agreements have several advantages over the four alternatives
suggested
above.
The risk
First, time and money can be saved by avoiding court battles.
of losing everything in court is eliminated.
occupants can be avoided.
Second, the use of force to remove
If all "stakeholders" 7 have participated in the
6 Throughout
this thesis a subsidy will be considered any one of the following:
cash, guarantees on loans, change in zoning or the contribution of physical
assets.
7 This
term will be used to refer to all parties which have a stake in the final
outcome of any conflict. There are different degrees of stakeholders, as will
be outline
later.
In general, stakeholders
will refer to three major groups
involved with insecure tenure:
the occupants of the property, the owners of
the property and the government officials or administrators.
This term is
13
settlement and each receives
negotiated
a portion of the final development,
they have an incentive to do that which is necessary to enforce the
settlement, including vacating the land.
Third, flexible financing is possible,
e.g., the government need not provide cash subsidies as it must when land is
The fourth advantage of STEP is that tenancy can be secured for
appropriated.
both owners and occupants.
Secure tenure avoids further invasions by the
same occupants of other parcels of land and, at the same time, lays the
foundation for increased investment in housing.
intact and maintains access to jobs.
STEP keeps communities
Traditional relocation schemes do not, and,
as a result, many relocated land occupants have sold their new units in order
to seek out more favorable locations.
precedent.
setting
Finally, STEP deals need not set a
Each conflict can be settled on its merits without concern about
precedents.
In this thesis, I will investigate further the concept of land sharing, that was
laid out first by Angel and Boonyabancha, adapting its factors to general STEP
considerations.
I will define the makings of a good consensus-building
process and outcome, as defined by negotiation theorists.
As my contribution
to the field. I will then define the process of STEP by incorporating the
consensus-building
conflicts.
process
and tasks
for the
resolution
of land tenure
In order to facilitate consensus building. I will also argue not only
for the integration of a financial model into the process but also for a specific
new method of financial evaluation to be utilized--the Valuation by
taken
from
the writings of Lawrence Susskind
and
Jeffrey
Cruikshank.
Breaking The Impasse:
Consensual Approaches to Resolving Public Disputes.
(New York: Basic Books, Inc., 1987).
14
Components Method (VC).
In order to illustrate these ideas I will use a case
study in Slo Paulo. Brazil to make proposals as to how a STEP process could be
formulated to resolve land tenure disputes on occupied private land.
In this
particular study the disputed occupied parcel is the parcel desired for further
commercial
development. 8
The first chapter outlines background on the city of Slo Paulo and the sources
and institutional problems of insecure tenure.
It also outlines the specific
case study which focuses on one occupied private parcel in S~o Paulo for
which Ua negotiated settlements have been reached, but which could
potentially demonstrate how the STEP process could work in the developing
world.
Recent legislation in Slo Paulo might expedite the application of STEP for
tenure disputes on privately-owned land.
In December 1986, the city enacted a
law (Lei Desfavelamento) 9 providing incentives to developers
removal and rehousing of favelas (squatter settlements).
demonstrate how STEP
new Brazilian law)
privately-owned
8 The
to finance the
I will try to
(which incorporates the incentive structure in the
can generate solutions
to land tenure disputes on
land.
process defined in this paper is adaptable to other types of land tenure
disputes
although I have chosen to focus on occupied private
property in
which the same parcel is wanted for development.
9 Lei No.
10.209, Dec. 6, 1986. City of Slo Paulo, Brazil.
15
The new law is a tool to remove favelados (squatters) from both public and
private land within the city.
The law states that a private contractor may
request a change in zoning, which consists of a change in the floor-to-arearatio (FAR), change in use and/or change in the side yards, if in exchange he
is willing to give the government low-income housing.
translated administratively
This has been
into an across-the-board payment of 50% of the
increase in value, due to a change in zoning, back to the government.
payment may be made in cash or in kind--infrastructure
This
and housing.
The
city can use these funds or facilities to rehouse favelados removed from public
lands bound for public works projects, or located on public lands in areas of
"physical
risk". 1 0
If a private developer wishes to develop his parcel of land
occupied by favelados, he must request a large enough change in zoning on
that property and/or other properties to permit the rehousing of all the
favelados occupying his parcel.
responsibility
In all cases, the government has the
(and therefore the risk) of removing and relocating the
favelados; the private developer only pays for the units into which they move.
There are several novel aspects of this law.
Desfavelamento
Unlike most laws, the Lei de
is open-ended, allowing room for a negotiation process
between the developer and the government.
A special team within the
mayor's planning office was set up to administer and negotiate the projects
with only the developer.
board for a variance.
1 0 Interview
Each project is treated as a request to the city zoning
The zoning board has the power to approve or reject
with SEMPLA personnel.
16
negotiated projects.
This law also demonstrates that the city is placing a high
priority on the clearance and rehousing of favelas.
In order to finance this
(Other
priority, the city is "selling" a change in zoning to the private sector.
than permitting a change in zoning for historical
preservation,
there have
been no other like variances since the establishment of zoning laws in 1972).
a)
Through this approach, the city is assuming a contractual responsibility to:
use the funds for no other purpose than rehousing the favelados; and b)
physically remove the favelados and pay for the cost of the removal.
The law also has many deficiencies, which bias its application in favor of
occupied government land and deter its use on occupied private land, that is
This bias stems from the
desired for further commercial development.
distribution
of risks and returns between the developer and the government.
The law creates no risk for the developer other than increased "market risk"
due to the increase in volume of sellable area or change in use;
government has the risk of relocation of the favela.
favela from public land the government receives
of the previously occupied land.
whereas the
In cases of removal of the
housing and additional use
In cases of removal from private land the
government is obligated to remove the favelas, but receive nothing in return
In these cases, the government
other than new housing for the favelados.
would be signing a contract that it may not be able to fulfill.
Without a means
for the favelados to enter into the negotiation process, the risks are high.
government
cannot guarantee
property (thus,
timely removal
defaulting on its contract
of the favelados from
The
private
with the private developer) unless
force is used--a tactic not in the interest of the government.
The structure
17
and application of the law will force the government not to enter into
concessionary
property.
agreements to secure tenure in the cases of occupied private
In addition, the law requires that there be a defined legal owner of
a parcel before it will enter into negotiations.
Thus, the law is structured in
such a way that it may not function as a favorable alternative to litigation.
It is my position that the incentive of change in zoning, to "sweeten the deal",
as part of STEP, should be applicable in the cases of occupied private property
in cases where the tenure dispute is between the land owner and the
occupants or the tenure dispute is among two or more land owners and the
This application is important because 27% of all favelas in Slo
occupants.
Paulo are located on private land and 35% of them are located on a mixture of
public and private land. 1 1
or removal by force.
Thus, the law would be an alternative to litigation
The only way that an agreement and implementation of a
settlement can be reached under these conditions is through a consensusbuilding process, in which all the parties involved in the conflict are included
in the process, i.e., the favelados, the government, and the disputing
landowners,
resulting in a negotiated
agreement
where each party finishes
in
a position equal to or better than his initial situation.
The thesis will examine the case of Parais6polis, a favela in Slo Paulo.
It is a
useful an important case study to discuss my proposals because the area of
1 1 Diario
Oficial do Municipio, City of Sio Paulo, December 2, 1986, p. 7.
18
Parais6polis has a substantial amount of illegally-occupied,
privately-owned
land, as a result of squatter invasions and years of litigation.
19
CHAPTER TWO:
Introduction of The Case Study
This chapter will describe the setting of the case study in S~o Paulo, Brazil.
First, the sources of insecure tenure will be identified.
Second, the present
means of securing tenure and the institutional obstacles to achieving it will
illustrate that options are limited and not sufficient to resolve all cases.
The
second half will be devoted to the description of the case--Parais6polis--an
area within the city of S~o Paulo.
The physical characteristics
and interests of the stakeholders involved will be developed.
of the area
Through this
case study insecure tenure will be seen as a cause of under-investment in
housing, lower tax rolls for the city and anxiety for all of the stakeholders.
The need for an additional solution--Secure Tenure Production-- in order to
establish
secure tenure will become apparent.
Slo Paulo is a city of 10 million people, in the third largest metropolitan area
in the world, after Mexico City and Beijing.
Area)
(See MAP #1 Greater Slo Paulo
It has a serious problem of "illegal squatter-settlements"--favelas.
12
In
1988, there were 818,872 favelados occupying 150,497 dwellings in 1,594
favelas.
This represents 7.8% of the total population of the city.
decade, the favelado population has increased.
was only 71,840.
Over the last
In 1973, the favela population
During the 1973-1983 period, the general population grew at
the rate of 59.9%, while the favela population grew at the rate- of nearly
12 For
the purposes of this census, a favela is considered a set of households
built of brick, tin, cardboard, wood, or corrugated steel. In general, they are
built in an unorganized manner on property on which the occupants do not
have legal tenure.
20
1,040%.13
The table below illustrates that the increase in growth in the favela
population has been ahead of the general population growth.
Table
1
Annual Growth Rate in Municipal
Population and in Favela Population (in percentage)
Years
1973 - 1975
1975 - 1979
1979 - 1985
Favela
Population
Municipal
Popluation
4.44%
3.15%
3.14%
27.75%
22.79%
12.42%
Source: Favelas: Fatos e Politicas (p. 81)
by Suzana Pasternak Taschner
The increasing number of favelas is a function of several factors; two
dominate factors are the cost of housing and demolition.
risen faster than salaries.
Housing costs have
At the same time, many of the cortigos (tenement
buildings located in the city center) have been demolished.
Since people are
priced out of the housing market and many well-located tenements have
disappeared, favelas, especially those with access to jobs and transportation,
have swelled.
Unlike the earlier inhabitants of the favelas who were migrant
workers from the Northeast of Brazil, many favelados are now low-income
1
wage earners who have lived in the same locale for several years. 4
de Sao Paulo. SEHAB. Censo das Favelas do Municipio de S~o Paulo
1987. (April 1988)
14 Suzana Paternak Taschner.
"Favelas: Fatos e Politicas," Espago e Debates.
79-105.
pp.
Ano.yI, 2, No. 18 (1986),
1 3 Municipio
21
Gru
Us PAueo
DMiso Sub-RegioaL. 1985
These so-called squatters inhabit both private and public land.
available data for these numbers are from 1986.
The last
Thus any solution to insecure
tenure must address both the question of publicly and privately occupied
lands.
Table
2
Distribution of Favelas on Private and Public Land (City of Sio Paulo)
Owner of Area
Private
Municipal
State
Federal
Mixed (a)
Total
Favelas (c)
Nudeus (b)
% of total
# dwell ings
% of total
# dwellings
% of total
# dwellings
27.7
3 9,607
25.6
32,394
44.9
7,213
37.3
5 3,267
35.7
45,247
49.8
8,020
17
0
0
0
0.1
17
0
8
0
0
0
8
35
4 9,865
38.7
49,023
5.2
842
TOTAL
16,100
100
126,664
100
14 2,764
100
Source: Didrio Oficial do Municlpio, City of SAo Paulo, December 2, 1986, p. 7.
Note (a): "Mixed" includes favelas situated on both public and private land
Note (b): Nucleus contains 49 dwellings or less
Note (c): Favela contains 50 dwellings or more
For many of the favelados, the location and the price of their current housing
suits their needs, even though the conditions would not be considered
acceptable by developed-world standards.
The question of official tenure does
not appear to be a priority to the favelados as long as they are not threatened
by eviction.
A federal law does exist (Law of Usocapido)15 by which
individuals can obtain tenure through uncontested use of land over 10, 15, or
20 years. 1 6
However, the law has many complexities that confound its
15 Codigo
Civil, Federal Lei No. 3.071, 1 January 1916.
16 The three categories are outlined in the Codigo Civil. The first category,
Usocapiao Ordindirio , applies to land which has been occupied continuously
without opposition as well as having a bona fide purchaser. After 10 years,
23
application.
First, it is not easy for occupants, who have been inhabiting land
illegally, to produce proof that the cumulated time between them and past
occupants meets the specified period of time of occupancy under the law.
Second, if occupancy can be established there is the problem of the favelados
affording the "hidden costs" in obtaining tenure, even though free lawyer
associations are available.
The "hidden costs" consist of time spend away from
work to start an application process and to go to court plus the cost of
surveying the parcel.
These costs are often a hindrance in utilizing the law. 1 7
Moreover, the original owner of the land, as well as owners of the
surrounding parcels, must pose no opposition to the request for tenure from
the favelado; if one of these claimants appears, the favelado risks losing all he
has invested.
Finally, even without opposition, the approval process may take
6 months, while a court battle may take from 5 to 20 years.
The tenure
approval process results in long delays, high costs and may carry a high risk
of losing. 1 8
the individual (Mr. X) who is the last bona fide purchaser and occupant of land
that has been occupied for 10 years without challenge, will receive clear title
over a challenge from another apparent bona fide purchaser who lives within
the municipality. Mr. X must wait 15 years before he can claim clear title if
the challenge comes from another bona fide purchaser who lives outside the
municipality.
Usocapiao Extraordindrio is the second category of usocapido.
Title may be receive with 20 years of continuous use without opposition,
independent of title or a bona fide purchaser, i.e., adverse position. A third
category, Usocapiao Especial, applies only to rural areas thus it is not
discussed.
The above explanation was taken from interview with Paulo
Guilherme de Almeida. Interview on 25 July 1988.
17A survey of the area should be conducted to establish
the correct boundaries
that will appear on the title of the owner, i.e. the occupant.
18 de Almeida interview.
24
of
Sources
Tenure
Insecurity
Insecurity of tenure has many sources, at least five of which can be readily
identified: 19
1) Unclear title:
Some parcels of land do not have a registered land owner.
Some parcels have several people who hold legitimate deeds yet only one is
registered.
On the other hand, some parcels have one registered owner,
although false deeds may arise and cause court battles.
Some parcels have
unregistered legitimate deed holders due to the inability of the new owner to
pay delinquent taxes that the previous owner never disclosed upon the sale.
2) Squatting:
Land with clouded titles, unregistered land, or land purchased
years ago for speculation is often the target of squatting.
Through the
application of the Usocapido law, insecurity can be created or heightened for
the land owner or the favelados. 2 0
The land owner or the favelados can be tied
up in court for many years with a probability of loosing his land in the end.
3) Invasions:
invasions.
Land that has clouded title or is unregistered is prime for
A traditional invasion is one in which a grillheiro is involved, the
goal is for the grillheiro to obtain tenure to the land, the means takes two
forms. 2
pay
1
In one case the grillheiro is the instigator of the invasion.
individuals to invade a parcel of land.
He will
They will remain there for some
years with the understanding that they are employees of the grillheiro. At
1 9 From interviews,
2 0 See above section
research, and professional experience.
for complication of application of the law of Usocapido.
21In recent years there have been other reasons for invasions.
Some
interviewees have stated that the total deficient in housing and poor living
conditions have created more invasions for the purpose of obtaining shelter.
25
any point in time when the validity of the ownership of the land is in
question, the occupants will claim that the grilleiro is the true owner.
Grillheiros
also enter into the picture through another means.
Grillheiros
can also enter areas that already have squatters and claim they are the real
owners.
titles.
The grillheiro
will contact the favelados and present fabricated
They will ask (order) the favelados to leave the land, or just wait to
accumulate as many parcels as they can for future use.
When the grillheiros
do not want to use the land immediately they make a pact to allow the squatters
to remain and guard the land.
In return, the squatters often sign a waiver to
any right of ownership to the land.
In either case, the grillheiro
will also use
the favelados in order to obtain ownership if he can not obtain it with his
false deed.
The grilleiro
will pay the occupants to invoke the law of
If the occupants gain tenure they will turn the property over to
Usocapido.
the grillheiro.
4) Political
Patronage:
When squatters are in place, they often trade their
votes with politicians for protection from eviction.
The politician usually will
stave off eviction but not obtain a permanent solution for secure tenure.
Rarely is help offered by the politician in obtaining secure tenure when a
threat of eviction is not present, even when occupants might be eligible for
ownership.
This process sustains insecurity for both the land owners and
favelados.
5) Declaration
of
expropriation:
When areas are frozen for expropriation,
invasions have occurred. (as will be seen was the case of Parais6polis)
expropriation is unable to be fulfilled, due to financial
If
constraints, tenure
becomes insecure for both the land owners and the squatters.
26
Existing
Solutions
to
Land
Insecurity:
There are several existing solutions to land tenure insecurity in Brazil,
although they do not appear to be sufficient for resolving all cases of
insecurity.
1) Going to Court:
much money.
As stated, court battles tend to take many years, and consume
In addition, one party wins and the other loses.
2) Expropriation:
Expropriation is the traditional method by which land
tenure disputes are settled.
funds into an escrow account.
The government expropriates the land, places the
If there is any question as to who the legitimate
owners are the parties must fight it out in court. 2 2
Unfortunately, it is not
always financially feasible for the government to expropriate the land.
Besides, if the land is occupied, the government ends up paying twice:
once to
the legal owners and once again for the housing or removal of the squatters.
3) "Pay Off" the Favelados:
The land owners can either pay the favelados to
leave the property now or pay them to sign a contract to leave in the future,
waiving any rights to ownership.
4) Abandonment:
If the occupied land is not valuable, some owners opt to
abandon their land rather than face the hassle and expense of maintaining
ownership. 2 3
If favelados are not aware of the abandonment, a better-
informed grillheiro will claim title to the land.
2 2 de Almeida.
2 3 Carlos
Memolo.
Interview.
Interview on 3 August 1988.
27
5) Partition of Land without Payment:
Sometimes, a small portion of land is
given as payment to squatters in order to protect further invasion of the rest
2
of the property; this is often done in the periphery.
Institutional
Several
Problems
institutional
of
Resolving
factors contribute
4
Tenure
to insecurity
and hinder potential
solutions in Slo Paulo.
First, there appears to be informational roadblocks for the favelados, the
government, and the owners.
Favelados know that the Usocapiao law exists
but often do not understand the applicability of the law, or for that matter
where to go to get a process started.
Thus, only when they are confronted with
eviction do they present their cases to politicians to defend their right to stay
or entangle the owner in a court battle. 2 5
At the same time, government
officials and land owners do not have the expertise in development and
finance to find profitable solutions.
In addition, they tend to have a mind set
of all or nothing, which the court system promotes.
Since the beginning of
the democratization of the Brazil governmental electoral system, i.e. direct
elections of all officials, it appears that land owners may have less power than
2 4 Celso
2 5 1n
N.E. Oliveira. Interview on 12 September 1988.
past years, with lower levels of organization within the favelas, people
would believe anyone who showed a deed and move out or sign a waiver of
Also, from interview with Maria
ownership, without verifying the deed.
Betania Ferreira Mendonga, 27 July 1988.
28
in the days of military dictatorship; numbers of votes may weigh more to
public
officials. 2 6
A major institutional source of insecurity is the high standards of subdivisions
that result in high costs of creating formal subdivisions.
This high cost
reduces access to formal subdivisions for the majority of the population in Sao
Paulo.
The excess demand for housing is supplied by illegal subdivisions
which are accompanied by insecure tenure.
be overlooked.
generate
This institutional
factor cannot
A plan, such as STEP which incorporates cross-subsidies, can
alternative
financing methods increasing
ends of the income scale.
the housing
stock at both
If a plan also includes education of the value of
secure tenure and offers the possibility to enter into the formal market,
favelados will have less of a probability of entering into another transaction
involving
insecure
tenure.
Finally, before the Lei de Desfavelamento, an incentive never existed to
negotiate a win/win agreement.
support this win/win agreement.
Now, occupied land may generate funds to
Large privately owned areas that were
frozen for future use by the government but never appropriated, require the
city council to pass a law unfreezing the entire area for future developed.
In
some cases, land owners, favelados and involved government agencies can not
come to a consensus that represents an equitable solution for all.
Thus this
2 6 This
is an observation on my part. Both the politicians and land owners may
not be aware of this yet, or may not have developed strategies which work
under these new conditions.
29
institutional problem creates insecure tenure for all involved, because none
of the stakeholders make a decision.
The new Lei de Desfavelamento,
dismantles this institutional block by overriding the zoning laws, as well as
the need to have a law passed for entire areas.
The establishment of parcel-
to-parcel trades enables all stakeholders to respond to needs of coalitions
within larger stakeholder-groups to build a consensus. 2 7
The Case
Identifying
Study of Parais6polis
the Conflict
In 1921, the neighborhood of Parais6polis, consisting today of 1,300,000 square
meters was the inheritance of Alfonso de Oliveira Santos. 2 8
The property was
isolated physically, on the other side of the river Pinheiros (see MAP #2 and
MAP #3), at that time the border of the city of Slo Paulo.
primarily
The land was
farming
2 7 Flexibility
in the negotiation process might also mitigate the institutional
problem of non-registration due to back taxes. All back taxes must be paid in
order to register a parcel of land as well as receiving approval for
Many times transactions with land are done without a review of
development.
back taxes. Thus many individuals have not registered their land because they
do not have the sufficient cash to pay the taxes. By exempting land owners
from this rule as part of a land sharing deal less cash would be needed to
register land.
2 8 Cenaviva.
Interview.
30
Center
Rio Tiete
ase-
23-30r
o
I
1314S
Limits de Zona
Limit de Distrito 0 Subdistrito
1
24'00
0
_
5
Ikm
MAP #2:
Municipality of Sio Paulo
and Case Study Area
I~0
I,-
-CAR
~
R5]
A: Area that contains Porto Seguro Favela
11: Area that contains Paraisdpolis FavMa
C: Area that contains Jardim Columbo Favela
MAP "3: I.ocation of Favelas in the
Neighborhood of Parais6polis
area and had no infrastructure.
By 1929, Mr. Santos decided to liquidate his
inheritance by subdividing the land and sell off the small lots.
Mr. Santos sold
most of the plots to people living in other major Brazilian cities.
Several plots
were sold multiple times and registration of the titles was difficult to monitor.
Since the owners usually lived far from their properties lacking a bird's eye
view of their parcel and the increase in value of urban land had not yet
reached the area, people who did not have title to the land began to settle it,
approximately in the 1950's.
Once the Governor's Palace was built in the
adjacent neighborhood, Morumbi, and a bridge was built connecting the area
to the center of the city, land values and development increased.
Many
wealthy people wanted to live near this impressive and powerful building and
have access to the city. 2 9
This trend signified the creation of the
neighborhood of Morumbi, which consists, even today, of large mansions.
This area mirrors wealthy suburbs of the United States.
As Morumbi grew, so did the settlement of what today is called the
Neighborhood of Parais6polis, which contains three separate favelas:
Parais6polis, Porto Seguro, and Jardim Columbo (See MAP #3)30.
The increase
of civil construction and domestic services in the area generated a demand for
low-wage workers.
The logical place for these workers to live was in a
location that shielded the physical unpleasantness of low-income life from the
luxury of the mansions.
As a result, the favela of Parais6polis was settled in a
2 9 Isolda
Paiva Carvalho. Interview on 17 August 1988.
that the area of the case study is called Parais6polis as well as one of the
favelas which make up the area. The use of Parais6polis will refer to the area,
unless identified otherwise in the text.
3 0 Note
33
valley within walking distance of large mansions.
Today the favelas of
Parais6polis is sandwiched between the low density area of mansions and a
high-rise
strip of upper-income
apartments.(See
The owners did not live near their
Why was the land in Parais6polis settled?
properties and had no use for the land.
Map#3)
As the value of the area increased,
some 30 years later, most of the owners had to overcome several obstacles to
regain the use of their land.
Many problems over the title of the land began to
appear as development tried to take place.
Several legitimate owners found
that there were other legitimate owners, each unbeknownst to the other at the
time of purchase.
Favelados had occupied the land, and some owners believed
force would have to be used to resolve the conflict, even if legal title could be
established.
Also, many heirs to the properties were either very old or had no
interest (or need for the money) in starting the long confrontation; or there
were now many heirs to the same piece of land with each heirs desiring a
different outcome. 31
and heirs.
There have been many disputes between the occupants
The potential value of the resolution of these cases to each heir is
usually so small that the fight is not worth pursuing seeing that all proceeds
would have to be split between all the heirs.
abandoned by their legal owners.
Thus, some properties are
The confusion of the legal problems and the
low value of the land over time was well known as an obstacle to the
development of the property, and as such the land was seen as prime for
squatting.
3 1 According
to Brazilian law, an individual's estate must be divided between
the children, half going to the spouse and half to the children.
and
the spouse
34
Prior to 1968, there was no public intervention on behalf of the squatters or
the land owners in Parais6polis.
During the next 15 years, several public
initiatives are worth noting: 3 2
1968: Decreto (public decree) no. 7.180/68 officially designated areas
for playgrounds and public parks.
1971: Decreto no. 9.724/71 declared that the city would expropriate part
of the area of Parais6polis to create a green area.
1972: The zoning law for the city was created. Lei no. 7.805/72 stated
that as part of the zoning plan, part of the area would have the zoning
of Z8-0.29, and the area would be "frozen". Z8-0.29 designates the area
for future expropriation as green open space. Owners could build in the
area, but such construction would be restricted to a floor-to-area-ratio
(FAR) of only 0.29--basically a house. This restriction lowered the value
of the land.
1973, 1975, and 1978:
the Z8 zone in Parais6polis was enlarged.
1978: Decreto no. 15.556/78 expropriated the land to be a green area
and allowed several proposals to develop low-income housing to be
considered. As expropriation began, the State decided to service the
area with water and electricity.
Many complications arose during the expropriation period and in 1980,
Decreto no. 16.751/80 revoked the expropriation process.
1981: Lei no. 9.411/81 further expanded the area of the Z8 zoning to
bring the area up to today's existing area of 1,300,000 square meters
An impasse exists in Parais6polis today:
no development rights for the
supposed land owners, no ownership rights for the squatters, and
inconsistency and inability on the part of the government to deal with one of
the most populous and largest favelas in the city of Sio Paulo.
3 2 AIl
Squatting
the following laws and decrees are from the city of Slo Paulo.
information has been outlined in several EMURB reports.
The
35
accelerated with the government's announcement that it would expropriate
the land for a green area.
It should be noted that the early 1970's were a time
of depression and hardship in the Brazilian economy, which only fueled the
expansion of squatting.
In the early 1970's, it was estimated that 60 families
were living on approximately half the present area of the favela of
Parais6polis. 3 3
By 1983, approximately 3,500 families were in the total area of
the favela, 3 4 and it is estimated that 5,000 families are now living in the same
area. 3 5
The early 1980's were characterized by a boom in the development of highrise apartment buildings on the other side of the valley in which the favela is
situated.
The developers capitalized on the name and image of the Morumbi
neighborhood and an increasing demand for the security (from crime) that
high-rise apartments could offer.
the favela was an added attraction.
servant. 3 6
The large pool of cheap labor provided by
It would be easy to engage a domestic
At the same time, the state installed infrastructure in the area of
Parais6polis, under a campaign to assist under-serviced areas.
increased infrastructure and further development,
As a result of
the value of the land
3 3 EMURB.
"Reurbanizagao Parais6polis." 1984.
da Familia e Bem Estar Social - Butantd. "Favela
Parais6polis: Relatorio Preliminar." August 1984.
3 5 Antonio Teixeira.
Interview on 8 August 1988. Also, from Mendonga
interview. The number is only an estimate because the census-takers did not
survey Parais6polis. 5,000 families appears to be accepted by all the
stakeholders, including the land owners.
3 6 0ne interviewee stated that friends who live in the high rise apartments
often call down to the porter and ask him to round up some one to go to the
store for them. The porter would then call someone in the favela to do this
work.
3 4 Secretaria Municipal
36
occupied by the favelas increased in value.
The high-rise development
created potential increased value in the surrounding land and may have led to
the reversal of the expropriation of the land, because the potential value was
the agreed upon expropriation
higher than
price.
During this period, several organs within the government tried to develop
land sharing schemes to urbanize the entire area at once.
Due to the planned
relocation of all the occupants to the southern corner of the area,
expropriation
was always a component of the projects put forth, yet none were
ever accepted.
In 1985, a proposal for transferring the development rights to
other properties in the area and developing the area as a whole, once again
was put forth.
Stakeholders,
made suggestions,
at times, talked with each other, although owners
without discussing options with the occupants.
There were many problems with the above proposals, in both the process and
the substance of the outcome.
First, the favelados were consistently offered
apartments in an area that is comparable to a small version of the Grand
The favelados all said it was dangerous to live in that area because the
Canyon.
slopes were so steep that a house would not be safe from being washed away
during
rains. 3 7
the land.
Second, the government did not have the funds to expropriate
Third, the developers were waiting for a law to enable them to
remove the favelados from the area.
Finally, a law had to be passed by elected
officials in order to implement the projects.
3 7 Alvaro
Pereira Santos.
The area consisted of 25 to 30
Interview on 1 August 1988.
37
thousand people--too many votes were on the line for politicians to declare
removal; the approach was a failure from the start.
Beyond this, all the
stakeholders, as will be seen, had very different interests and fears--one equal
By the end of
solution for all the stakeholders would not produce a consensus.
1985, the impending approval of the Lei de Desfavelamento
was an incentive
for developers to believe that they might have a new way to remove the
favelas.
Since the adoption of the Lei de
Desfavelamento, one project has been
proposed in the area of Parais6polis.
It asks for the removal of 66 houses in
exchange for an increase in FAR on the occupied property as well as another
property.
As of now, no information relating to the negotiation has been
divulged.
Thus, this thesis will not compare an optimal negotiation process to
the actual, because there has been no actual negotiation to date.
Instead, the
thesis will propose a negotiation process to build consensus, Secure Tenure
Production--STEP, but first an introduction of the area and the stakeholders is
necessary.
The Physical Characteristics of the Neighborhood of Parais6poliS
As of 1988, Parais6polis contains 1,300 hectares.
largest open spaces in the city (See MAP #4).
under the zoning of Z8-0.29.
It is still considered one of the
The total area is now frozen
The area is serviced by water and electricity.
section on the east side of Avenue Gronchi (see MAP #5)
The
is bordered by large
38
estates of high-income families; high rise apartments are to the west.
cemetery lies to the south, and the Avenue borders to the north.
A
The section
on the west side of Giovanni Gronchi is bordered by large higher-income
apartment buildings.
The topography of the area varies from block to block.
In the south and the north, there are very large ravines.
38
the total area is occupied by favelados.
Thirty percent of
Green areas and substantial amounts
of vacant land still exist although interspersed among the favelados (see MAP
#5).
3 8 EMURB
1984.
SEMPLA interviews.
Memo from Arnaldo Paoliello.
39
OS GRAN DES VAZIOSDESAO PAU LO
-da
*CAANDIRU -Os 400 COO mretros quaudrados
pisao tern ludo para se usat
,rciaus. Dever! set
cue, sqwiodo urbanistAs, o dtmstino d~a reAno
CAMPO DE A4ARTE - Not sm S mil~es de
metras qlzadrados pod. surgir um.paqwu. HA
mwita genle pensando nisso - fors da
Aeronlutica. a quern pertence o term-no.
CIIACARAS (IA.CANTAREIRA
Maim vazio
*urban* de Sjo Fau*M. corn 10 ri~sdomto
quadrados dividiuos entre a Saw~a CAsa
paulistan e pequens chacareiros insaLuios hM
ateao
an
SANTAN
IZONA AAETR6 LESTE
rv
I
ao BNDES.
Pool"I
CDAOE JAROLM Area 4obre de 300 000
awmoquadra&dos, ent re as avenid.. Cidade
Jardirn eluaceino bKubitchck junto a Marginal,
popniuldAde de 6rglos f ederais e es'aduass.
Autenfico fili no freezer.
SANTO AMARO
Corredor oe 300 000
Lestce~.-siecdo mctr6. Vai vaoruar -wemutnu
pr~xirns arias. rsta con;uu~da.
MA TAL&.ZO- No :ocil. antes sede das1
induhtrias, demAr set erjuido urn shovpiag
ALTO DE PINPICIROS - Neisa
4rea de I rilhlo de metrios
quadrdos ezistem tres proje(os
- 25 locrfe$ da C P0. 80 pred.s
da faiia Abd~tila e urn paeque
corucebido pelo governo do
Estado.
-
.1
AREAS DA LUBECA EDA kVELA
PARAIS6POLItS - A pnrneiri, uma extenslo do
Momm~bi corn 1,5 milhio de mefros quadrados.
twl pt~dios. A oulra tern Ioorafia irrepulaz e
S 000 buaracos de favela&s em ma l imnie.
Represa de
.uarapiranga
~
.
KELIOPOUS - 500 000 metro quadxadm emn
que eonviem um.& emxme I avela e uinma etaIode tratiamento da Sabesp. Urna are-A conrepLcada.
Aur~otomo
EINTRLACL,
mihe
emte
tPIRANCA
udao
-
vcpdrd
ptir
a-
Represa Billings
"MAP #4: Open Spaces in the City of Sdo Paulo
MAP #4 Legend
a park can be created.
2.5 million m2,
CAMPO DE MARTE: On its
idea, aside from the Air
Many people are thinking about this
Force, to whom this land belongs.
the
complex can be used in
The 400, 000 m2 jail
CARADIRU:
construction of residential and commercial buildings. According
to urban planners, this should be the future destiny of the area.
The largest urban open space in
CHACARAS DA CANTAREIRA:
divided bewteen Santa Casa
is
Paulo, with 10 million m2,
small farmers who have been located in region for years.
Sao
and
ZONA METRO LESTE: A strip of 300,000 m2. Runs parallel with the
E-W Metro Line. The value will increase greatly in the next
years.
an enormous
500, 000 m2, in which sit
HELIOPOLIS:
water treatment plant. A complicated area.
favela
and
a
AUTODROMO DE INTERLAGOS (raceway): Its 3 million m2 are asking to
be transformed into a giant recreation area.
In this area of 1 million m2 exist 3 projects
ALTO DE PINHEIROS:
-- 25 hi-rise towers, 80 buildings of the Abdalia family, and a
park conceived by the state government.
CIDADE JARDIM: A "noble" area of 300,000 m2 between Av.Cidade
with the Marginal
and
Juscelino Kubitschek, along
Jardim
is like "the
agencies. It
Owned by federal and state
(highway).
filet in the freezer."
The first is an
AREAS DA LUBECA AND PARAISOLPOLIS FAVELA:
extension of Morumbi, has 1.5 million m2, and will have dwellings
The second has an irregular topography and 5,000 shacks
on it.
for favelados inside its
boundaries. Problematic.
In this locale, there was going to be a
MATARAZZO:
center. The land, hypothetically, belongs to BDNES.
shopping
PKIINOT
ft
W
0
s
E
90
*115
44
~~+
-
+
414
A
AM
olo
,,
-
a,
*'
MAP#5 Favela of Paraisopolis
Favelas
-
Sistema CartogrAfco Metropowano da Grande SAo Pauo
.9
High- and middle-income homes
t
+
FOLHA:SF-23 -Y -C -V
Lm- income homes
I -2-NO-E -II
Apartment buildings
lasttutins
-'
ESCAL-A 1:5000
Paved roads
Unpaved roads
Qreenare"s
GrWad Sao PamSA
Stakeholders Analysis of Parais6polis as of 1988
The first step in negotiation is to identify the parties involved in the case,
their alternatives to resolving the conflict, their interests and fears.
stakeholders are involved in Parais6polis.
Many
Although one would think that
stakeholders on one side of the table would have common concerns, it is
inevitable that differences exist among them on specific issues, which creates
coalitions within the groups.
These tasks of definition, alternatives, interests
and fears of the stakeholders will be addressed after a brief discussion of
BATNA's.
BATNA
A BATNA is an acronym for the "Best Alternative to a Negotiated Agreement."
As it is traditionally defined by Fisher and Ury, 3 9
a BATNA is the best estimate
by a stakeholder of his probability of winning or gaining without negotiation.
Without negotiating, the land owner might have a 20% chance of winning in
court, while spending "x" amount of money and "y" amount of time.
be the best--the most feasible-- alternative to negotiation.
This may
The process of
defining one's own BATNA is only half of the chore; each group should also
try to define the BATNAs of its counterparts.
3 9 Fisher
and Ury.
their book.
The ideas in the following
BATNAs are not easily
section have been adapted from
43
quantifiable, and many BATNAs may appear to be equal.
Therefore, the
following discussion will not necessarily focus on quantifying the BATNAs,
but rather on identifying these alternatives
and approximating the best of the
lot.
The purpose of identifying a BATNA is twofold.
First, it is a means by which
the stakeholders can evaluate participation in the negotiation process.
If any
one of the parties feels that a negotiated agreement cannot improve its BATNA,
then that party will not have any incentive to come to the negotiation table.
Secondly, the BATNA is a means by which each party can evaluate the possible
offers that arise during the negotiation process.
If, at any point in time, the
potential agreement does not better the stakeholder's BATNA,
should be rejected.
then the deal
Entering and evaluating negotiated deals in this manner
maintains more flexibility.
A stakeholder should not walk away from a deal
that does not beat his best alternative, even if it is not exactly that for which
he had hoped.
In addition, it should be recognized that a negotiation process
and agreement do not mean that each stakeholder will better his BATNA by
equivalent amounts, but only that each &il
In the case of a land dispute, 12.
and the group.
better his BATNA.
dimensions of the BATNA exist:
the individual
The actors in each group are dependent on each other, just as
the groups are dependent upon each other.
It is critical to establish this
dependence in order to bring people to the table and to turn a win/lose
44
outcome into a win/win outcome. 4
0
Each party has something the other needs
in order to realize its own goals; thus, room for trading exists so that all can
realize their goals.
A comparison of the significance of individual versus group actions may
A group L.ct
indicate that group actions exercise more leverage and security.
effectively take a stand against a proposed plan of action, when it finds itself
in a defensive position.
cooperative,
But if the structure of the relationship is to be
a group that declares "we
all
want one thing" (a one-solution
posture) will hinder the actual consensus-building process.
In the case of
securing land tenure, the goal should be to secure land tenure for all parties
involved, i.e., both the favelados and the land owners.
The actual physical
product of the negotiation needs to satisfy the different needs within the
groups of land owners and favelados.
Typical one-solution posture associated
with group action can reinforce opponents' views that the solution should b&
homogeneous (each individual should receive the same thing).
A solution
based on these perceptions could prevent potential negotiators
from even
coming to the table because true differences do exist within the stakeholder
groups.
Thus, group representation and action need to be utilized very
cautiously.
40
Roy J. Lewicki and J.A. Litterer.
importance
book.
of dependence
(Homewood, IL:
among stakeholders
Irwin, 1985).
The
is developed extensively in this
45
BATNAs are not stagnant over time.
Events outside of the disputing parties'
control, as well as incentives offered by each party, can shift to influence
BATNAs.
In negotiating a Secure Tenure Production (STEP), for example, there
is no guarantee that the housing market will stay the same or improve over
time; one owner might offer a large house for each of the favelados yet one
year later with market conditions being less optimistic he might only offer a
plot of land.
At the same time, no accurate forecast of the time needed to
resolve the problem in court exists.
In addition, judges may change their
perspectives over time or laws may shift indicating an advantage to one party
over the other.
Finally, the local or federal government may change its
stance over time, resulting in an advantage for one party or the other.
Each disputing party can also produce both incentives and disincentives for
other stakeholder by changing, or attempting to change the BATNAs of other
stakeholders.
The government can offer an incentive to the developer, such
as zoning changes or guarantees.
On the other hand, the private land owners
can bring about disincentives to change the positions of the favelados.
latter is more often the case.
The
The owners will often try to buy out each
favelado with a small sum of cash.
A land owner might also resort to arson in
order to remove people quickly or intimidate occupants.
A land owner might
hire individuals within the favela to harass "non-compliant favelados" or pay
a group of people to thwart the organizational process among the favelados.
At the same time, the favelados can use the media, the church and the political
parties that are vying for their votes to influence the land owners indirectly.
46
These political groups can bring to the forefront any perceived injustices to
the public's
and government's attention.
BATNAs are not only hard to determine quantitatively at the beginning, but
also can be moving targets as time goes on or as negotiations progress.
Ury
and Fisher notes that each group should never lose sight of its BATNA and
should realize when it is better to stop negotiating--if the BATNA appears to be
better than a negotiated agreement.
Stakeholders:
Characteristics,
BATNAs,
Interests
and Fears
I. THE LAND OWNERS:
General
Characteristics
A) Size of Holding:
Small and Large
There are approximately 2,000 lots within the area of Parais6polis.
There does not appear to be an accurate count of land owners today, but
there are both small and large land holders within the area.
B) Occupation of Land Holder:
Legitimate Developer, Old Inheritor,
Young Inheritor, Grillheiro, High-Income House Owners, and Favelados.
There are six identifiable types of land owners:
1) Several developers
who have bought parcels with the hope of developing a project.
2)
Older individuals who bought the land as an investment or with the
hope of giving the land to their heirs to build a house.
3) Young
47
inheritors who no immediate use for the land; they have often
abandoned the land since the costs of vacating the land were too high to
make holding the land productive.
Such inheritors have another
profession that brings them income, unlike the developer.
4) A group
of owners called grillheiros. They present fabricated titles to the
favelados and ask (order) them to leave the land, or just wait to
accumulate as many parcels as they can for future use.
When the
grillheiros do not want to use the land immediately, they will pay the
individuals to occupy the land as their employees. This is often done on
land that was never registered or on land that has been abandoned.
5)
Several high-income house owners who live within the boundaries of
the favela.
6) Favelados who have gained title to the land and are living
on their property.
They often have additional smaller houses or rooms
rented out on their property.
C) The Status of Title:
Clear, Clouded, or At Risk for Loss.
Some titles are clear.
Others are clouded and in pending court battles.
Some titles may be lost if the occupants have been living on the land for
more than 20 years without objection. 41 (See the previous section for
explanation of the application of the law Usocapiao).
41At the time of writing, the Brazilian Constitution was in the approval
process. One of the articles proposes that only 5 years be necessary to gain
tenure in urban areas.
48
Land Owners' Alternatives to Resolve the Conflict
A land owner's alternatives are to wait for the government to remove all the
favelas, to try and buy off the favelados, or to go to court and face either losing
title or winning the right to remove the favelados.
requires a lot of time and money.
Each of the three options
For the individual land owner, within the
larger neighborhood of Parais6polis, it is evident that any of these
alternatives leaves him in an even worse position than if he were to join
forces with the rest of the land owners.
If he wins a court battle, his land
would still not be worth very much if it were surrounded by or adjacent to a
favela.
The owner can also pressure the government to remove the favela, but
he alone cannot bring enough power to bear to effect this outcome.
For these
reasons, apparently, a group of land owners in Parais6polis has collectively
arrived at a more favorable BATNA, which has manifested itself in the
"Association of the Friends of the Neighborhood of Parais6polis" (Sociedade dos
Amigos do Bairro de Paraisdpolis). It was the increase in value of the land that
prompted the group's formation in 1980.42
Land is increasing in value, and evidence may suggest that the developers and
land owners market strategy is to build before the market becomes saturated.
43 The Sociedade
wants to urbanize area.
To this end, it has been trying for
4 2 M~molo
interview.
4 3 This pressure
has been driven in the last years by the initiation of the
tunnel to Morumbi, which will provide greater access between the area and
the center of the city. Interviews with various developers and land owners
throughout the city of Slo Paulo.
49
several years to remove the favela, to secure control over the use of the land,
and to release the land from the con
gelamento
(freezing of zoning).
government, though, can issue a guarantee for the release of the land.
Only the
The
government can also remove the favelados, but it has been unable or
unwilling to do so.
As a result, only the favelados can guarantee a timely
relocation and protect the land from further invasion.
owners need the favelados.
Paradoxically, the land
Only if the land owners reach an agreement with
the favelados, can the elimination of a potential court battle be assured.
Thus,
the BATNA for the land owners is to go to court, and at the same time try to buy
off the squatters.
LAND OWNERS' INTERESTS:
General
1)
2)
3)
4)
5)
Interests of the land owner:
To
To
To
To
To
reach a quick solution
obtain clear title in cases of dispute
have development rights, vacated land
re-zone the frozen area
decrease risk in implementation,--to have a speedy and secure
removal of occupants
6) To minimize forceful confrontation
7) Not to use self-built housing, because it takes a long time and does not
support the formal construction industry
8) Not to talk with criminals (e.g., murderers, thieves) among the favelados.
Property
Owners'
A)
B)
C)
D)
E)
F)
G)
who want to develop, but have no cash to develop
who want to sell the parcel
who have an income and want to continue to speculate
who want to develop, and need no cash to develop
who want to settle a court case
who want to expropriate unregistered land
who want the favela removed
Those
Those
Those
Those
Those
Those
Those
Subgroups
and Interests:
Property Owners' Fears:
1) Government will not live up to its decision
2)
Favelados cannot be represented
by legitimate
individuals; leaders
cannot make concessions that the group will recognize.
3) Their property will be devalued because of adjacent low-income housing.
50
4) Political parties and the Church will interfere and delay an agreement
5) A new government will be elected before an agreement can be reached.
6) If a developer has to build low-income housing, and obtain the
certificate of occupancy on these low-income units prior to
receiving the certificate of occupancy on the market units, he fears
that he will have to pay large bribes to obtain the certificate of
occupancy on the low-income units. Thus, he would prefer to donate
the cash equivalent to the state and have the government build the
units.
II. THE OCCUPANTS:
According to the latest report done by the government, in cooperation with
the organization of the favelas in the area of Parais6polis, the following
population figures show a growth in the area: 4
Table 3
Population
Growth
in
Area
of
4
Parais6polis
Source
Dwellings
People
1980 Census
1,634
7,071
1983 Pro-Luz
2,100 (with electricity)
N.A.
1983 Sabe Report
3,500-4,000
15,000
1988 Census
5,000a
25,000a
SOURCE:
1980 and 1983 data from Secretaria Municipal da Famflia e Bem Estar
Social - Butanti.
" Favela Parais6polis:
1988 data from SEHAB Census.
aEstimates.
Relatorio Preliminar". August 1984.;
44Unless otherwise indicated, information in this section is from Secretaria
Municipal da Familia e Bem Estar Social - Butantd, 1984.
51
According to the figures of the 1988 Census of Favelas, only .94% of the favelas
in the city of Slo Paulo have more than 1,000 dwellings thus Parais6polis is
one of the largest in the city. 4 5
In Parais6polis, the average family size was estimated to be 4.4 persons per
household.
53% of the population was younger than 19 years old, and the
majority of the remaining population was in their forties.
44% of the
population has an origin in the Northeast of the country and 38% were born
in Slo Paulo.
According to the report in 1983, 96% of the dwellings were used for residential
purposes, with 80% built of wood and 16% of blocks.
Although 82% of the
dwellings were privately owned and 10% were rented, only 2.2% of the people
had ownership of the land, in 1983.
10% of the population owned land out of
the area, accordingly, when asked, 90% of the population did not have any
other option for housing than their dwellings in Parais6polis.
33% of the
families have been residents in the area for 1-5 years and 31% of the families
have been there for 5-10 years.
Thus it could be assumed that these people
were not new comers to the area or migrant labors.
Today, in 1988, utilizing
the same percentages 33% of the families would have been occupying the land
for 5-10 years, and 31% of the population for 10-15 years.
4 5 Municipio
1987.
de Sio Paulo. SEHAB. Censo das Favelas do Municipio de Sao Paulo
April 1988, p. 19.
52
These figures may be misrepresentation as to the time of occupation of the
land.
In fact, they only signify the length of stay of the individuals living
there not the length of occupancy and use of the land.
If an agreement is not
reached within five years the possibility of invoking the law of Usocapiao is
very real, because the report could be utilized as proof that the land has been
occupied for 20 years.
both within the neighborhood and in
The area is relatively rich in resources
the surrounding areas.
There is open space; the favelas cover only
approximately 30% of the total area; there are two large football fields and
open areas through out the favela.
pharmacy,
There are bars, fresh food stores, a
construction material stores
and a new health post, although many
The area is well serviced
of the residents use the hospitals that are close by.
by bus lines both outside the favela and inside during the week.
public
telephones
within the favela.
There
child care services and community support.
are several
There are
churches,
which offer
The children of the favela have
access to both the public and private schools in the neighborhood;
the private
schools taking the children on for free.
Table
4
Family Income Distribution:
Gr. S.o Paulo(a)
Paraisopolis (b)
Parals6polls and Greater Sao Paulo (1983)
---------------------- (In
<1 min. salary 1-2 m.s.
No income
25.0
11.7
1.4
34.0
9.9
7.4
Percent)
2-5 m.s.
37.0
43.0
---------------------------> 5 m.s.
Unreported
0.9
24.0
2.2
3.5
Source: (a) EMPLASA, Sumdrio de Dados da Grande Sao Paulo 1985
(b)Sabe Report
53
According to the 1983 survey, by comparing the general population family
salaries, the favela appears to consist of low to middle income wage earners,
77% of the favelas' families earn between 1 and 5 minimum salaries as
compared to 66% of the general population.
The difference in income between
the general population and that of the favela appears at the extremes.
There is
a higher percent of unemployed within the favela, 7.4% as compared to 1.4%
in general population.
And only 3.5% of the favelas have family incomes
greater than 5 minimum salaries as compared to 24% in the general
population.
Sixty percent of the people worked in the neighborhood of Morumbi or
adjacent neighborhoods
(all of which are mostly rich residential
areas); 20%
of the population worked directly over the bridge inside the city or south of
Morumbi (Jardim, Santo Amaro, Pinherios and Lapa).
direct public transportation from the favela.
All of these areas have
This distribution of work
location coincides with the types of jobs that these people hold:
28% of the
working force was in domestic services ( women, as maids, cooks, baby sitters;
and men as gardeners), 20% of the population worked in civil construction,
16% worked in industry and 18% worked in other occupations (building guard,
porter etc.)
Although the salaries are low to moderate, the occupants appear to
be well integrated into the surrounding economy.
Occupants' Alternatives to Resolve the Conflict
The BATNA of the favelados reveals the dependence within the group of
favelados and upon the other stakeholders.
An individual favelado's
54
alternatives can be to receive money to relocate on his own, to react to a court
order and risk losing the property, or to wait until the government removes
him. 4 6 Staying indefinitely is no longer an option in light of the fact that a
conflict exists.
On the other hand, the alternatives for the groug of favelados
are much stronger.
Together, the favelados can:
a) trade their collective votes for a delay in the
process of removal or receive just compensation for their removal; b) lobby
for the government to expropriate the land and sell it to them; or c) go to court
to try to secure title to the land.
The favelados in Parais6polis have already
recognized their strength and have formed an organization called Unido de
Moradores da Favela Parais6polis (Union of the Residents of the Parais6polis
Favela).
By harnessing their communal power, they have been able to
achieve installation of telephones, health posts and streets since the
establishment of the organization in 1983.
In addition, the community has
established a school, community center and a day care center.
Above all, they
have been able to stay in the same location and maintain their social and
economic ties. This appears to be the main reason for the formation and
interest by the community in the Unido de Moradores da Favela Paraisdpolis.
In a survey in 1983, 70% of the population listed the three most important
reasons for participating in the organization:
1) not to leave the community,
2) to see where they were going, 3) not to have the favela removed.
As of
now, however, the favelados have not requested title to the land from the
4 6 Some
favelados would have to join together in order to go to court if each
one individually did not occupy the legal boundaries of the parcel.
55
government or the land owners, but they have been able to stop further
development in the area.
For example, the group was able to arrange the free
services of a lawyer from one of their elected officials in order to stop the
eviction of one plot. 4 7
Given the valuation of the land and the increased probability of efforts to
expel them, the favelados need the government/politicians, the judiciary, or
the land owners to facilitate their ability to stay in the same location; this the
favelados cannot do on their own.
Therefore,
the BATNA for the favelados is
to lobby for permanent services, and hold out to be able to use the Usocapido
law to obtain title to the land.
If development projects occur, the favelados
must go to court and try to stop the project and impending eviction.
FAVELADOS' INTERESTS:
General Interests:
1) To secure title
2) To maintain community
3) To maintain access to present jobs
4) To maintain affordability
5) To increase jobs in the area
Favelados
A) Those
B) Those
C) Those
D) Those
E) Those
Subgroups and Interests:
who want to remain in the favela in current situation
who want to remain in the same locale, but with improvements
who want to build a house on their own outside the favela
who want cash to return to another state
who want cash to move to another favela
Favelados Fears:
1) Developer will not live up to an agreement
4 7 Mendonga
interview.
56
2) Government will clear favela and relocate without choice
3) Government will change before agreement is settled
III, THE GOVERNMENT
The Administration, The Zoning Commission, The Elected Representatives, The
Government Housing Company, The Administrative Agencies.
Brazil is
experiencing a democratization phase that is influencing all of its sectors.
The role of popularly-elected officials and the development of political parties
have had a strategic effect on the policies and their implementation.
a) The
Administration
has the responsibility of proposing new laws and
executing all laws passed by the legislative branch.
b) The Zoning Commission
proposed projects.
has the responsibility of reviewing all
It has the right to grant variances as it sees fit.
The
Commission is appointed, yet it has representatives from both the
government and the private sector.
Under the new Lei de
Desfavelamento, the Commission has the power to negotiate the number
of houses for which a developer must pay and the transfer of
development rights (TDRs) that will be granted in exchange for the
provision of housing.
In practice, the Commission does not negotiate,
but rather approves or rejects the preprocessed agreements that have
been negotiated between a team from the administration and the
developer.
c) The Elected Representatives
have the power to create laws.
These
representatives also have access to influential people within the
administration for the purpose of aiding the favelado or the developer.
57
d) The Government
years.
Housing Company
has been building housing for
It formerly received its funds from the now-defunct National
Housing Bank to build low-income housing projects on a massive scale.
This organ receives funding made available from the Lei de
Desfavelamento to continue building large-scale public housing.
e) The
Administrative
Agencies
consist of both the planning and
implementing agencies. The planning agency, SEMPLA, under the new
Lei de Desfavelamento, has the responsibility of negotiating with the
developer and processing the agreements that are presented to the
planning board, the implementing agencies and those within other
secretaries
of the administration.
The Government's Alternatives to Resolving the Conflict
The government is in a very delicate position, as can be seen in its BATNA.
Angel states very elegantly the dilemma:
Government usually finds itself in the position of arbiter between the
conflicting claims of landlords on the one hand, and slum dweller on
the other. The general claim of landlord, whether private or public, is
that the government must protect their legal rights to the land and
assist them in clearing the slums so that they can exercise their right to
use the land as they see fit. The position of the slum dwellers is that
they have established a claim to the land through prolonged stay, that
they have no place to go without losing their means of survival, that
the law is unjust if so many people have to suffer so that so few may
benefit, and that the government has a social responsibility to house
them properly. 4 8
The government's alternatives are:
a) to remove the favelas and give them
alternative housing or not; b) to let the favelas exist and hope that the parties
4 8 Angel
and Boonyabancha.
58
battle out the situation in court; or c) to leave the problem to the next
administration.
The government's interest to resolve this problem on private
property is low because the land and valuation in the land will be returned to
individuals and not the State.
Therefore, unless the controlling political party
can provide secure tenure and keep the votes in the area intact, it will not be
interested in any project.
Therefore, the government's BATNA is to try to
release the area from the zoning freeze, wait for the favelados and owners to
sort out their problems, meanwhile only intervening to gain short-term votes.
GOVERNMENT INTERESTS
General Interests:
1) To maintain urban form
2) To maintain equity and not set a precedent
3) Not to be seen as favoring only the developer or favelados
4) To gain or maintain votes of favelados, and to keep the organized votes
intact
5)
6)
7)
8)
To
Not
To
To
clear the unsightliness of the favela
to lay out any cash
create some green area
remove the freeze from the zoning
Government Subgroups and Interests:
A) Officials who are corrupt and want to be paid off
B) Officials who are ideologically driven, and want the favela either to stay or
be removed
C) Opposition parties that want to do nothing
D) Officials who seek concessions to benefit both sides: to maintain pressure
from favelados and developers to keep the law working
E) Those who have a preoccupation only with the urban form, and want no
concessions on zoning
F) Those who want to give temporary and physical goods to the favelados to
gain short-term votes, although they do not want to give tenure
Government Fears:
1) Developer will try to make an unfair profit off the government
2) Corruption will be all-consuming
3) Favelados do not have the capacity or resources to negotiate
59
4) Political parties and the church will work to hinder negotiations
5) All stakeholders cannot come to an agreement to be realized during the
negotiating administration; energy will be wasted
IV, THE POLITICAL PARTIES
Various political parties are working within the favelas throughout the city.
The parties try to produce results for the favelas in order to gain votes.
If a
party is in power, it tries to provide services; the party not in power promises
to deliver services.
The level of political party intervention varies depending
on the organization of the particular favela.
In some cases, the political
parties are very active and in others they are not.
In the case of the favela of
Parais6polis, some political parties are present, but their influence is small
relative to their influence in other favelas.
V. THE CHURCH
The Church also works to deliver services. It is, at times, connected with
political parties.
within each favela.
The Church influence, like that of political parties, varies
In the case of the favela of Parais6polis, the Church is
present, but it is not accepted as a representative for the favelados.
The impasse that exists today causes no further development in the area of
Parais6polis.
The land owners have no incentive to invest for fear that they
will encounter a court battle.
The favelados will not invest to their total
capacity because they have no guarantee of their presence.
The city
continues to no be able to fully address the needs of either the favelados or the
land owners and continues to have both unpaid taxes and foregone added taxes
on land which could be developed.
The government is also seen by the
60
surrounding higher income constituency as a failure because it has not been
able to provide green open space for the city and it has been unable to remove
the "eyesore", the unsightly physical mess of the favela.
Through a Secure
Tenure Production scheme all the parties can come out winners.
The ability
for all to gain secure tenure will create development in the area, will increase
tax rolls, could possibly create green open space and relieve the anxiety of
removal for the favelados resulting in an incentive for increased investment
on the part of the favelado.
61
CHAPTER THREE:
Elements of Secure Tenure
Production--Considerations,
Measures
of
Good
Outcomes and the Role of an Intermediary
In applying Secure Tenure Production to resolve the problem in Parais6polis,
STEP is not necessarily
several considerations need to be evaluated.
applicable under all circumstances. 4 9
Examples of land sharing in Thailand
and Pakistan give a starting point for understanding and expanding the
considerations that need to be assessed in applying STEP.
Having taken stock
of the considerations, the question of a "good outcome" will be addressed.
Finally, the complex nature of insecure tenure and the means to resolve it
makes the role of an intermediary critical to achieve a good consensus.
Accordingly,
the final section will define an intermediary and his role.
Considerations
The following four categories outline STEP considerations developed from land
sharing examples in Thailand and Pakistan.
different
categories: 5 0
Physical/Technical;
They appear to fall into four
Economic; Functional; and
Political.
49"Land sharing is, however, not a panacea for halting slum evictions. It is a
tool which can be applied under specific conditions in a limited number of
cases." Angel and Sheng, p. 7.
5 0 The following "Considerations" are an expansion of land sharing
criteria
cited in Angel and Somsook Boonyabancha.
"Land Sharing as an Alternative
to Eviction: The Bangkok Experience," unpublished paper, May 1987 and in
62
Physical Considerations:
o The disputed parcel must have a low enough density to be able to carry an
increase in density.
parcel is to be shared.
An increase in density is needed, particularly if the
In the case of Parais6polis, the area is developed with
mostly one-story, single-family dwellings.
If these same houses were to be
two-story dwellings, the same number of families could remain on the same
property and half of the land would be vacant for further development.
If the
property in dispute cannot carry the increase in density, additional parcels of
land will be needed in order to share the land.
In the case of Parais6polis,
some properties that are now very dense could be incorporated with other
parcels that are under-utilized or vacant, in order to reach a consensus.
o The neighborhood in which the site (or sites) is located must have the
capacity to carry increases in density as a result of any specific project.
Aside
from the physical capacity requirements of the initial site, the larger
neighborhood's infrastructure must also be able to respond to future increases
in density due to low-income and market development.
In Parais6polis, the
surrounding area i. capable of handling such increases for the first few
Angel and Sheng. The criteria are: 1) LAND CRITERIA, a) development
pressure, b) legitimacy of land occupation, c) stage in the eviction process, d)
landlord cooperation; 2) SOCIAL CRITERIA, a) community organization, b)
outside support, 3) PHYSICAL CRITERIA, a) existing density, b) existing
housing values, 4) FINANCIAL CRITERIA, a) affordability, b) cross-subsidies, c)
external sources of housing finance.
63
projects; but the roads and sewage system would have to be expanded if the
entire neighborhood is to be developed at once.
Even though the first project
approved in the area may have high amounts of risk due to its innovative
nature and untested market, the physical costs/investments for developing
increased density in the area will be less for the developer of this initial
project.
o The site (or a site nearby) must have sufficient room to house the occupants
temporarily
while reconstruction and increase in density takes place, during
the implementation phase.
If the development of the site requires that the
market portion of the site be vacant, housing must be built or supplied for the
occupants prior to developing the market units.
This would require that the
developer make a large up-front investment before being able to start his
development, which increases the risk of the deal.
If the site is large enough,
both the low-income and the market-rate housing can be developed
simultaneously--a means to reduce the time factor, uncertainty, and, thus, the
risk.
Another option to reduce risk is to incorporate a third site into the deal.
The
third site can be utilized as temporary shelter for the occupants while both the
low-income and market units are being built on the original site.
In
Parais6polis, all three of these options, physically speaking, have potential.
Parais6polis has vacant land to house people during the construction phase.
It
also presents the potential of combining adjacent properties in order to
64
develop both the low-income and market units simultaneously. (see MAP #5)
All three options must be analyzed with a financial model to understand which
option is the least costly and gives the highest return, according to the
different risks associated with each option.
o In order to evaluate and develop these various options, some form of
technical
assistance
must be available during the negotiation
process.
Economic Considerations:
o The location of the site must be one with a return on the commercialized
portion sufficient to pay for the cross-subsidization of' the rehousing and
infrastructure
for the existing occupants.
Otherwise,
the risk inherent in the
project must be reduced to warrant a smaller required profit for the developer.
A market that can support the outputs being produced on this parcel (marketrate housing) at the price necessary to cross-subsidize the project must exist as
well.
In any STEP consensus, the cross-subsidy for the entire project comes
from three sources:
a) passing on the cost of the low-income development to
the market-unit buyers; b) the developer receiving a lower profit, which
would be the residual of the low-income project costs that cannot be passed on
to the buyer. 5 1 ; and c) any additional concessions from the favelados or the
government, e.g.,
guarantees
of loans, smaller units.
51This lower return would be justified if the negotiated project were to have
This assertion follows
less risk than a non-negotiated hypothetical project.
65
In Parais6polis, there are several indications that development pressure exists.
The table below shows that there has been much development, particularly of
high-rise apartment buildings in the adjacent area.
For example, in tract 227
which contains a large portion of Parais6polis, there was a percentage change
of 716% in the number of units in high rise apartment buildings during the
period of 1980 to 1984.
In a tract adjacent to Parais6polis, tract 228, there was a
percentage increase of high rise apartment buildings of 82,300%.
from finance theory which states:
the greater the risk the higher the return,
the lower the risk the lower the return. For further background see Richard
Brealey and Stewart Myers. Principles of Corporate Finance. (New York:
McGraw-Hill Book Company, 1984).
66
Table 5:
CHANGE IN LAND USES
(1980 ----------
1984) FOR PARAISOPOLIS AND ENVIRONS
Percentage change 1980-1984
Bldg
Land
Units
---------1984 --------Bldg area
f units Land area
(m2)
(m2)
1980 ----------
Sector
Use
198
198.
198
Horiz.
Apt.
Vacant
196
20
513
57,947
1,990
399,675
24,886
5,574
0
248
20
465
67,640
1,990
375,934
32,941
5,574
0
26.5%
0.0%
-9.4%
16.7%
0.0%
-5.9%
32.4%
0.0%
226
226
226
Horiz.
Apt.
Vacant
75
20
269
41,307
2,008
21,835
574
0
110
20
228
61,212
2,008
118,246
33,083
574
0
46.7%
0.0%
48.2%
0.0%
14.1%
51.5%
227
Horiz.
Apt.
Vacant
42
25
742
13.0%
204
131.5%
367.6%
0
738
32,362
9,962
465,494
12,124
2,459
475,909
5,237
6,773
56
227
227
228
228
228
Horiz.
Apt.
Vacant
65
1
458
27,182
4,770
702,650
7,493
12,942
120
824
41,209
23,146
0
424
243
Horiz.
Apt.
Vacant
15
7,500
1,040
351
191,250
41
1,063
243
243
144
144
144
Horiz.
Apt.
Vacant
# units
Land area
(m2)
137,694
Bldg area
(m2)
-15.2%
-
31,672
0
33.3%
716.0%
-0.5%
3 05.1%
663,350
28,053
77,184
0
84.6%
82300.0%
-7.4%
15
7,500
1,040
0
336
181,500
0
37,356
16,630
61
53,044
708,111
0
977
60,265
28,649
0.0%
-2.2%
NA
51.6%
274.4%
496.4%
0.0%
-5.1%
24,281
48.8%
42.0%
0
-8.1%
-91.5%
Decreases in vacant land are also attributable to commercial or industrial development
NA
385.2%
-5.6%
-4.3%
Source: Cade.stroFiscalde/mobiiario,EMPLASA, 1985.
Note: Data are not available for the following tracts-200, 157, 129.
0.0%
NA
0.0%
P-46.0%
NA
K
,V
I
(2)
Z00
""'a
(qr
2ZY
4
(q) 22a
I
I1
(3) 45:F
CEMi
rER4Am
MO'9.M d
MAP 0 6 Land Use Tracts
0.0Border of Favela
1
60
227
Area
=AvenueGiovaniGrenchi
Land
Scale U1O OW
Use Tract
Fear that the area of Morumbi is already over-built is not based on fact.
neighborhood
city.
is one of the last remaining large un-urbanized
areas
The
in the
The development of a new tunnel connecting the center of the city to
Morumbi presents further development potential for the area.
Is there a
market for a final sale price for the units that would subsidize the deal?
The
answer is a function not only of the buyers' capacity but also of the available
financing.
The financial
calculations and estimates in the financial chapter
and appendix will show that a market does exist.
o At the same time, as Angel has stated, the land cannot be excessively
valuable.
If it is, the owners will have enough profit to compensate all the
parties involved to clear the land. 5 2
From interviews and observations on
land prices within the city of Slo Paulo, the land in Parais6polis does not
appear to represent the higher priced land in the city.
Almost all of the new
apartment buildings in the area are selling at prices below the highest prices
in the city. 5 3
o The government must be willing to work with the private sector and offer
some incentives to all parties involved, e.g., rapid approval of the proposal,
change in zoning, or guaranteed financing.
In addition, both the land owners
and the occupants feel that the government has in some way created the
conflict over the parcel of land and, therefore, has a responsibility to help
resolve it.
5 2 Angel.
In the case of Parais6polis, this bilateral perception of
Telephone interview. June 1988.
Marcos Mendes.
Interviews July and August 1988.
5 3 Gonealves,
69
governmental responsibility is very strong.
government's
past expropriations
more invasions.
The land owners feel that the
of the land have indirectly encouraged
From the point of view of the occupants, the government has
the responsibility of providing housing or access to housing for those who
have no means to provide it for themselves.
The use of government subsidies
could be a means to make the deal more profitable for all the stakeholders.
o Each group must receive some financial support during the negotiation
process, especially the favelados who are without savings, to participate in the
project.
The support may come from the government, non-governmental
organizations, political parties, the developer/land owners or through barter
--by exchanging an apartment for the services of development or negotiation
professionals. 5
4
o Construction and permanent financing for the project must be obtained.
Functional Considerations:
o The occupants of the parcel of land must have an organization and a
representative.
The occupants need both in order to exercise their leverage,
to define their interests, to develop alternatives and to participate effectively
54 Rod
Hackney. Workshop on Community Architecture, MIT Spring 1988.
Hackney has successfully developed low-income housing in England using
barter as a method of payment.
70
in the negotiation process.
The strongest leverage that the individual
occupants have is the power of their numbers, which can be realized only
with an organization that stands against receiving anything less than its
BATNA.
Additionally,
it is only within a group that interests can be defined,
while maintaining the leverage.
The occupants hold information that is
crucial in evaluating any project, e.g., what is affordable in terms of housing
costs.
Effective negotiations require representatives who can convey the
needs and fears of the group that they represent; each individual cannot come
to the table to negotiate his own agreement.
In terms of negotiation, a
representative is one who can transmit and aggregate the interests of his
stakeholders.
In the case of Parais6polis, the Unido de Moradores da Favela
Paraisd'polis can be utilized to define the interests of the specific individuals
on any parcel within the larger area of Parais6polis.
The organization has
already formed a network through which information can flow during the
negotiation.
o The land owners must have a representative organization,
parcel is involved.
be identified.
if more than one
In all cases the land owner or disputing land owners must
In cases in which court disputes exist between two supposed
land owners, while the property is occupied, clear title or resolution of the
court battle is not necessary for negotiations to start.
As long as both of the
disputing parties are also part of the negotiation, the question of ownership
may be able to be resolved out of court.
71
o In addition, the occupants and land owners of a specific parcel should have
an opportunity to participate in any negotiation with representation therein,
if they so wish.
The specific occupants and the land owner of the particular
parcel in dispute must have direct representation as well.
In this way, the
larger interests of the neighborhood will not override the specific needs of
the individuals whose tenure is in question.
Thus, in the case of Parais6polis,
the residents on the specific parcels to be considered for STEP should be able to
have direct representation, utilizing the larger organizations
for support.
o There must be some traditional or legal precedent that affirms the
occupants' right to remain in the same location.
In the case of Sao Paulo, the
law of Usocapido serves this purpose, as well as the political atmosphere that
dictates no eviction policies.
The intensity of this factor will range from site
to site, in some cases it will be a stronger advantage for the favelados and in
other cases it will give more leverage to the owner.
In the case of
Parais6polis, the long length of occupancy relative to other favelas in the city
seem to give the favelados more legitimacy in the eyes of the public, the
politicians, the government and even the land owners. 5 5
5 5 There
are no aggregate figures on the age of favelas, although most
interviewees assert that it was in fact one of the oldest in the city of Sao Paulo.
Many interviewees felt that in comparison to other favelas, this one had much
more power due to the size and age.
72
Political Considerations:
o The government must lack funds to build replacement houses for the
occupants.
STEP is an alternative when the government does not have the
funds to pay for complete relocation of the occupants.
Thus, when a
government does not have the funds to relocate, yet would like to see removal
of the physical sight of a favela and promote further market development, it
will search for ways to subsidize a solution that does not require cash.
In
Parais6polis, the government does not have the cash to expropriate the area;
the government does not have the cash to remove and relocate the favelados.
Thus, contributions of change in zoning, guarantee of loans and a rapid
approval process are non-cash methods that can subsidize a solution.
o The type of State or federal administration, within which STEP is taking
place, must be defined.
In some societies, a pull exists between the incumbent
political party and alternative political parties--a pull that may work to
forward STEP.
In any event, the goal may not be to isolate the process of STEP
from political influence, but to recognize the potential for political
exploitation of the situation in order to promote STEP.
o The government must be willing to cooperate with both the private sector
and the occupants to find a solution.
o The potential for a STEP deal, as opposed to removal, also hinges on the actual
location, size of the parcel, length of stay of the occupants, and doubt over the
73
legal title of the land.
The potential for STEP must be analyzed with regard to
the stance of the government.
It is often the case that a government will not
be absolutely opposed to a STEP deal, but it may nevertheless thwart its
progress.
When a government is not necessarily in favor of STEP, as is the
case Sao Paulo, a remote location of the proposed STEP scheme (Parais6polis is
not on a major highway and not seen from the roadside) may have a higher
potential for a STEP solution than a more visible location.
Criteria for a "Good Outcome"
Having reviewed the considerations for a STEP process and consensus, the
criteria for a good outcome will be outlined.
In cases of disputed land tenure,
the process and the agreement reached should be fair, efficient, wise, and
stable.
It must also satisfy both the stakeholders' interests and fears.
These
are tests of a good negotiated settlement, according to negotiation theorists and
will be consider the criteria for STEP.5 6
Fairness
Procedural as well as substantive aspects of fairness need to be addressed.
5 6 Susskind
and
Cruikshank.
74
The process:
What counts most in evaluating the fairness of a negotiated outcome are
the perceptions of the participants. The key question is 'Were the
people who managed the process responsive to the concerns of those
affected by the final decision?' 5 7
If the person managing the process cannot address all the needs of the
stakeholders, they, in turn, will perceive it as an unresponsive process.
Through the Lei de Desfavelamento, the favelados in Parais6polis do not have
any official channel for participation in the process, and, thus, perceive any
outcome as unfair.
The government is not only trying to manage the process
but also represent the favelados at the bargaining table, which often places it
in an ambiguous role.
In addition, the Slo Paulo municipal planning board, which has final approval
over the outcome, tends to focus on a formula to replace process to assure that
"fairness" is evident.
The planning board wants to prove to the
underrepresented parties that, in fact, they were dealt with fairly in the
process.
Another way to achieve fairness is to produce a set of rules that are applicable
in all cases.
This can set a dangerous precedent-- some conflicting interests
cannot be resolved through the application of rules.
If such rules do go into
effect, one party will always feel that it is being treated unfairly in the
process and may not even want to "play".
5 7 Susskind
When rules are considered unfair
and Cruikshank, p. 21.
75
the focus turns on disputing the fairness of the process which created the
It is more important, as Susskind and Cruikshank state,
rules.
In a problem-solving context, perceived fairness depends more on the
willingness of the parties to accommodate each other's special needs
than on the rules not changing. 5 8
Thus, it is more important that parties perceive that they are being treated
fairly in a process that can be adapted to the needs of the groups involved,
than to have a system of inflexible rules that supposedly convey the concept
of fairness.
In order to achieve perceived fairness, it is suggested:
If each stakeholding group [is] given some responsibility for making a
solution work (as well as part of the credit for devising a set of good
ideas), they probably all would have viewed the process as fair. 5 9
This should be the goal in order to achieve fairness--it can be accomplished
only through the direct interaction of all parties involved.
The substance:
Focusing on the substance (content) of a negotiated agreement is a second
dimension by which to evaluate fairness.
Susskind's conclusion from field
work:
. . . avoid ironclad determinations of 'fairness'.
.
. in a public dispute, a
good process produces a good outcome; and a better process, a better
5 8 ihid.,
p. 22.
and Cruikshank, p. 23.
5 9 Susskind
76
outcome. A process is fair if it is perceived as fair by the disputants and
the community at large. 6 0
Thus, perception is a critical factor in evaluating fairness, for if the process
and the substance are perceived as fair, involved parties will be more willing
to work to implement the agreement.
Efficiency
Efficiency is defined by Susskind and Cruikshank in relative terms:
If it takes much longer to produce an outcome that is only slightly
fairer than what might have been achieved in the absence of
consensus, then the process is inefficient, and probably not worth the
trouble. Our contention is that a better process produces a more
efficient as well as a fairer outcome. A better process is one that first
creates a climate in which side-by-side problem solving is possible.
Such a climate is a prerequisite if the participants are ever to trust each
other enough to divulge their true priorities. And unless they reveal
their underlying interest it is almost impossible to invent the most
efficient agreement. 6 1
Under the Lei de Desfavelamento, a side-by-side problem-solving
does not exist.
relationship
In the case of Parais6polis, the government has become a
broker between two fighting factions:
the land owners and the favelados.
Thus, neither the favelados nor the land owners want to reveal their true
interests because each believes it is fighting the other for all or nothing,
which precludes finding a solution to insecure land tenure.
This creates
inefficiencies because the government is placed in the position of proposing
solutions that are not necessarily going to satisfy the interests of all the
stakeholders.
6 0 ibid.,
p. 24.
61ihid., p. 26.
77
Another source of inefficiencies in negotiation is unclear definition of
stakeholders' interests.
In the case of a parcel of land with many land owners,
the owners may refuse to reveal their true interests and, thus, be unable to
work together to achieve the highest value in a STEP deal.
Therefore, instead
of concentrating on the negotiation, a more efficient solution would be to
concentrate on the organization of land owners so they could participate in a
more efficient manner and act as a united front.
At the same time, many land
owners appear to be threatened by the high level of organization among the
favelados, when, in fact, in the negotiation process, a strong and legitimate
organization allows negotiations to proceed more efficiently for all involved.
When disputes arise negotiations can take place or unilateral action can occur.
The unilateral move, prompted often by a political concern, appears efficient
because a solution is arrived at quickly.
Susskind argues that such an
approach is only a short-term gain and may be costly later.
He has observed
that in the United States,
The public official who acts unilaterally in a public dispute 'trades
several months of negotiation for roughly twice as many months or
years in court. In the public disputes, it is often necessary to "go slow to
go fast." 6 2
In the case of land disputes in Brazil, this same rule is often applicable.
Unilateral deals are often made with the favelados in order to gain votes by a
particular party in power, or in order to deny votes to a particular party in
power.
In the case of Parais6polis, one of the opposition parties will provide
6 2 Susskind
and Cruikshank, p. 27.
78
lawyers to defend any favelado in court if expulsion is pending.
But the
intervening party will not help the favelados find a solution to gain tenure to
the land in the absence of a conflict.
battles with the land owners.
Unfortunately, this only prolongs court
More often, the government will reach a quick
agreement with a land owner, counting on easy removal of the favelados.
Yet
as in the case above, an opposing party may be willing to defend the side of
the favelados, or the favelados may be willing to use the power of the media
and their numbers to protest any removal effort.
Thus, unilateral decisions
often do appear to be easy and efficient, yet the consequences may lead to
long-term
delays.
On the other hand, Susskind and Cruikshank highlight the trade-off between
efficiency and fairness, "It may well be possible for an informed observer to
invent quickly a set of policies identical to those developed by a group of
Such a brilliant individual
negotiators working over a long period of time.
effort would undoubtedly be more" 6 3 efficient than a group process.
This
trade-off is being played out under the new Lei de Desfavelamento and other
ad hoc pay-off agreements with the favelados.
The government is acting as a
proxy for the favelados in negotiating with the developer.
the favelados only after a decision has been made.
As such, it informs
The government team feels
that it is the capable technical group and can formulate an accord more
rapidly than one negotiated with all parties.
Yet this lack of participation by
the favelados induces them to try to undermine the land owner/government
79
negotiated agreement.
It is not that the favelados do not like the agreement
but they feel they should have a voice in determining their future
dwellings. 6 4
The favelados, though, are not part of the negotiation process.
As Susskind and Cruikshank state: "Our experience suggests, however, that
perceived fairness depends on participation.
Those who participate feel that
they 'own' the agreement, and are therefore more likely to support its
implementation."
65
Wisdom
6
"The key to wisdom is what has been called 'prospective hindsight'." 6
Sometimes relevant experiences can be used to identify the potential problems
and solutions; but all solutions contain some element of novelty and risk.
Many novelties are incorporated in a STEP consensus. The introduction of
changes in zoning alter the value of land, as well as the potential profit of the
At the same time, a change in the final product or an increase in
project.
square footage also increases or alters risks.
These risks and value changes
are difficult to estimate for there is no real active market in real estate and
each parcel is unique.
This [novelty and uncertainty] often leads to the dismal process of
'advocacy science,' in which disputing parties use hired experts to
undercut each other's claims. As a result, useful information is
Instead of being examined and resolved, legitimate scientific
obscured.
6
and technical differences are exaggerated. 7
6 4 Santos
65
and Mendonea interviews.
ii.
66 ihid.,
p. 28.
67ihid., p. 29.
80
In the case of Parais6polis, the government, the developer, and several experts
have tried to define these values, each claiming that their numbers are
correct.
Focusing on a set formula to define these numbers, with no regard to
the viability of the total project, leads each side to develop a number or value
that is more advantageous to that side's position.
For every desired number
(e.g., maximum number of houses for the government; minimum number of
houses for the developer) one can construct and defend a formula to produce
that
number.
Instead of defining a formula, "The answer lies in cooperation: both sides must
participate in an effort to minimize the the risk of being wrong.
They must
develop a working approach that accommodates the best possible technical
6
evidence--no matter which 'side' that evidence supports." 8
This thesis will develop a model that can serve to help identify tradable
components to reduce the risk for all involved in land tenure dispute in order
to create a successful project.
The model will not give one answer, but it will
help stakeholders define and understand their costs and benefits.
Stability
The final element necessary for a good negotiated agreement is stability.
Negotiation theorists cite several sources of instability.
unrealistic expectations--feasibility
6 8 Susskind
The first source is
of a project is the key.
If stakeholders
and Cruikshank, p. 30.
81
have unrealistic expectations and act on them, the consensus will only fall
apart during implementation causing all the stakeholders to lose.
In cross-
subsidized projects, unrealistic market sales prices will only cause the
developer to default on the project, forfeiting the source of funding for the
Second, "feasibility rests on realistic timetables".
low-income units.
A STEP
consensus is very sensitive to time which directly effects the costs and
benefits of the project:
the market may move away from the owner causing a
down turn in sale prices, the low-income housing units might take longer to
build than expected, the favelados might take longer to be transfer to their
new dwellings, and the government might take longer to approve certificate
of occupancies.
projections.
Thus, realistic time table must be factored into any
Moreover, everything should be done before hand to minimize
the negative effects of delays.
The third element related to stability is the
Each party should only
commitments that each party makes to the other.
commit itself and request of others that which it can honestly deliver, if not
stability will be sacrificed at the point of delivery.
It will help none of the
stakeholders to force one party to agree to something under pressure which
they can not fulfill.
In a STEP consensus there is a high degree of
interdependency, such that if one party fails all of the others will also loose.
One way to enhance stability, suggested by negotiation theorists, is to
leave
room in the contract to renegotiate the agreement, especially under changing
circumstances.
One option is to outline the circumstances under which the
contract is renegotiable.
Another is to identify under what circumstances
specific parts of the contract are renegotiable.
This may be particularly
82
important in developing STEP because larger projects last over long time
periods, as such are more susceptible to outside influences.
In the case of
Brazil, the inflation factor can make previously agreed to quantities or quality
of units for either party (developer or city) difficult to achieve.
At the same
time, the sale price agreed to by the favelados may not be feasible one year
later, when the new units are completed.
Timetables for construction may also
be altered due to changing prices or market conditions for resale of the
market
units.
Finally,
Susskind and Cruikshank state that stability within agreements
depends on relationships.
If all parties still feel that they have something
worthwhile within the contract and are able to renegotiate, they can
overcome an impasse easily.
In traditional methods of win/lose
agreements,
As a result,
confrontational encounters...create hostility and ill will.
the slightest flaw in an agreement imposed by such methods will be
seized upon by a disgruntled disputant and used to scuttle the entire
New information and unexpected turns of events pose
agreement.
Any wedge that a loser can
grave threats to nonconsensusual solutions.
6 9
agreement.
the
topple
to
used
be
find will
Unlike
traditional
agreements,
win/win
agreements
have
built-in
incentives
for each party to try and over come any problems.
69
Susskind and Cruikshank, p. 32.
83
Intermediary
7
0
The integration of the function of an intermediary who can bring the
stakeholder together can facilitate arriving at a STEP consensus. Tenure
conflicts are representative of what Susskind and Cruikshank describe as
public,
distributional disputes that require assisted negotiation:
Most public dispute are highly complex, for example, and the affected
Disputing parties
groups are hard to identify and difficult to represent.
often have great difficulty initiating and pursuing discussions.
Emotional, psychological, or financial stakes may be so high that the
disputants are unable to sustain the collaborative aspects of unassisted
Finally, power imbalances may preclude direct and
negotiation.
unassisted dealing among disputants. 7 1
In the case of Parais6polis, it is questionable as to who the correct
representatives are for land owners, favelados and the government.
Even
on
a particular plot, the actual number of separate families may be unclear; and
as soon as tenure is awarded, more families will appear.
disputes, false proposals, misunderstanding,
Because of past
and unclear outcomes of
alternative actions, it is hard to begin negotiations, let alone sustain them.
There are strong emotional, psychological and financial stakes.
very valuable to both the land owners and the favelados.
The land is
The developer feels
that his land has been invaded and that the government has never lived up to
its bargain of expropriation when the zoning was frozen.
At the same time,
the favelados are very poor and they are in the position of losing not only
7 0 The
ideas in this section are derived from Susskind and Cruikshank.
71ihid.., p. 136.
84
their homes but the support of their community and access to their jobs.
Finally, an imbalance of power exists between the land owners and the
favelados.
The land owner often has money and knowledge of the legal and
financial system, yet he lacks the "power in numbers" to exercise political
influence in an election process.
power of information
On the other hand, the favelados lack the
and financial resources.
to be perceived as aiding one side or the other.
conditions,
an intermediary
The government
does not want
Under these complex
is necessary.
An intermediary may be called on by one of the stakeholders, may be indicated
by an outsider, or be a disinterested observer who may offer his assistance.
The role of an intermediary can be filled by one individual or a team.
major concerns of the stakeholders regarding
intermediary
are control,
negotiation theorists.
Three
the introduction of an
neutrality and competence,
as outlined by
In an ideal world, an intermediary should be one who
has no control over the final outcome, has interest only in finding a solution
agreeable to all, and is competent enough to produce the best possible solution.
The role of and concerns regarding an intermediary have possibly hindered
the appearance of an intermediary in Parais6polis in the past.
If the
developer or the favelados were to propose an intermediary, the other side
would believe that the intermediary has the interest of only the proposing
party at heart.
The government i& in a position to inject an intermediary into
the dispute, but within the government there a
the other.
those who favor one side or
In addition, government officials usually do not have the
85
negotiation or financial evaluation skills needed to evaluate the proposed
options.
Within the larger community, some individuals are seen as neutral with no
direct control over the outcome of the case.
number.
These individuals exist in small
Their integrity and personal relationships with the stakeholders
present them as potential intermediaries.
In the last year, an economics
professor and former politician, who was known to each of the stakeholders,
acted as an intermediary for one meeting between the favelados and the land
owners.
In general, in Brazil today, it appears that personal integrity and
acquaintance with the stakeholder is also a concern in identifying an
intermediary.
72
No matter who the intermediary is, as long as each
stakeholder has the power to veto the decision, the intermediary could be
acceptable to all.
Extent of Involvement of an Intermediary
In traditional negotiation theory, three levels of intermediaries
facilitator; mediator; and non-binding arbitrator.
are identified:
These three types of
intermediaries are separated by the level of involvement in the process of the
negotiation.
7 2 Ceniviva
interview.
86
Facilitation:
"facilitation is the simplest form of assisted negotiation,...the
facilitator restricts himself or herself to procedural questions". 7 3
Mediation:
"Mediation intensifies the substantive involvement of the neutral
without removing control over the outcome from the parties.
It also involves
the helper in a great deal more confidential interaction with the parties ...In
essence, the mediator plays a transforming role--helping the parties out of a
zero-sum mind-set into an integrative bargaining role". 7 4
Nonbinding arbitration:
"a process whereby a private judge or panel listens
to the arguments of all sides, and then suggests an appropriate solution that
the parties can either accept or reject". 7 5
In STEP a mediator is necessary.
In the case of Parais6polis,
a mediator is
needed not only to facilitate discussions but also to meet privately with each
side to discover interests that are tradable-- interests that would be difficult to
discuss in front of the other stakeholders.
For example, a favelado would not
say that some individuals in his group would be willing to relocate to another
site outside of the neighborhood for fear that he would jeopardize the ability
of the rest of his group to receive housing on the same site.
A developer would
not want to disclose to the government his real cost of construction of lowincome units, for fear that he will be seen as not spending enough on the
7 3 ibid.,
7 4 ibid.,
p. 161.
p. 162.
75ihid. p. 175.
87
project to receive a change in zoning.
Thus, the need to have private
meetings in order to develop potential proposals as well as transmit
hypothetical
proposals to stakeholders
is critical in obtaining a consensus--it
is just as important as face-to-face negotiations.
Finally, the use of an
intermediary helps all the parties appear "tough" in public.
For example, one
land owner may not want other land owners to know that he is willing to talk
with the favelados.
If an intermediary is present he may be able to conceal
identities as well as information.
Alternatives to an Independent Mediator
Government as Mediator: with and without separate orientator for
occupants.
An alternative to an independent mediator is to utilize the government as a
stakeholder
anAd mediator.
Even though the government does have a stake in
the outcome, in some ways it can be seen as not having a predisposed bias
towards one side or the other in the terms of the outcome of the negotiated
agreement.
Thus, it has an incentive to resolve the conflict, but may not have
an interest in any particular outcome.
In this option, the government would
perform the chores of the mediator in the above scenario.
If it did not have
the expertise to develop a feasibility study, it could hire an independent
technician.
In terms of representation,
the government could
represent the
favelados or the favelados could obtain their own orientator to help them
define
their
interests.
88
First, it is entirely possible that the
Such a process has several deficiencies.
government would have a specific solution in mind.
Second, the government,
once it is seen as the mediator and driving force behind the agreement, will be
more conservative so as not to set a precedent for future deals.
When the
government assumes the position of negotiator on behalf of the favelados, the
government may very well, once again, make decisions for this group of
occupants who, it often feels, has no ability to comprehend the issues at stake.
Thus, the government will reduce the decision-making role and, therefore,
the
responsibility
of the occupants--an
implementation of any agreement.
approach
that might
later hinder the
Third, the government often maintains
stances that are contradictory to the goals of not only the developer but also
the favelados, e.g., the government would like to see more open space by
moving the favelados to another site instead of development.
Thus, if the government were the mediator, it would be worthwhile for the
favelados
to have an independent orientator to maintain their ability to
participate on a more knowledgeable and active level with the other
stakeholders.
Occupant and Land Owner Negotiate
A third option would be to have negotiations proceed with a mediator between
the occupants and the land owner.
These two groups could develop various
options and choose the most feasible one.
Then, the two groups could go to the
89
government to request the approval of their joint project, which would
include the necessary participation of the government.
This process would
place enormous pressure on the government to approve the proposed project.
Nevertheless, the late entry of the government into the process might alienate
the government into not agreeing to participate in the manner necessary to
make the agreement profitable.
As will be seen in the last Chapter, the
participation of the government is critical to make a STEP consensus feasible.
The government should be treated as a stakeholder, i.e., it must be brought into
the negotiation process from the start.
Satisfying
Interests
and
Fears
Beyond the considerations for Secure Tenure Production and the criteria
outlined above for a good outcome and the need for an intermediary, interests
and fears of the stakeholders must also be satisfied.
This can be done through
a combination of the negotiation process and the substance of the final
agreement.
For example, the fear that a favelado's interests will not be heard
can be satisfied through face-to-face participation in the negotiation process.
But, merely participating in the process will not address his interest in
receiving a plot of land or a new dwelling--only the substance of a final
agreement
can guarantee that interest.
Thus, I will develop several negotiation processes for the case of Parais6polis
and offer several possible outcomes.
These processes and outcomes will be
90
evaluated by the four criteria of a good negotiation process and agreement as
outlined by theoreticians--fairness,
efficiency,
wisdom, and stability--as well
as how they address the interests and fears of the stakeholders.
I will show
that ont solution cannot respond to the specific characteristics of each
negotiated case.
Every solution has its benefits and costs and must be adjusted
to meet the varied interests of the stakeholders.
91
CHAPTER FOUR:
Negotiation Tasks--The Case Study
of Parais6polis
Hypothetical
Conflict
Under the new Lei de Desfavelamento, a land owner from within the area of
Parais6polis presents a development project for his parcel of land to the
government.
He asks for an increase in the FAR in order to build an
apartment building.
Currently, 30 families live on his plot--they have
occupied the land for 15 years.
The developer has agreed to build housing for
and give land tenure to the occupants on another parcel of land 5 kilometers
away from the present site.
The government has agreed to relocate the
favelados and award the change in zoning.
the relocation plan to the favelados.
The government then announces
The favelados respond that they do not
want to be relocated and that they have the potential to go to court to invoke
the Usocapiao law to stop all proceedings.
At this point, the government does
not force the proposal for fear of a public clash.
sought by all stakeholders.
negotiation
An alternative solution is
They decide they would like to try a STEP
process.
Several procedural and substantive tasks need to be accomplished in order to
start a STEP negotiation and see it through to a successful consensus-based
agreement: 1) Prenegotiation, 2) Representation, 3) Fact Finding and
Inventing Options, and 4) Packaging and Formalization.
This Chapter will
address the first four task categories; the final task of packaging and
92
formalizing
an agreement will be addressed in the following Chapter, utilizing
a financial model.
intermediary--an
It will be assumed that these tasks will be facilitated by an
independent mediator--in
the case
study of Parais6polis,
although the direct identity of the mediator will not be determined.
93
Prenegotiation
In the case of Parais6polis, an
Prenegotiation is the first critical stage.
independent mediator comes forth either voluntarily, appointed by a court,
designated by one of the stakeholders.
stakeholders, privately.
The first task is to talk with each of the
He helps the groups define their true interests, fears
and BATNAs (as listed in Chapter 2).
The mediator devotes a great deal of time
helping the government group and the favelado
internally,
making
or
their respective interests.
group develop
and define,
An important part of this process is
each party aware of its BATNAs and defining the different interests
that exist among the stakeholders.
Generally, each group is accustomed to
playing a defensive role in any conflict.
As a result, all of the stakeholders'
current mind-sets, as well as envisioned solutions, tend to focus on what they
can do to thwart the opposing party--not on how they can help themselves
Put
achieve their own interests by utilizing the resources of the other parties.
simply, most factions see the conflict as a zero-sum game; the intermediary
needs to turn this into a non-zero sum game or at least show the potential to
arrive at a non-zero sum game.
One obstacle in turning the game around is convincing the stakeholders that
it is possible and better to define the divergent interests within their group.
When organizations are in a defensive mode they need to stand together.
result,
individuals within the group
divergent interests.
more often conform
than express
As a
their
For example, some favelados in Parais6polis say they want
a house for all the favelados, or they will not move.
In fact, some would prefer
to have money to build a house on land they own somewhere else.
The former
94
posture suits
process
a defensive action, but does not necessarily work in a negotiation
where the differences
and the different values each
stakeholder
places on items are the elements that can be traded to bring about a consensus.
Government also tends to define interests and solutions in this same manner,
based on a need to simplify implementation and demonstrate fairness and
equality for all involved; while internally each faction ends up compromising
their interests.
Thus,
a mediator for Parais6polis must reorient the
stakeholders to divulge their sorted interests and to understand that other
groups also have these same variations.
recognize
Meanwhile,
the mediator needs to
some reorganization of the present internal
structure or coalitions
may need to be addressed.
Disaggregating interests does not imply dilution
of the organization, existing
power structures or group representation, which is usually assumed to be the
case.
A well-organized group of individuals with defined interests can be just
The need
as powerful as one that seeks an equal outcome for all its individuals.
for group action is very strong, especially for those stakeholders who lack
financial resources or feel powerless in a negotiation process, as is the case
for the favelados.
In fact, it benefits the government and the land owner to
deal with the favelados as a group.
A united front of favelados can guarantee a
smaller probability that one favela will hold out and impede a deal, an
advantage for the owner.
The government can also benefit from a well-
organized group of favelados.
with the favelados,
By placing the decision-making
the government can redirect its energies
responsibility
from enforcing
imposed decisions to negotiating a better solution for themselves.
Through
95
such an approach, the government can avoid being seen as taking one side or
the other.
Representation:
Who can participate, who
sits at the table?
The second operational task is to identify any unrepresented stakeholders, to
choose spokespersons or team leaders for all the stakeholders, and to devise
All parties that are directly
strategies for dealing with diffuse interests.
affected by the outcome of implementing a STEP consensus should be
In the case of the land tenure dispute in Parais6polis, the first
represented.
difficult task is to identify the number of families directly affected in the
occupied plot.
It would be nice to have an independent source to verify the
number of families, but this is impossible.
the number of houses on the parcel.
The next best thing is to identify
At this point criteria needs to be
established as to who can participate in the negotiations.
efficiency,
For reasons of
the favelados and an independent source--either the mediator,
government representative or land owner--should take stock of the
population.
It is important to identify the stakeholders immediately, particularly the
favelados.
It is probable that over the course of the negotiation more houses
will be erected or more families will show up.
Either the favelados should
agree to limit further entry or a rule must be established as to how new
comers will be factored into any solution.
For example, all of the existing
96
favelados would be willing to give up one square meter for every new family
who enters the parcel during the negotiation period.
Setting the number of
total participants needs to be done at the outset with all the stakeholders.
Later, the criterion for the exact distribution of benefits from any solution
should be determined.
Some criteria might be size of family, level of income,
level of participation in community, length of stay in the community, size of
existing plot or dwelling.
This is best left to the internal discretion of the
occupants. 7 6
It is sometimes easier to create new more efficient organizations
in order to
give more control to outsiders or other stakeholders.
Disputing parties'
confidence in such new structures may be very low.
Thus, working with
existing organizations is critical, especially in reference to the favelados.
Parais6polis, a favela organization already exists.
In
It should be included in
order to tap a network of communication and trust that is already established.
The exclusion of the favelados would give them grounds to be suspicious of any
outsider who was trying to dismantle the existing power structure.
One owner of land in Parais6polis has tried to negotiate with the favelados.
priority was to determine the number of houses in the area.
people on each block and asked them to count the houses.
they did not want to do this.
His
He talked with
The favelados said
From the owner's point of view the favelados did
7 6 This
was the case in the projects in Osasco, a municipality adjacent to Sao
Paulo where occupied municipal land was being regularized.
The city
delineated plots and the distribution was left to the favelados. Interview with
Ione Marisa K. Cornejo, 18 August 1988.
97
not want to talk because they were lazy.
From the favelados' point of view, a
stranger to their community was coming into count how many favelados had
to be removed.
Why had the owner not contacted the existing "mayor" of
Parais6polis, who had all the necessary information? 7 7
In negotiating one parcel within the favelas of Parais6polis, the larger favela
organization as well as the people directly located on the disputed parcel need
to be included in any negotiations.
Those on the parcel will need to define
their interests, while the larger favela organization can be seen as a resource.
In the case of Parais6polis,
the Uniao de Moradores da Favela Paraispolis
might be able to bring future guarantees of no entry by additional families
into the area.
The group might be able to pressure smaller dissenting factions
on the plot to agree with the majority.
The larger organization may be able to
offer other useful components to close an agreement.
For example, an
individual on the disputing parcel might no want to take part in the
negotiation.
The larger favela organization might be able to find another
family within the favela who would be willing to trade houses with this family
in order to part take and benefit in the negotiation.
At the same time, the land owner and designated governmental agencies
should be directly included in the negotiations.
Likewise, the larger owners'
association should be involved, although perhaps not directly, because the
owners, too, can bring added resources to the table:
7 7 Santos
and
offer the incorporation of
M6melo interviews.
98
other land owners and their parcels and/or alternative land parcels within or
outside the area.
The same holds true for the government.
SEMPLA (the
planning office) should negotiate, but it should be able to utilize its contacts
and access to available resources within other governmental institutions to
the table, e.g., state banks, tax offices.
Finally, any other non-profit
organization in the community should be given a chance to participate in the
negotiations along with the favelados, although the final decision on any
agreement form the favelados point of view should remain with the occupants
themselves.
Once stakeholders have been determined, spokespersons need to be chosen to
represent the groups at the bargaining table.
A spokesperson, unlike a
representative, can speak only for the group and is not vested with authority
to make decisions for the group.
The role of spokesperson for the favelados at
least appears to be a familiar one within their organization of dwellers.
When
the president of the favela organization was asked if her community would
like a "hypothetical solution X or solution Y", she responded that she did not
know and would be willing to go back and ask her community what they
thought of the idea. 7 8
would be efficient.
To work with the present structure in Parais6polis
A role of spokesperson, similar to that of the favela
president, would help create a more stable solution in the end because each
individual would feel that he would have contributed to the decision-making
process.
7 8 Mendonga
interview.
99
Once spokespersons are chosen, the question then becomes one of whether or
not this spokesperson is legitimate.
Government and owners are often wary of
believing in the legitimacy of any favelado.
This can be dealt with through
procedure, having elections observed by the mediator.
In reality, it is often
clear whether or not the representative is truly a respected leader, by the way
individuals listen to this person and whether or not the person is well known.
Remember the spokesperson does not have any authority to take decisions for
the group thus the legitimacy question may be considered of secondary
importance in this framework.
The legitimacy of the land owner concerns the
government and the favelados, particularly when a lawyer is used as a
representative.
A solution to this problem is for the owner to show his clear
title or for the lawyer to show his contract with the land owner.
When the
title is in question or a lawyer or other party represents owners who are in
court the fear of dealing with a non-legitimate owner is heightened.
Again, if
two land owners are in court, the potential for an agreement out of court with
both of them and the favelados may be enough incentive to resolve the two
problems at once.
Therefore,
it is not necessary that there be only one owner
or that there be clear title in order to start a negotiation.
Once spokespersons are chosen, agenda-setting becomes the next task.
First
acknowledgement of common issues of concern should be recorded. In the
hypothetical case, time is a common concern.
It appears contradictory that
time would be of the essence for the favelados, but they too have said that they
do not want to waste their time negotiating and having nothing come of their
100
investment.
Accordingly, it is important for all stakeholders
time table.
In the case of Parais6polis, I suggest a one-year negotiation period.
to agree on a
In fact, by setting a time table the developer is exposed to less risk of market
movement--he faces a lower probability that the market will move away from
him.
The developer desires a time table not only during the negotiation phase
but also during the approval process of the project.
A shorter approval time is
of great value to the developer yet it is no extra cost for the government.
The
time table is a perfect example of tradable item, it should be factored as a
benefit for the developer.
The second item of the agenda is the fear of how each party will live up to its
part of the agreement.
solution.
This can be addressed by a procedural and substantive
By allowing each party to participate and negotiate, each
stakeholder will have more of a responsibility to fulfill the outcome.
On the
substantive side, the parties, with the help of the mediator, can draw up
contracts to enforce the agreements.
Also, in structuring the agreement, each
party should be required to fulfill an action equal to its rewards; thus no one
party will feel that it is being taken advantage of.
The third item is to designate meeting times and locations.
For the sake fo
efficiency the time should be convenient and the location accessible.
For the
sake of perceived fairness, meetings should take place on neutral ground.
the sake of efficient and perceived fairness.
for
This item is very important for
the favelados, for they usually work all day and do not have the freedom to
attend meetings during regular business hours.
One of the land owners who
101
said he was willing to talk with the favelados called the president of the favela
and scheduled a meeting downtown at 3:00 p.m.
president never showed up.
He later said the favelado
The president was a receptionist for a state
agency, and it was impossible for her to attend the meeting.
Yet, her absence
was construed as unwillingness to discuss options. 7 9
This example illustrates the problem of timing and location of meetings.
Downtown is not the most convenient location for the favelados.
In the case of
Parais6polis, meetings with all the stakeholders should be held every other
Sunday evening.
The meetings should take place, alternately, at the church in
Parais6polis and the land owner's office, as long as the latter location is
In addition a public office on the site
accessible by public transportation.
should be designated in order to facilitate communications.
Internally, both
the favelados and government must designate meetings to inform their
constituencies.
Fact Finding and Inventing
Options
The next task is to designate a fact-finding group.
Fact-finding, feasibility
analysis and packaging of agreements must be done simultaneously and are to
be coordinated by the mediator.
The resulting data from fact finding must be
analyzed, then packaged to produce different alternative solutions.
7 9 Memelo
Generally,
interview.
102
a joint fact-finding mission and feasibility study would be completed by
outside independent experts, so as to produce unbiased information.
In the
case of STEP, most of the information needed to develop packaging options is
not accessible to outside experts; the experts happen to be the stakeholders
themselves.
For example, it is the occupants who know how much they are
willing and able to spend on serving new housing expenditures.
It is the
developer who knows what his cost of capital is, and it is the government who
knows how much of a change in zoning it is willing to allow.
Next, the
mediator needs to outline what each group needs and from whom it is able to
receive these components.
On the following three pages a summary table
(table 6) outlines these needs and shows how they can be satisfied.
103
Satisfying Stakeholders' interests and Fears
Parties Needed to Achieve Satisfaction
InterFAVELADOS
Govern't Owner Lendei mediary
General Interests
X
X
title
secure
1)
X
2) maintain community
X
3) maintain job access
X
X
X
4) maintain affordability
X
5) increase jobs in area
Table 6:
Means to Achieve Satisfaction
Agree to give title to the favelados
Agree to keep people together, favela should act as a group
Agree to maintain people in close proximity to jobs and/or transport
Sale price should be according to affordability, provide financing
Agree to location with access to jobs, if in area agree to hire
workers from within the occupants for construction
Sub-group___nterests_
Sub-group Interests
a) those who want to remain
X
in favela in current situation
b) .... to remain in same locale X
but with improvements
c) ....to build a house outside
the favela
d) ....cash to return to
another state
e) ....cash to move to another X
favela
_____________________________________
Fears
X
1) Developer will not live
up to agreement
2) Goverment will clear favele X
and reloacte w/out choice
3) Government will change
X
before agreement is settled
C0
X
X
X
X
Agree to relocate in the same area,
make new units affordable, need to use favela group pressure
Agree to relocate in the same area,
also make new units affordable
Cash equivalent of construction costs to build unit
off-site if occupant has clear title to another parcel
Ticket to return to another state
X
X
X
X
Agree to no resale restriction, occupant can sell unit
and move later
X
X
X
X
X
For all: a financially feasible agreement
A Signed agreement, with built-in renegotiation clause, and
a process in which all stakeholders participate
Utilize political pressure with favela group action and
a process in which all stakeholders participate
Time-specific agreement with all stakeholders to reach agreement;
intermediary can provide continuity over administrations
LAND OWNERS
General Interests
Govern't Favela Lendel
1) reach quick solution
X
X
2) obtain clear title
X
X
X
3) have development rights
X
4) re-zone the frozen area
X
5) speedy and secure removal
7) not use self-built housing
____________Owner
8) not deal with criminals
X
X
X
X
_____________________
X
must build or contract affordable conventional housing
a) Those who want to develop, X
but have no cash
Agreement to exclude occupants with past police records, and/'or
agr ement within favelados to take responsibility for all occupants
____X
________
_______
Part of the overall agreement outlining tenure
Part of overall agreement
Conditional agreement, fulfillment of low-income units
Agreement on specific time of removal,work with favela as a group
Process of neotiation that includes all stakeholders
____
___
X
Interests
A "time agreement" with all stakeholders
____X
_____X
6) minimize confrontation
Sub-group
In t e r mediary
all: change zoning and favelados consent to secure tenure and
___For
_
increase land values
__________thus
X
X
Find a partner with cash (individual or institution) and
land as equity contribution
_______use
b)..to sell the parcel
c) ....to develop, and need
no cashXXX
X
X
X
X
Find other person within area to sell to, as part of a STEP option
Organize an acireement with stakeholders
d) ....to settle court case
X
X
Structure an agreement to include disputing parties
x
x
X
Signed agreement by all stakeholders, renegotiation clause
2) Favelados can't be represented
X
X
X
3) Property will be devalued
b/c of adjacent low-income
housing
4) Political parties & church
interfere and cause delay
5) New gov't will be elected
before agreement reached
6) Will have to pay bribes for
certificate of occupancy
X
X
Agree on a representation structureuse intermediary to
verify, find funds to incorporate an oientator for favelados
X
X
X
X
X
X
Fears
_
1) Gov't will not live up to
its decision
_____________________
X
X
__________
_______intermediary
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
Design and construction of units must be approved by all
stakeholders
_______________________________
Agreement on means of representation and definition of
stakeholders, use of an intermediary
Agreement with time specification;
intermediary can give continuity over administrations
Agreement for inspection and defined means to resolve
any dispute, especially outlining time to resolve disputes;
can oversee implementation
-I
Inte r-
GOVERNMENT
General Interests
1) maintain urban form
2) maintain equity
3) not favor one side or other
4) gain votes of favelados
5) clear favela
6) not lay out any cash
7) create some green area
8) remove zoning freeze
Sub-aroup interests
a) ....are ideologically
driven
Fears
1) Developer will make unfair
profit
2) Corruption will abound
3) Favelados don't have capacity or resources to
negotiate
4) Political parties & church
will hinder negotiations
5) Will take too much time
C
Favela
X
X
Owner Lende
X
X
mediary
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Develop area, remove the physical appearance of favela not people
X
Reach agreement to develop area
Utilize a financial model, change zoning to enable cross-subsidy
X
Aareement on the goal of secure tenure, not housing
X
Utilize a financial model to measure fair return to risk
X
X
X
X
Define guidelines for urban form
Define equity in terms of process and utilize financial model
Use independent intermediary
Achieve secure tenure through an agreement
X
_
X
X
Use intermediary, barter,i.e., avoid exchange of cash
Utilize an intermediary, and find a means to fund technical
assistance
X
Agreement on means of representation and definition of
stakeholders, use of an intermediary
X
greement for a time to reach an agreement
The mediator can help establish a joint fact-finding mission, made up of
representatives from the stakeholders and technical experts.
find out the facts.
The goal is to
In some cases, a joint mission might be impossible if each
party does not want to divulge its true positions.
In these cases, the mediator
can be a "holding bank" for the information needed to develop a feasibility
study.
In developing STEP agreements, this is probably one of the most
important roles of a mediator. 8 0
take place.
Simultaneously, inventing of options should
Negotiation theorists suggest role playing and brain storming for
good methods for inventing options.
Role playing is a particularly helpful
method for stakeholders to understand the needs and fears of their
counterparts.
These exercises can be run as a group activity with all the
stakeholders by the mediator, or they can be done within each stakeholding
group with the mediator.
Once the facts are in, the task of packaging the options are at hand.
Packaging is the process of first finding elements that are valued differently
by each party and trying to trade these items to reach a win/win consensus.
In addition, packaging entails finding the way to structure a consensus that
will reduce the overall risk and, it is hoped, make the project feasible for all
stakeholders.
This process will be described in the following Chapter along
with the formalization of a STEP consensus.
A summary diagram that
illustrates the STEP tasks and process described in this chapter follows.
8 0 0n
the other hand, an outside expert could be hired to develop these
This option will be reasserted
alternatives and hold the sensitive information.
mediator.
outside
is
no
which
there
in
in the following options
107
Diagram
3
Prene otiatio
Favela Organization
Intermediary
Occupants
f Site
Owner's Organization
Gove nment
P
Intermediary
Intermediary
I
Adm inistrative Agency
Site Owner
Representation
S okesperson (G)
Spokesperson (F
I
(0)
-Spokesperson
Intermediary
r act Findin
I ntermediary
Fact Finding
Group
PackMj
Itnventing Options
CO.,
ei
Spokesperson (G)-----
Spokesperson (F)-
Intermediary--Spokesperson (0)
Develop' Proposals
I
%
\'
SIP
Tender Outstanding
Needs
Consensus
I Formalizing
Agree
t
Administrative
Agency
Consensus
Site Owner(s)
Occupants
Zoning Board
108
CHAPTER FIVE: The Role of a Financial Model in
Packaging a STEP Consensus
This Chapter will discuss the role that a financial model can play in a STEP
process and consensus.
The valuation and financial structure (packaging) of
the deal is what the financial model addresses and helps to accomplish.
It
assists greatly in conducting feasibility analyses and in eliciting options for
secure tenure production.
It incorporates the cash flows and risks, and
permits the users and observers of the model to assess a project's impact on
each of the different stakeholders.
below are:
Accordingly, the topics to be discussed
a) The Financial Model as a Knowledge-Building and
Communication Tool; b) What a Financial Model Needs to Do:
Feasibility
Analysis and Negotiation; c) Options for Securing Tenure Production; d)
Defining the Components of the Projects; e) Obtaining Information Related to
Outflows and Inflows; f) Risk Analysis and Its Impact on Each of the
Stakeholders; g) Feasibility; and h) Formalizing the Agreement.
In addition,
some results of simulations for the Parais6polis case study will be presented
and the implication of their values on a negotiated solution will be discussed.
The actual simulations and explanation of the financial model is presented in
more detail in Appendix.
Many potential STEP negotiations are unable to reach consensus because of
problems in knowledge, communication and feasibility, even though the
stakeholders are willing to try to build a consensus.
The outcome of STEP is a
complex real estate deal based on project finance.
Both the physical and non-
109
physical components of the deal must be valued and analyzed.
value the various options, the cash flows must be identified.
In order to
These cash flows
must be communicated to and understood by the negotiating parties for them
to reach an agreement.
An educational process for all stakeholders is critical.
The elements of the cash flows (risks and returns) must be packaged in a way
that the final consensus is feasible to all parties involved.
integrated
into a consensus-building process,
can help
A financial model,
overcome the
communication, knowledge and feasibility obstacles in packaging a deal that is
agreeable to all--or at least a deal which is better for all than would have been
reached without a financial model.
The particular method of financial
evaluation called Valuation by Components (VC) can facilitate the process.
What exactly is and is not a financial model?
defining,
structuring
and
evaluating
and their alternative financing options.
A financial model is a means of
different
alternative
physical
projects
A financial model incorporates
the
specific risks of each venture and the ability of each party to bear the
potential risks.
A financial model differs from project to project and from
stakeholder to stakeholder.
It is a tool both to educate and clarify the
implications of alternative options, as well as to be useful as a decision-making
tool.
A financial model is go
a formula which will produce a single answer to a
problem once all the data is input.
It often is not an objective tool which can
necessarily be used repeatedly without being adapted from one option to
110
another, or from case to case. 8 1
A financial model is not a black box to replace
human reason or individual responsibility for taking a decision.
A financial
model i. a tool or instrument to help all parties involved in a complex decisionmaking problem arrive at a more rational decision based on their knowledge
of the conditions and assessment of the risks and expected rewards.
81In land sharing deals the location of each project and the type of project, i.e.
commercial or residential, may change the value of different options as well
as the components which make up the valuation process. For example, the
value of a parcel of land will be worth one value if there is a commercial
project developed and may be worth another value if a residential project is
developed.
111
A
Knowledge-Building
and
Communication
Tool
When each individual begins to search for a house(s), he has an ideal house in
mind--usually the size or the location is beyond the price the individual is
willing or able to pay.
After a period of searching for this dream house, the
individual realizes that his dream house does not exist or it is out of his reach
at the moment.
He then has two options:
to wait until he can afford or find his
dream house, or he can change his vision of his dream house.
knowledge-building
process is crucial in understanding
This search or
the realistic available
options.
The search process can be expanded to a knowledge-building process through
practical investigation, resulting in clear comprehension of the values of the
variables in any package of options.
All stakeholders must undergo the
knowledge-building process in a systematic manner.
The search for the data
needed to build a financial model is a method by which knowledge-building
can take place in a systematic and efficient manner.
Each group must be given the responsibility and direction to research and
gather the necessary information to devise a financial model.
The process of
data gathering serves to inform stakeholders of the available options as a
function of the market, the individuals in their groups and the other
stakeholders.
The knowledge-building process can help individuals
understand what their trade-offs feasibly could be, as in the above example of
the buyer searching for his ideal home.
This process serves to shift positions
112
on issues which might make the options or the positions of stakeholders more
feasible or realistic.
The knowledge-building process is an important task for the favelados, the
land
owner/developer 8 2 and the government to undertake.
For example, the
favelados in Parais6polis do realize that they are situated on valuable property,
although they do not know how valuable.
The favelados think that a proposal
for a new house on another site of 30 square meters is too small, but they have
no idea how much a square meter costs.
The favelados believe that no one will
develop a project in the area of Parais6polis because all of the previous
projects required large trucks to move earth within the area.
The favelados
understand that such hauling involves a substantial amount of money, yet
they have no idea how much money.
The favelados do not know how or where
the money would come from to finance their dwellings. 8 3
It is also very
typical for individuals and governmental bodies who receive payment for
moving, not to, comprehend or acknowledge the resale value of the unit that
the individuals are receiving.
The developer is often seen, by both the state
and the favelados, as one who is receiving an extraordinary profit; but he is
never credited for creating wealth for the favelado. 8 4
The favelado, upon
receipt of the house, can sell the house on the open market for much more
than he received for it; he will now have the right to sell it because he has
8 2 Throughout
chapter Five and in Appendix
the land owner will be referred
to with the title "developer" or "owner".
8 3 Interviews with Mendonga, Alvaro Pereria Santos,
and other residents.
8 4 The wealth creation depends
on who will receive the proceeds from the sale
price of the favelados' low-income units. If the state holds mortgages on these
units it may be the recipient of this wealth instead of the favelado.
113
clear title to it.
Thus, the gap between what the stakeholders perceive and
what the numbers actually indicate is crucial in defining a package.
Stakeholders
inaccurately perceive
their potential gains not only because
of
ignorance of the numbers, but also because they tend to focus on the tangible,
and not the intangible, elements of a project.
elements
o
o
o
Some examples of tangible
are:
construction costs
sales revenues
interest payments
o size of units
o location of units
One can often consult official sources of information to determine these
elements:
in Slo Paulo, there are monthly published tables of construction
costs in A
Construggo (a trade journal), and estimates of sales prices of
apartments can be assembled by perusing the weekly newspapers.
Land
prices can even be determined by assessors and conducting market
comparisons.
Because these factors are "tangible"--that is, easily identifiable,
and often easily measured by a meter stick or bank account--they are often
the focus of attention during negotiations.
On the other hand, the "intangible" elements are often just as critical defining
an agreeable package of options, yet are so often overlooked because they are
difficult for parties to comprehend and determine.
elements
Examples of "intangible"
are:
o a tax shield received by the developer (construction interest is
really
a cost, thus reducing the final taxes paid on the profit)
o the total value of the investment, which includes the cash equivalent
of the land value
114
o the resale value of the low-income units and the question of who
receives the money from the resale
o the different risks which are associated with different cash flows
within the project
o the impact of timing factors in the worth of the subsidies within the
project
It is precisely because these factors are intangible that they are hard to
convey to the various stakeholders in the project.
Furthermore, some of these
factors are the most difficult to estimate from an independent source.
In some
cases there is no active market to estimate the values; this is the case with the
resale value of the low-income units.
On the other hand, some of these values
are also a function of individual expectations; this is the case with the risk
associated with different cash flows.
It is hard to find two projects which
carry same risk and two companies which have the same perception of this
risk.
Even though complications exist, there is no reason to disregard the all-
important intangible factors.
Benchmark
estimates of the intangibles can be
utilized as a means of accounting for their existence.
One way to decrease the gap between reality and perception is for an outside
expert to define the numbers.
If this route is chosen, the expert must be
agreed upon by and have the confidence of all the stakeholders,
favelados.
including the
An outside expert may give more credence to the numbers, but the
stakeholders still may not understand the magnitude and weight of the
numbers.
In order to overcome this problem, the expert should incorporate
the help of the stakeholders in gathering the information necessary to build
the financial model.
Many representatives of government and land owners
say that the favelados do not have the educational expertise necessary to carry
out this task--even though the favelados search the market place and devise
115
income allocations every day.
The favelados require a technical
orientation as
to what data is necessary and the sources of that data; but they are surely able
to retrieve the information.
Accordingly, the expert would be needed both to
define the financial model and incorporate all stakeholders into the datagathering process.
Such a method would enable all the stakeholders, in
particular the favelados, to participate in the decision-making
In
Mexico,
an
innovative
architectural
partnership
worked
with
process.
a
cooperative
of low-income people in such a manner to design and erect a new apartment
building.
The architects defined the necessary data to develop the project and
they supplied direction for the individuals to obtain the needed information.
On their own, the residents searched for alternative sites to buy and priced the
land.
During this process, the residents realized the relationship between the
price of the land and the location of the property.
When the units were being
designed, the architects gave the opportunity to residents to price different
building materials.
The group initially wanted to use high-priced tiles; after
the search, they realized they could afford only a cheaper tile or a smaller
amount of the expensive tile.
The group initially wanted to build the units
themselves, until the architect instructed them to go out and get a bid on the
construction from a contractor.
Afterwards, the group realized they could
afford to contract the project out to a builder; in fact, it was not as expensive as
they had thought. 8 5
8 5 Jorge
Andrade, Visiting Prof. of Architecture, MIT, IAP Seminar:
"Participatory Design: Aims and Limits". Cambridge, MA, January 1988.
116
The above project example shows that if assistance is given in defining the
necessary
data and interpreting
that data, the
stakeholders
can obtain the
information on their own and make decisions based on their findings.
Users
more readily believe in self-collected information and, as a result, can assume
responsibility for a decision.
As a result, the process of gathering the data for
the financial model has just as much meaning as the outcome of the numbers
of the model itself.
All of the above is applicable for the developer and the government,
as well.
Each party needs to have a method of comprehending the costs, returns and
risks of their cohorts.
Therefore,
the
A financial analysis of any option can accomplish this.
knowledge-building
among the stakeholders.
process
can improve
the
communication
Having educated stakeholders is important, so that
each party can understand how it can alter components within a deal to
achieve its own interests.
approach
to
Communication is a prerequisite for such an
work.
What a Financial Model Needs To Do:.
and Negotiation
Feasibility Analysis
Any negotiated consensus must be financially feasible to all parties, especially
for the developer.
Without any direct cash subsidies from the state, a STEP deal
hinges on a valuable parcel of land and its development.
This parcel of land
and the developed project must be valuable enough to subsidize the lowincome units and still maintain a profit for the developer.
If not, there needs
117
to be additional subsidies, such as utilizing transfer of development rights or
government subsidies.
As a result, a critical goal in the negotiation process is
to assess whether or not a consensus option is feasible, profitable, for each of
the stakeholders.
If the option is not feasible, the financial analysis should be
able to identify the potential changes which would turn the project into a
profitable venture.
This task is referred to as "packaging" a STEP consensus.
A financial model is needed to facilitate the packaging of any consensus and to
assess the feasibility of any proposed package.
The following list describes the
demands of a financial model in STEP:
o Incorporate the economic value of the project to each of the
stakeholders, i.e., the costs and benefits
o Incorporate the impact of each component of a project to the total
value of the project, yet calculating each separately so that the
weight of the components can be seen in the overall value of the
project easily and quickly
o Incorporate explicitly the different risks involved in each alternative
o Incorporate explicitly the different risks for each of the stakeholders
o Incorporate explicitly the financial risk and the operating risk
o Incorporate the added value of the financing structure and intangible
items, such as subsidies, to the total value of the project
o Incorporate the time value of money
o Incorporate the probability of negotiating the deal
o Follow a consistent decision criteria
118
o Facilitate the stakeholder in achieving the criteria of a good
negotiated
agreement
Traditional cash flow methods cannot achieve many of these goals. 86 A
traditional cash flow
analysis generates a present value (PV) or an internal
rate of return (IRR) which dictate whether or not a project is feasible.
(A
traditional model is defined as estimating the expected cash flows for each
year and discounting the total periodic cash flows back to the present value,
using the average weighted cost of capital to determine the hurdle rate or
discount rate).
First, the IRR method does not give a consistent decision rule,
Thus the stakeholders may
i.e. unambiguous information as to the best option.
be making choices based on incorrect information generated from a
traditional model.
The second problem with the traditional model is its
In a negotiation, the
inability to disaggregate the cash flow components.
ability to disaggregate the cash flow components, understand their weights
and how shifts in risk can alter their values is critical.
This inflexibility
makes it difficult to see exactly what each party can negotiate, and why.
In
addition, it is difficult to assign different discount rates to different cash flows
within a traditional model.
final agreement.
In negotiation this can cause inefficiencies in the
If the risks are not correctly accounted for stakeholders may
be making decisions based on incorrect information.
Furthermore if the risks
are not distributed to the parties whom are best able to "bear" these risks then
a better agreement may have been passed over.
Finally, functionally the
8 6 See
Appendix
for a more detailed description of the problems with the
traditional method.
119
traditional model is often difficult to manipulate.
In a negotiation the ability
to test many different scenarios is paramount, especially to show all the
parties various options.
negotiating
Thus, the traditional model has limited value in a
setting.
A financial model for negotiation purposes needs to be more flexible and more
transparent than the traditional methods.
The Valuation by Components (VC)
method can achieve this:
VC is a simple approach which takes advantage of the fact that present
values are additive. The VC of a project is the sum of the present values
of the basic project cash flows, each discounted with an appropriate
risk-adjusted rate. . . The VC method is more powerful than a NPV
because it explicitly identifies and evaluates financial contributions to
the value of a project separately, something very useful for the
appraisal of different risk elements and for the contract negotiation
process itself, when special concessions may be granted which increase
the value of the project to the company. 8 7
The VC method solves the problems of the traditional methods of project
evaluation by separating out the project's important
cash flows",
such as:
investment
expenditures, operating costs revenues,
financing costs and benefits, and taxes.
expected cash flows is calculated,
rate for each component.
"component expected
The present value of each of these
using an appropriate (different) discount
Then, the present values of the respective
components are added together to obtain the total adjusted net present value
for the project.
8 7 Charles
Blitzer, P.E. Cavoulacos and J.L. Paddock. "Risk Bearing and Contract
Design: Are Stable Contracts Feasible?" in K. Khan, ed. Petroleum Resources
and Development:
Economic. Legal and Policy Issues for Developing Countries,
(London: Belhaven Press, 1988), p. 175.
120
Assessing the VC method against the criteria of illustrating the time value of
money, explicit incorporation of risk analysis and a consistent decision rule,
the VC method meets all of these criteria and is more useful for negotiation.
The VC method uses discounting for the component cash flows, and can even
incorporate a different discount rate for different time periods.
The VC
method incorporates risk explicitly for respective cash flow components
through the disaggregation of cash flow and the use of specific discount rates
The decision rule is not ambiguous--the
for each corresponding cash flow.
project
and financial structure with the largest positive VC or Net Present
The value of the project for resale purposes is
Value (NPV) should be accepted.
the value of the NPV.
If the VC is negative it would indicate the present value
by which the project would need to be subsidized in order for that project to be
feasible for that party.
Accordingly, the only measure of feasibility in VC
method is the NPV of the project.
Three additional advantages make the VC more useful for negotiation.
the VC method is more transparent.
First,
The users can see directly which
components of a specific project have dominant or more critical effects on the
project value and success.
Second, the VC is the easiest method for which to
conduct sensitivity analysis, due to its format.
Third, a VC analysis is meant to
be conducted from each stakeholder's perspective, not from an economic costbenefit analysis of the project.
By using the VC analysis, it is possible that an
individual stakeholder's value of the project might be greater than the actual
value of the entire project, if stakeholders' abilities to carry risk are
incorporated.
This unique character of the VC method, which identifies
121
values in increments to be valued differently by different parties, can enable
an intermediary to turn a zero-sum game into a non-zero sum game.
A VC
analysis requires no more information than the traditional methods of project
evaluation, yet it is much more flexible and useful for negotiations. 8 8
In addition any financial model must enable the stakeholders to achieve the
goals of a good negotiated agreement in financing terms.
The criteria for a
good negotiated agreement, as outlined in the previous Chapter, will be
invoked once again only in slightly different terms in order to measure the
most effective contractual and fiscal framework of various STEP solutions
utilizing a financial model.
following sections.
1) Risk/Return
These elements will be considered in detail in
Three elements define the criteria:
Effiienc
89:
The structure of a STEP consensus should take
advantage of comparative ability to bear different categories of risks.
the influences
are information
asymmetries,
Some of
controllability of factors
affecting respective risks, and different capital market bases for pricing
risks.
For example, the potential risk for a land owner/developer of the final
sale price of a market unit can be lowered by negotiating committed retail
financing through the national housing finance system.
The bank along with
the guarantee of the national housing finance system is better able to bear the
risk of the market than the developer.
aforementioned
8 8 Donald
This element is akin to the
efficiency criteria.
Lessard, E. Flood, Jr, and J.L. Paddock.
class notes.
8 9 Paddock,
.
(1986),
To be published.
122
2) Efficiency
Incentive 9 0 :
management.
The government
Ensure consistent and efficient project
and the favelados want the owner to build low-
income units with quality, yet all the stakeholders do not want great cost
overruns that would jeopardize the feasibility of the project.
Therefore, the
project should be structured so that both quality and cost-efficiency
maintained.
will be
One way to accomplish this is to locate the low-income units close
to the market units.
at least aesthetically,
The developer will have an incentive to maintain quality,
so that the physical presence of the low-income units
will not detract from the value of the high-income units.
As long as the full
value of the land and the realistic resale price of the low-income units are
calculated and the developer is compensated for these costs, expenditures
be kept to a minimum.
the contract.
will
Such a structure builds an efficiency incentive into
This element is akin to the aforementioned fairness and wisdom
criteria.
3) Omni-Enforceabilitv 9 1:
across all outcomes.
Designing a contract to be more self-enforcing
Since housing prices are very sensitive to mortgage
availability and interest rates, a contract which gives the owner an option to
develop his market units based on an index of these two factors would create
more stability over time.
This element is akin to the aforementioned stability
criteria.
9 0 Paddock,
class notes.
91This is a criteria set-up by the author.
of Paddock's, Cross-Border Enforceability:
self-enforcing
across
It has its origins in the third criteria
Designing a contract to be more
different legal/political
jurisdictions.
Omni-Enforceability self-enforcing across all outcomes
the structure of the solution to economic factors.
In the case
of
refers to sensitive of
123
Options for
Securing
Tenure
Production
I have developed four separate packages for a parcel of occupied land in
Parais6polis.
stakeholders:
The analysis will be done from the point of view of each of the
the land owner, lender, government and favelados.
Due to
restriction of time and information, during the research, sufficient data on
the taxes of the properties were not gathered, thus the government's VC will
be estimated conceptually and not numerically. 9 2
Likewise, some of the
favelados' values will be determined numerically and some will be determined
conceptually.
Only the results will be presented in this chapter, the detailed
analysis is in Appendix.
1) The traditional relocation solution:
both held by private investors.
be further away.
Two pieces of land will be developed,
One will be in Parais6polis and the other will
The piece of property off site will house thirty favelados on
it and the other will contain an apartment building for sale at market rates.
The object is to build housing off site and then build the market rate units in
Parais6polis.
2) Land Sharing Scheme:
One occupied parcel of land in Parais6polis will be
shared between the market units and thirty low-income units.
3) Two pieces of land are to be developed:
One will house thirty favelados on it
and the other will contain an apartment building for sale at market rates.
The
present land situation is that, one parcel has a low market land value because
9 2 1n
developing a project, taxes are not a significant cash flow factor.
Gongalves interview.
124
it is poorly located and vacant;
the other parcel has a higher potential market
value because it has a good location, yet has thirty favelados on it.
The object
is to build apartments for the favelados on the low market value land and then
construct market rate units on the higher valued land.
4) Three pieces of land are to be utilized. all within Paraisdpolis: two are
vacant and one is occupied.
The highest potential market value property is
occupied, and the two vacant parcels are poorly located.
The goal is to relocate
the favelados temporarily on the one poorly located property and build the
low-income units on the other poorly located parcel and the market units on
the well located parcel simultaneously.
The following Present Values of component cash flows result from an in-depth
VC analysis.
The methodology of the VC analysis will discussed in detail below.
However, the reader should be made aware that the Present Values across
options for each stakeholder (in the table below) represent the best possible
deal for each stakeholder, considering finance, risk, costs and revenues.
,The
NPV, considering the equity investment, shows the net value added to each of
the stakeholders as a result of the total investment.
As well, these figures
represent the optimum structure of an agreement for all the stakeholders.
The best option is the present value with the highest value for each
stakeholder, although every value which is above zero is a viable project for
that stakeholder.
A
minimum increase in one Floor-to-Area Ratio (FAR) has
been offered as the subsidy.
For a detailed version of the financial model and
estimation procedures, refer to Appendix.,
125
Table 7: Net Present Values of Options for Owner,
and Government (all values stated in OTN 9 3 )
Relocation
out of Area
LAND OWNER $ 8,996
LENDER
$17,664
Land Sharing
Same Parcel
$2,905
$13,920
Lender,
Relocation
within
Area
Favelados
Three
Parcels
$25,455
$ 9,423
$17,664
$21,320
FAVELADOS:
It is assumed that they will pay full taxes and full charges for services plus a
This will be considered as a slight increase in their costs, but
small mortgage.
it will be common to all options.
Relocation
out of Area
Land
Same
Low
$500 OTN
High
$1,000 OTN
High
$1,000 OTN
Costs
Community High
Disruption
Low
Moderate
Moderate
Mortgage
$145 OTN
$145 OTN
$145 OTN
$145 OTN
$4,400 OTN
$2,220 OTN
$6,660 OTN
$4,290 OTN
Benefits
Resale
Value
(per unit)
(per
Relocation
within
Area
Three
Parcels
High
$1,000 OTN
unit)
NPV for
Favelados
(30
Sharing
Parcel
units)
9 3 0TN
stands for Obrigagio Tesoro Nacional.
treasury bill.
It is the equivalent of a US
OTN is the most widely used Brazilian index to factor inflation in
prices.
126
GOVERNMENT:
Costs and benefits are common for all options, and therefore are not
considered to be factors.
o no infrastructure costs 9 4
o service of small mortgage and income from mortgage repayment, i f the
government were to hold them.
Relocation
out of Area
Land Sharing
Same Parcel
Relocation
within Area
Three
Parcels
One Time
One Time
One Time
Two Times
Shelter
Tax
High
Low
Moderate
Moderate
Revenues
Votes
Lowest
Highest
High
Moderate
Costs
Removal/
Transfer
Benefits
The option which produces the maximum joint benefits is the use of two
parcels within the area ("relocation within area").
All of the stakeholders
gain, all of the VC are positive, although not every stakeholder achieves his
most preferred option.
the developer.
This consensus produces by far the highest NPV for
It produces the second highest NPV for the lender.
government it has a moderate income from taxes.
For the
Relatively speaking, it
brings a high degree of satisfaction to voters because it keeps the group
intact, an added benefit for maintaining voting patterns.
The two-parcel
option has only a one-time relocation cost for the government.
For the
favelados, this option maintains their access to the larger favela community
and jobs, although it does require relocation to another site but within the
area.
The option also allows for one of the highest resale potentials.
A rough
9 4 This
value can be accounted for with the addition of a new cost component
in the analysis. In this analysis, for simplicity, it is assumed to be minimal, or
at least similar for each option. Any infrastructure costs can be estimated and
then added to the analysis.
127
estimate of the value of the project from the favelados' point of view is
approximately 6,700 OTN.
These NPV's and the choice of the relocation within the area option represent
a series of decisions to achieve the optimal joint structure for all the
First, the VC is used to estimate the value
stakeholders (i.e., the highest NPV).
to each stakeholder of the four different options.
defining the best financing structure.
risk involved
Then, the VC is utilized in
Later, the VC is used to incorporate the
in negotiating the agreement.
Throughout
this process,
each of
the components which contribute to the value of the project is analyzed.
more important point is that the value of the project for all the
positive, illustrating a feasible project.
The
stakeholders is
Moreover, all the participants have
been able to satisfy their interests, and have perceived that the process and
outcome is fair.
The process has been outlined previously, but the method, and
obstacles, for arriving at the numbers to package the consensus needs to be
defined.
Defining
the Components
of the Projects
For all of the stakeholders, defining the components to be studied is the first
step in financial analysis.
The components--costs,
benefits and probability of
achieving the option--will be defined in general for each of the stakeholders,
where the costs are the outflows and the benefits are the inflows.
Not only do
these individual components need to be calculated, but the corresponding risk
128
of each of these components needs to be analyzed.
discussed below.)
(The risk analysis will be
By incorporating the components and the risk, I will
provide a simple example of the analysis of a potential STEP consensus.
In the
last section, I will propose multiple options to show how the best possible
option can be reached.
The Outflows (costs) and Inflows (benefits) for each stakeholder follow:
From Owner's point of View
Outflows:
o Equity/Investment
Short fall in cash for development of the project
Value of the land for both market and low-income units, when the
property is occupied
Increase in value of the vacant land on the market unit portion or
parcel
o Debt repayment at the end of the project
o Other costs associated with debt:
points, interest, insurance
o Kicker to debt: points charged to the developer, by the lender, on the
difference
o
o
o
o
o
o
o
o
between
the total
amount of the
construction
financing
and
the total amount of the permanent financing
Architectural, legal and construction administration fees
Low-income unit construction costs
Market-unit construction costs
Infrastructure costs, if needed and if paid by developer
Sales commission on the market units
Taxes on the profit from operation
Property taxes during development
Loss in the market value of the low-income units 9 5
Inflows:
o Debt for the project
o
o
o
o
Increase in value of the vacant land on the market unit portion or parcel
Sale price of the market units
Sale price of the low-income units, if charged
Interest Tax Shield, the amount of taxes not paid because interest financing
is calculated as a cost
o Kicker Tax Shield, the amount of taxes not paid because the kicker paid to
lender is also considered a cost
9 5 Difference
between the market value and the sale price received as income
for the low-income units.
129
o Any property tax exemptions,
if given
Favelados' Point of View:
Outflows:
o The monthly payment for utilities, above that which they are paying now
o Up-front costs, such as downpayments, if a mortgage exists
o The monthly service for a mortgage, if there is one
o The repayment of the mortgage at the time the resale value of the units is
calculated ( if a mortgage is held)
o The forgone sale price of their present dwelling, exclusive of the land
because they do not own the land
o Additional property taxes
Inflows:
o The resale price of the new unit. This price should reflect secure tenure
o Mortgage, if given
o Any property tax exemptions, if given
Lender's Point of View
Outflows:
o The invest of the loan amount
o The taxes paid on the income
Inflows:
o The income
o The income
o The income
o The income
from
from
from
from
the up-front points
insurance
the interest on the construction loan
the kicker
Government's Point of View
Outflows:
o The cost of increased density or development of the area
o Infrastructure costs, if needed and if paid for by government
o Loss of property tax revenue due to tax exemptions, if any are given
o The cost of transferring the favelados
Inflows:
o The increase in property taxes from the market and low-income developed
properties
130
Obtaining the Information Related
to Outflows
and Inflows
For
Most of the necessary information can be obtained from unbiased sources.
example, the cost of construction for various quality levels is published
monthly in A Construcao.
Other information (e.g., the corporate and property
tax rates) is based on government regulations which change infrequently.
Financing charges can also be estimated, particularly if the national housing
finance system is used, which has little fluctuation in the interest rates and in
the points charged.
Once the financing is decided upon and the potential
market is targeted, the price of the market units can also be forecasted
through
market
surveys. 9 6
The only significant problem in defining the sale
price is that it is highly dependent upon the proximity of the low-income
units; the closer they are to the market units the lower the resale value will
be.
Division of the same parcel, i.e., land sharing, is the closest the low-
income units could be.
If the location of the units were in the neighborhood
of Parais6polis, the market value will mirror that of the existing luxury
apartments in very close proximity to the favela.
The value of these
apartments can be assessed in order to define the market more clearly.
The
resale value of the new low-income housing can also be estimated by
examining the market. 9 7
The value of the favelados' present units can also be
estimated by a quick survey of the transfer price of the dwellings in the
9 6 Final
housing prices are very sensitive to available
Brazilian officials have argued that in fact there
On the other hand, there
market for a low-income unit.
evidence that there is a market, for there is a line for
housing in the periphery of the city.
9 7 Some
financing.
would be no resale
does appear to be
government subsidized
131
favela.
Since this number is not recorded in any official document, it will be
difficult to find the figure without the cooperation of the favelados.
Three issues that are particularly difficult to estimate are 1)cost of increase in
density, 2) land values,
and 3) the value, the sale price and the beneficiary of
the increase in value of the low-income unit.
Some may argue that the
question as to who retains the benefit of the low-income units is strictly a
policy issue.
I will try to examine the issue as a question of feasibility, to be
dictated on a case-by-case basis.
In some cases, there is
The cost of increased density will vary from site to site.
very little increase in costs, where neither infrastructure, extra road systems,
nor an increase in open space is needed.
costs occur.
In other cases there are very large
These costs must be calculated and the costs must be paid by either
the government or the developer must pay the costs.
Who bears the burden is
again a question of the ability to pay and the capability of the market to bear
some of the costs.
In this case study it is assumed to be minimal because water
and electricity exist in the area, in
any event it is also assumed that the costs
would be approximately the same for any one of the options.
The next difficult estimation is the value of the land used in the development
of the low-income and market units.
The opportunity cost of land should be
that for which the developer could sell the property considering the location
and the zoning, assuming an approved STEP consensus.
Actually, two different
values of land are involved in STEP consensus, whether the favelados are to be
132
relocated or they share the land:
the value of the low-income property and
the value of the market-unit property.
These values must be calculated in
order to account for the developer's land investment.
There are three stages, or elements, in the process of estimating land costs:
1)
the value of the market portion of the land while it is occupied; 2) the value of
the market portion of the land when it has been vacated; and 3) the value of
the low-income developed land.
will reflect its occupied status.
The occupied land has a market value which
Once the land is vacated and has a change in
zoning, it will have a higher market value.
made by assessors.
Estimates of these figures can be
Newspapers and trade magazines also contain reasonable
estimates of land values but admittedly they are only prices at which land is
offered for sale and not the final sale value. 9 8
The value of the low-income land must also be estimated.
Whether the low-
income land is owibd by one owner (if the land is shared) or another parcel of
land is used to relocate occupants, two price influences can be identified to
arrive at the value of the low-income land or at least a range in which the
value will lie.
First is what I term as the "added project value premium",
a
premium which (when added to the market price of the low-income parcel of
land) defines an upper limit for the value of the low-income property.
The
premium will be based on the added value that the low-income parcel enables
the high-income income parcel to achieve due to the development plan.
This
9 8 See
Appendix : estimation of components, under equity for the values
estimated for the case study.
133
premium indicates that the low-income land will be worth at least something
above its prevailing market value but no more than the total value it adds to
the high-income land.
It defines the ceiling for the low-income land value.
The second premium, which I have termed the "attractiveness premium",
determines the degree to which the value of the low-income parcel will
approach the ceiling price.
This premium is based on the attractiveness of the
alternative parcel to the occupants.
If the occupants will settle for only the
portion of land which they now occupy, the entire added value will be
calculated.
If there are several alternative sites which would suit the
occupants, the full added value will not be reached because the owner will be
able to negotiate the price of the premium down among the alternative sites.
The applicability of the above two premiums is best illustrated through a
hypothetical example.
An owner has a parcel of occupied land, the market
value of which is 5 OTN/m 2 .
If the owner shares the land, he could receive 7
OTN/m
2
for the high-income portion.
OTN/m
2,
indicating a ceiling of 7 OTN/m 2 for the value of the low-income
property.
The added project value
premium is 2
If the only land acceptable to the occupants were a portion of the
presently occupied land, the maximum attractiveness premium of 2 OTN/m 2 (7
OTN-5 OTN) would be applied, increasing the value of the low-income land to 7
OTN/m 2 .
If the owner could. relocate the occupants, given the same parcel of land with
a value of 5 OTN/m 2 , the market value of his land might be 15 OTN/m 2 . The
added project value premium would then be 10 OTN/m 2 (15 OTN-5 OTN).
If the
134
market value of the parcels to which the occupants could be relocated were 4
OTN/m
2
(due to a less desirable location), the upper limit for the value of the
low-income property would be 14 OTN/m 2 .
Assuming several acceptable
alternate sites, the attractiveness premium would be lower than 10 OTN/m 2 ,
possibly 5 OTN/m 2 , resulting in a value of 9 OTN/m 2 (4 OTN+5 OTN) for the lowincome
property.
If the developer were to pay cash to the government to take on the
responsibility of locating the low-income parcel, the same calculations would
be necessary.
In this case the cost of the low-income land and construction
would be seen as an outflow for the government.
be the same and this amount should
The value of the land would
be charged to the developer if the
government were to obtain the land.
Even if the government were to utilize
some of its own land an opportunity cost needs to be factor for that
contribution.
The above method is a means for calculating this value.
The next difficult decisions are the estimation of the market value of the lowincome units, the sale price of the low-income units and who will retain the
increase in value of these units.
The market value of the low-income units
must be calculated to factor in the benefit created by the developer to the
favelados, as well as the forgone benefit to the developer.
low-income property can be estimated by assessors.
The value of the
This amount, net the sale
price, is then considered to be a loss of revenue to the developer. 9 9
For the
9 9 This
value has been calculated in the VC analysis for the developer, under
the title value loss due to low-income units in Appendix.
In effect it is the
market value of the units minus the sale price to the favelados.
135
favelados the benefit is the difference between the sale price (inclusive of
equity and mortgage) and the market value.
The goal is not to reward the
developer for the exact amount which he has created or lost, rather it is to
create an agreement which takes into consideration these costs and benefits
and shares these values with all the stakeholders in order to achieve positive
VCs for each of them.
In order to complete the calculations above for both the developer and the
favelados, the sale price of the units must be determined.
based on affordability for the favelados.1 0 0
one of two ways:
This price must be
Affordability can be achieved in
either the sale price must be low or mortgage financing must
be available.
If financing is available, then the holder of the mortgage must
be identified.
Finally, the beneficiary of the resale profit, due to valuation,
must be identified. 10 1
If the favelados were to sell the units, with financing
from the government, upon resale they would have to repay the mortgage.
Thus, they would rea'Iize a net gain of only the difference between the
mortgage, any equity and the resale price.
If the developer were to give the
units to favelados, without any mortgage, the favelado would be receiving the
total value of the property upon resale.
These factors are often not calculated,
they are the "intangible costs" referred to in the beginning of this chapter.
100 See
101The
incurred
payment
Appendix
resale profit
upon resale
would be a
for affordability calculations.
is the difference between the resale price, any costs
A mortgage principal
and any equity or downpayment.
resale cost.
136
After defining the market value and the sale price for the low-income units, if
the developer's VC is not positive there are four alternative means to alter the
The four alternative
agreement to regain a positive VC to the developer.
sources for further solutions follow:
an increase in the sale price of the units
with a larger "silent" mortgage, direct outlay of funds by the government,
pass-through to high income buyers resulting in higher sale price, larger
change in zoning or lower profits to the developer by trading or reducing
risks.
A "silent" second mortgage is a second mortgage on the property which
It
reflects the true market value of the unit and not the subsidized sale price.
is given in addition to a smaller affordable mortgage, which is serviced by the
low-income family.
This mortgage is "silent" because it is payable only upon
resale of the unit, with deferred interest.
It can be held by a bank, in which
case the developer would receive more funds up front.
It could also be held by
the developer as an investment, in which case it would be calculated as a
future income in his VC.
The down-side of this solution is that a silent
mortgage would reduce the benefit to the favelados.
The government could
also pay the developer a sum to bring his project up to a positive VC, although
as stated in an earlier chapter the government is utilizing a STEP process due
to lack of funds.
The government could also give a larger increase in zoning
to offset the deficit for the developer.
Finally, a means of reducing the risk
for the developer would turn his VC positive. 10 2
This will be addressed in the
following section, although one example is the guarantee of permanent
financing of the market units.
This reduces the risk of the resale value of the
units for the developer, thus increasing his VC without increased cash outlays.
10 2 This
will be elaborated upon in the following section.
137
Thus this question is not necessarily a simple policy question but is dependent
on the impact on feasibility of the specific project.
The resulting benefits can vary from case to case, indicating a flexible case by
case solution. In some cases, the expected resale value may be far above the
cost of the units, resulting in a potentially large benefit for the favelados even
if a cost for the unit was originally charged to the favelados.
In other cases,
the favelados may be able and willing to pay more for their housing, in which
case a cost for the unit could be charged.
Still, in other cases, the resale value
might be equal to or less than the construction costs, thus a cost charged for
the unit equal to the value of the construction costs would result in a smaller
profit margin for the favelados.
Thus it is seen that the arrangement depends
on the situation.
In Parais6polis, it the estimated market price of the units will be only slightly
above the cost of the units. 10 3
amount for the units.
The developer will charge an affordable
Mortgages are assumed to be committed via one of the
Brazilian finance systems at 145 OTN per unit, along with permanent
refinancing. 10 4
The favelado will be able to afford this added mortgage
expense and pay their property taxes and full utility charges. 10 5
The
structure of such a deal permits each of the parties to feel that it is the
10 3 See
Appendix : under estimation of components for cost of low-income
construction estimates.
10 4 See Appendix
-: under estimation of components of low-income revenue
for estimate of affordable sale prices for low-income units.
105At present the favelados are only paying a minimum service charge for
the use of public utilities.
'
138
legitimate owner.
Neither the government nor the land owner wants to feel
like it is giving something to the favelados.
In addition, the favelados say they
are willing and would like to pay for a secure housing situation, as long as it is
affordable.
10 6
Resale restrictions are another decision which enters into the question of the
value of the low-income units.
Many subsidized housing schemes have resale
restrictions and/or "silent" mortgages with the intent of discouraging quick
resale of units, or the intent of recapturing the subsidy in order for it to
remain with the unit or revenue for the state.
housing projects.
consensus.
This may be a goal in subsidized
Such a strategy is not advisable in trying to attain a STEP
In a STEP project all stakeholders are asserting that both the land
owner and the occupants have rights to the land, in this sense each should be
allowed to receive the benefits of the land, even the benefit of resale of their
units.
Secondly, the goal of STEP is to create and maintain secure tenure.
Accordingly, any barriers which might induce people to sell their property
10 6 Unfortunately,
this structure may not be the most financially feasible,
although I do not have the necessary information to discern this. It may be
that the cost of servicing these small mortgages may not make it a profitable
venture. If a mortgage is used it may be worthwhile to have a cooperative
mortgage on the whole building. On the other hand, the small amount of
income to the developer resulting from the sale price charge to the favelados
may be better traded back to the favelados. They would value this component
more. If this were the case, the government would not have to guarantee any
additional debt and it would not have to service more loans. The issue of
responsible ownership can be fulfilled by having each favelados pay full
taxes and full service charges no utilities. More investigation needs to be done
on the feasibility of low-income mortgages.
Alternative types of co-operative ownership should also be examined. It is
beyond the scope of this thesis to address this issue. Even though it is not
discussed this does not imply that co-operative ownership may not be a viable
alternative.
139
under the table, i.e. without registration, must be removed.
In the face of
resale restrictions or mortgages, the individual who wants to sell his property
will find a way to sell it, illegally or non-legally.
Thus, an apartment may be
sold but never registered, which would point to a failure of STEP since legal
tenure has not been secured.
Third, by increasing resale restrictions through
mortgages or restricted sale prices the VC of the favelados is reduced, thus
creating disincentive for them to enter into an agreement.
In this light, it is
suggested that resale restrictions should not be encouraged.
Actually, an offer
of resale financing should be established as an incentive for continued legal
transfer of property, as has been stated above.
Beyond estimating the values of the components, the risks which affect these
components must be identified and incorporated into the financial model.
Then, the probability of reaching an agreement must also be factored to
arrive at the value of the options and to understand the movement possible to
achieve a consensus.
Risk
Analysis
and Defining
the
Best Agreement
Often, projects have different risks according to their phases and, as such,
should be analyzed differently to incorporate the proper discount rates
associated with each phase.
project need to be addressed:
In the case of STEP, two distinct phases of the
a negotiation phase and a development phase.
The development phase consists of analyzing the value of the project as if the
140
negotiation were completed.
The project itself is not necessarily anything
other than a cross-subsidized project of low- and high-income apartments
and,
as such, is dependent on the risk associated with such projects.
Once this value is known, the second analysis can begin, the negotiation
phase.
This phase consists of analyzing the probability of negotiating an
option over an expected time period.
It is a conditional value, since some of
the risk during this phase are a function of the market and some depend on
the ability to negotiate the deal.
To incorporate these changes into the risk, an
expected VC is calculated, by estimating the probability of succeeding or
failing to negotiate the project.
Then, the resulting value is discounted at the
proper risk-adjusted discount rate, reflecting the systematic
negotiation stages.
risk during the
With this new value and by incorporating the costs of
negotiation, it can be estimated if the value of the subsidy through zoning will
make the project worthwhile, i.e. the net present value of the project is
greater than zero.
If the project is deemed to be worthwhile, the most feasible
project, i.e. the project with the highest net present value, can be highlighted.
If the projects are unfeasible, the analysis can show how much additional
subsidies would be required to make the project feasible.
beginning
of the chapter feasibility
As stated at the
is a multi-dimensional
question.
Feasibility is not only tested by a positive NPV but also by analyzing an
agreement
according
omni-enforceability.
to
risk/return
efficiency,
efficiency
incentives
and
This will be addressed in the following section.
141
Identifying the Risks During the Development Phase
In general, several risks impact on the inputs and outputs of any construction
project of apartments in Brazil.
In defining the financing and structuring of
a STEP deal, some additional risks exists.
In either case the goal is to assign the
risk to the party with a comparative advantage in managing the risk,
according to the definition of efficiency.
The first section will outline and
discuss the risks involved in self-financing of a construction project in
general, highlighting additional risk due to the cross-subsidy specific to a
STEP project.
The second section will present a table assigning the risk to the
party best able to manage to these risks, as well as potential means of
mitigating some of the risks.
The method by which these risks are
incorporated into the financial model will be described in Appendix,
the determination of the discount rate.
under
From these calculations a table will
follow illustrating the first set of VC evaluations for each of the options and
financing possibilities.
This will show the best option for financing based on
an optimal risk management scheme.
General Risks
o cost risks due to inflation, miss match of currency of inflows and
outflows and presold units
o price risk due to uncertainty of market sale price and indexation
o interest rate risk
STEP Risks
o
o
o
o
inflow risk due timing of sale
cost risks due to timing and approval
interest rate risk
risk of resale value of low-income units
142
o risk that the project's value will not be enough to guarantee loan
amount
o risk that the project will default
o Cost risks due to inflation, mis-match of currency of inflows and outflows:
Many costs
The problem of inflation is all-encompassing in Brazil's economy.
risks are heightened by increasing month to month inflation.
These are
normally hedged by the use of an indexed currency OTN, although risks still
remain.
The use of pricing in OTN shields the developer from inflation
through inflation
unfortunately
adjusted monthly payments
from the buyers,
but
construction costs rise faster than the general index of the OTN.
This phenomenon has been calculated in the model by adding a minimum
construction
inflation rate of 12%.107
Beyond this there are further
complications due to the use of an OTN index.
Although the index is readjusted
monthly, the inflows and outflows are not matched.
Most costs are paid out in
cruzados at various times during the month while the inflows are calculated
on indexed cruzados readjusted only the first day of each month.
Thus any
inflation during the month must be made up by the developer, yielding a
1
potential loss even though there is indexation. 08
The next section will describe the reason for presold units, but I will address
the cost problem associated with this system.
Once units are presold the risk of
increase in costs rests totally with the developer.
Any unanticipated real
increase in costs of the project will be picked up by the developer.
1 0 7 Rocha
Lima. Interview on 5 August 1988.
Lima has said that this can be as high as 25% a month.
Unfortunately, this has not been calculated into the model because no
ibid.
concrete information has been found.
1 0 8 Rocha
143
o Price risk due to uncertainty of market sale price and indexation:
Normally,
90% of the units in a construction project are presold, to secure occupancy
after construction and the reduce the risk of price uncertainty.
national
housing finance
system both construction
and
Under the
permanent
financing
can be obtained at the same time in order to reduce the uncertainty in the
probability of selling the units and at a specific price.
Thus, the downpayment
for the units is paid to the developer over the construction period, and is paid
in indexed cruzados, OTN.
Although this indexation shields the developer from
inflation on the inflows side, it also adds some risk.
Most individuals receive
their pay or interest on their savings in cruzados yet they must make monthly
payments in OTN.
Unfortunately, some individuals do not have the means to
keep up with the monthly OTN payments.
As a result, a great risk exists that
pre-sold units will not close at the end of construction.
valuation occurs as a project progresses.
On the other hand,
So, the land owner may be better off
10 9
taking back the unit in the end and reselling it for a higher price.
Thus,
the risks of cost of construction and loss of buyers, due to indexation, must be
incorporated.
o Interest rate risk:
Interest rate risk exists on both the construction loan
and permanent financing.
Traditionally, these are passed to the national
housing system (SFH) by utilizing subsidized credit.
Both construction and
cost-plus-construction sale price to the buyer would shield the developer
from increases in construction costs. This is typical with very expensive
units, in the case of Parais6polis all of the sale prices are too low, indicating a
target market which could not bear this cost risk, thus is must stay with the
owner.
109 A
144
permanent financing are committed if the units are sold within the sale price
limits set out by the bank.
This system can be used for the market units but
additional financing must be sought for the low-income units.
This can come
from other funds within the government which loan for low-income housing
or possibly through SFH itself 1 1O.
Thus interest rate risk is placed with the
national housing finance system, through up-front commitments.
not come for free.
construction
These do
The bank will charge a commitment fee for both the
finance
and the permanent
financing.
STEP Project Risks
o Inflow risk due to timing of sale: A STEP project is more complicated and has
increased risk than a normal project due to the miss match in the timing of
the inflows and outflows.
If the occupied parcel of land is to be utilized for the
If,
market unit development then the low-income units need to be built first.
as traditional practice has it, the downpayment of the market units is only
received upon the commencement of construction
then the low-income
must either be financed by additional debt or equity.
units
In addition, if the market
units can not be presold, i.e., a commitment from the future buyers, until the
site is cleared there is greater uncertainty in the market price at which the
units could be sold.
110 Time constraints did not allow for investigation of the possibility of SFH
finance for the low-income units. If SFH cannot provide the permanent
financing, other sources do exist for low-income financing, although they
will not be explicitly outlined in this thesis. For simplicity, I have assumed
that SFH would provide the construction financing on the low-income units
and another unspecified source would provide the permanent financing.
145
The time delay due to the construction of the low-income units increases the
possibility of selling the market units at a lower price than anticipated.
This
risk is present if the STEP deal does not afford the owner the option of
delaying development of the property, or the sale of the property.
option is not given to the owner, the risk is high.
If the
One additional method of
reducing the sale price risk is to build the low-income and market units
simultaneously, thus reducing the time over which the market units are sold
(a three parcel scheme).
the
There is less time for the market to move away from
developer/owner.
o Cost risks due to timing and approval:
Because the low-income units must be
built first, there is a long time horizon to the entire project.
This exacerbates
the problem of estimating costs and calculating inflation, thus increasing the
cost risks.
A second factor concerning the risks of construction cost is the
final approval of the completed construction project, i.e., receipt of the
certificate of occupancy.
In a normal project, the potential delays in
obtaining inspectors during construction
and at project completion often
lead
developers to pay extra money or make extraordinary changes to obtain the
final approval.
A STEP project has the additional risk that costs will increase
during the approval process with the added approval of the low-income
project.
One way to mitigate this type of risk is to have an agreement as to the
exact specifications of the low-income projects, as well as a process designed to
settle any disputes.
It would also be worthwhile to have the government
146
commit to making inspectors available upon request or within a short period
of time of a request.
o Interest rate risk:
Once again, the fact that a STEP project takes longer to
build, the interest rate risk is extended over a longer period of time.
If the
commitment from the lender to fund both the construction and permanent
financing is done at the beginning of the project, the lender is exposed to a
longer period of time during which he has funds committed than in a normal
construction project.
If the commitment is not made, then the
owner/developer is assuming some of the interest rate risk, unlike a
traditional
project.
o Risk of resale value of low-income units:
The inflow in the VC of the
favelado is based on the value of the new low-income unit, with secure tenure,
which he is receiving in return for vacating the insecure parcel of land.
There is risk in the resale value of the low-income unit, especially if resale
financing is not available, or if the lending institution recognizes only the
subsidized sale value of the unit, rather than the market value.
mitigated by a commitment of resale financing at a base level.
This can be
Another means
of reducing this risk is to have the owner/developer give an option to the
favelados to purchase the units back within a specified period of time at a set
price.
The owner could also place a sum of money for each unit in an escrow
account for a determined period of time.
The owner would make-up the
difference for any of the individuals who do not receive at least the valued
price for their unit.
Such a guarantee could also ensure a higher quality level
147
of the low-income units, if the owner knew he stood to make additional money
on the resale of the market units at some future date.
o Risk that the project's value will not be enough to guarantee total loan
amount:
The risk that the project will not be able to guarantee the loan
amount is a normal risk in any development project.
It is usually satisfied by
the collateral of the land and a portion of equity investment.
In the case of a
STEP project this traditional method becomes more complicated.
The total
project loan amount, inclusive of the low-income loan amount,
is actually
only being collateralized by the value of the high-income, market units and
the land for these units.
This collateral can be put forth only after the low-
income units are built and turned over to the favelados, and title for all the
land is cleared. 1 11
Thus, there is an added risk that the collateral may not be
enough to guarantee the loan amount.
Even if the developer were to use his
own funds, i.e. make an equity investment, for the initial low-income units in
order to clear title to use the land as collateral, he would have to bear the risk
that the future market units would cover the costs of the initial investment.
Therefore, the risk cannot be mitigated, but it must be accounted for and held
by the party best able to bear it.
o Risk that the project will default: The risk that the project will default, or
that payment of the interest will be delayed, relates directly to many of the
above risks.
The fact that there is a delay in the income from the low-income
111Theoretically, the title would be defined and agreed upon at the signing of
the agreement, although the actual transfer of the parcels and titles would not
take place until the completion of the low-income units.
148
units shows that the potential for default or delay of payment is all too real.
This delay would indicate that an investor with "deep pockets"
would be
necessary or an institution furnishing the debt should be prepared to
participate in the profits if more cash or delayed payments occur.
conditional
A
agreement might be arranged to accommodate these short-falls in
equity or in delayed repayment, in order to cover this very real risk. 1 12
1 1 2 1n
order to incorporate the risk due to default, one would conduct an
analysis to define an interest rate which is adjusted for the probability of
default (i.e., the expected interest rate equal to the promised interest rate). I
have not carried out such an analysis due to a lack of information on loan
pricing methods within the SFH system. Thus, an interest rate of 13% and a
kicker of 7.5% have been assumed. It appears that the presence of any kicker
indicates that the interest rate is not a sufficient return to cover the risk of a
normal SFH project. In a STEP project, the interest might be higher and/or a
larger kicker might be needed (if interest rates are capped) in order to cover
additional risk; in which case, the VC to the developer would be reduced. More
research needs to be done in the area of pricing of SFH loans.
149
Table 8:
Risks and Who Bears the Risks
Risk Manager and Method
OWNEROEVELOPER
RISKS
FAVELADO
GOVT
LENDER
General Risks
Cost, due to inflation, mis- Use of OTN index;
match of currency inflows cost risk due to inflation;
&outflows and presold units presell units
Price, due to uncertainty
of market sale price and
indexation
Commit to permanent financing
risk of drop out of presold
units
Take commitment fee for both
construction and permanent finance
Interest rate risk
STEP Risks
inflow risk due to timing of
sale
Provide financing for low-income
units,with provision that 80% of
market units sold prior to takedown
Risk remains w/developer
reduced by guarantee of
inspection from gov't
Cost risk, due to timing
and approval
Interest-rate risk
Developer could guarantee
value of low-income units
for 2 years
Risk of resale value of
low-income units
Risk of project's ability
guarantee loan amount
Risk that project will
default
Guarantee
for
inspection
Risk remains with lender;
return based on additional fees
and a participation
Refinance Refinance Guarantee
Guarantee
to
Participation,
if delay In payments
150
Table
9:
OTN)
1 13
Net
Present
Values
During
the Development
Land
out of Area
Same Parcel
within
150,227
10,780
141,699
100,517
Lender
17,664
13,290
17,664
21,320
Favelados
12,150
24,420
24,450
23,610
(30
Relocation
(in
Relocation
Owner
Sharing
Phase
Three
Area
Parcels
Units)
One of the goals in packaging is to provide win/win solutions.
achieved
by examining the value each party places
components with regard to risk.
This can be
on the different
"[If] any party has a comparative
advantage
in [holding that risk], for that party will assign a lower cost of holding that
risk than the other party and thus will have to be compensated less for
holding
it."'114
In essence, values will be traded but not at equal costs and
benefits, clearing the way for a win/win outcome.
trade risks, there are ways to mitigate general
In addition to trying to
risks.
From the table above, the highest VC for the owner is the relocation outside of
the area, although not far behind is the relocation within the area option. The
major difference between these two options is due to the small difference in
the land values for the low-income units.
The best scenario for financing,
according to the owner's point of view, is to finance the low-income units with
equity
1 13
1 14
and utilize a combination
of debt and buyer downpayments as
See Appendix A:
effects of financing combinations.
Blitzer, Cavoulacos, and Paddock, p.174.
151
financing for the market units.
These results illustrate the fact that the major
risk during the development of the low-income units is the cost risk.
The
owner is best able to bear this risk, thus he will charge the least for holding it.
In the case of the market units the resale value risk is predominant.
lender and buyer are better able to bear these risks, therefore
The
the owner will
have a higher VC with debt and buyer financing.
The highest VC for the lender is the three parcel option.
lower discount rate and a shorter built-out period.
This is due to the
While the second best
option is to finance only the market units for either the relocation within or
outside the area.
Both of these values are higher than the land sharing
scheme due to the kicker component--the
higher in the relocation scheme.
line with the other preferences
sale value of the market units is
In order to bring the option of the lender in
of the stakeholders,
an increase
in the
interest rate or an increase in the participation rate would have to be
arranged.
For the favelados, all the options are very close in value, except for the
relocation outside option, if the project were to be developed.
The major
difference between these options is a lower resale price in the relocation
outside of the area.
These values are only half of the picture.
The other half is the incorporation
of the risks during the negotiation phase and the probability of achieving an
152
agreement for each of the options.
the best option.
Expected
This will give a more accurate definition of
The following section addresses these issues.
Negotiation
Value
During the negotiation phase there are different systematic risks which effect
the expected values for each of the options and stakeholders.
In addition,
there are different probabilities associated with reaching any one of the four
options put forth in the beginning of this Chapter.
been incorporated in the cash flow estimates above.
These factors have not
First the present values
have to be adjusted by the probability of the stakeholders accepting.
probability is considered a non-systematic risk.
This
The basis of accepting or
rejecting a proposal is based on the total agreement and is not necessarily
dependent on any systematic economic conditions,
as such it must be
incorporated by tht use of a probability analysis.
Once the probability has been incorporated the new values have to be
discounted over the time period needed to complete the negotiation process.
The discount rate used will reflect the systematic risk during this period.
time period has been assumed to be one year.
The
These risks and probabilities
will be outlined below. 1 15
115 For further discussion see Appendix.
153
Owner's/Developer's Risks:
the developer.
Three main risks can be identified that impact on
The strongest risk is the time it will take to negotiate any deal
with the government, other land owners, and the favelados.
the developer.
Time is money to
The risk that the next elected government might not want to
continue negotiations or offer the same incentives is very real.
The second
risk, which is again a function of the time it takes to negotiate, is that the
market in which the developer had planned to sell his units will move away
from him by the time the negotiations have ended and the favelados have
vacated his property.
This is extremely critical.
If the market moves too far
away, the project may no longer be profitable or the type of project may no
longer be suited for the market.
Third, if too much time lapses, costs might not
be valid any longer and the project will not be profitable.
The ranking of
options according to risk follow, with their corresponding probabilities:
o Relocation out of the area: This has the highest risk for the developer
because the negotiation process would tend to be the longest and most
difficult. The probability of achieving this option, based on the
consensus of the favelados and government is estimated at 10%.116
o Relocation within the area: This is a less risky prospect. This
alternative would reduce the time necessary to negotiate the deal, yet
the time lapse between the building of the market units until after
completion of the low-income units places risk on the project. The
probability of achieving this option, based on the consensus of the
favelados and government, is estimated at 30%.
o Sharing the same parcel: This has equal amount of risk as the above
project. The probability of achieving this option, based on the
consensus of the favelados and government is estimated at 45%.
o Relocation within area with three parcels: This is probably the least
risky venture because negotiation would move rapidly and the time
span to build out the projects would be shorter, or at least simultaneous.
116These are the author's estimates based on the acceptability of the option to
the other stakeholders.
154
The probability of achieving this option, based on the consensus of the
favelados and government, is estimated at 15%.
The government's
risk:
The first risk to the government is to allocate time
and money and find an agreement can not be reached.
The second risk is
trying to keep intact the votes of the occupants in Parais6polis, this is a
function of the final destination of the favelados, they should all be kept
together.
According to these risks the three alternative solution can be
ranked according to the risk premium which would be necessary for the
government
1
to enter into this solution: 17
o Relocation out of the area: This is probably the most risk project for
the government, for the time to negotiate would be long and the
possibility that the occupants would not be together would lower the
probability of keeping votes in tack.
o Relocation within area with three parcels: This is a less risky option.
Votes would be intact but the there is a longer time period of
negotiation due to multiple parcels.
o Sharing the same parcel: This option carries less risk because only
It also keeps votes intact.
one land owner is involved in the negotiation.
flexibility in terms of
little
It is not the least risky because it has very
options.
o Relocation within the area: This is the least risky of all the options. It
keeps the votes intact. It has flexibility by utilizing another parcel in
Relatively, it requires the least amount of negotiation time.
the area.
The favelados' risk:
The favelados have two main risks.
First that they will
end up in a location which will not be as favorable as the present one.
they will put out energy and time and no agreement will come about.
Second,
Third,
1 1 7 Due to lack of data, specifically the value of real estate taxes, the
government's VC will not be defined numerically, thus no probabilities have
been calculated.
155
they will be moved before they receive their new dwelling.
According to
these risks the three alternative solution can be ranked according to the risk
premium which would be necessary for the favelados to enter into this
solution:
o Relocation out of the area: The has a high risk that the resale value
will be low. The units will be built prior to movement. The probability
of reaching a consensus from the government and the developer is
estimated at 40%.
The risk of moving before
o Relocation within area with three parcels:
low risk that the resale
is
There
high.
is
built
are
dwellings
the new
value will be low.
The probability of reaching a consensus
from the
government and the developer is estimated at 20%.
o Sharing the same parcel: This option is the least risky: the resale
price will be high, the dwellings will be built prior to movement. The
probability of reaching a consensus from the government and the
developer is estimated at 10%.
o Relocation within the area: This option is equal to the above proposal.
The probability of reaching a consensus from the government and the
developer is estimated at 30%.
The effect of the probability analysis on the VCs of all the stakeholders will
have strong implications for the ranking of the options.
favelados
Originally, the
were indifferent between the land sharing, relocation
within the
area and the three parcel options, all of which produced a VC of approximately
24,000 OTN.
Now there will be a clear ranking of the choices, the relocation
within the area will be by far the the highest VC.
156
It could be argued that various desired ordering of the options for each
stakeholder could be formulate utilizing different probabilities.
The purpose of
only the numbers are the criteria for the best outcome.
describing
process of dispute resolution,
an elaborate
This is true, if
as well as an inquiry
into all the risks that influence the values, is to provide a means to arrive at
numbers as well as probabilities that reflect the reality of the situation, not to
choose numbers to create any one desired reality.
On means of testing the
probabilities assigned to the various options is to do a sensitivity analysis of
probabilities.
these
1 1
8
Feasibility:
Table
10:
Highest
Expected
Relocation
out of Area
Land Sharing
Same Parcel
(in
OTN) 1 19
Relocation
within Area
Three
Parcels
25,455
9,423
17,664
13,920
17,664
21,320
4,400
2,220
6,660
4,290
8,996
LENDER
(30
Value
2,905
Owner
Favelados
Negotiation
units)
118This has not been done for the case study.
It should also be remembered
that probabilities will often change during the course of a negotiation
Therefore, it is important "update" the calculations of the
process.
stakeholders' VCs periodically.
1 1 9 The government's PV has been outlined in the beginning of the chapter.
These figures do not include the cost of negotiation, i.e., the cost of an
This cost would have to be subtracted from these present values.
intermediary.
Depending on the distribution of the expected negotiation costs between
various stakeholders, some stakeholders' present values could result in
negative
the
values.
157
From the table above it can be seen that all of the highest NPVs for each
stakeholder is positive.
This would indicate that all the projects are feasible
for each of the stakeholders, although each stakeholder individually would
prefer his own highest NPV.
parcel option.
proportion.
Jointly, a win/win solution would be the two
Each party is gaining, yet not necessarily by the same
The goal of the analysis is not to make each person gain an equal
amount, but is to make sure that each stakeholder gains, the result--a non-zero
sum outcome. 12 0
With a win/win solution, each of the stakeholders will have
the incentive to see the project through to its completion.
If the NPVs were not positive several alternatives could be investigated to
produce a positive VC.
If any of the stakeholders VC's were negative, risks
could be traded, as was defined in the previous section.
Perhaps there is a
more optimal means to manage the risks within the options.
If the owner's VC
were negative, an additional increase in zoning could be offered to the owner
on the parcel in dispute or on another parcel. (transfer of development
rights)
A new use of the parcels might have to be investigated, in order to
obtain a higher sale price on the market units.
to be arranged from the favelados. 12 1
A larger sale price might have
If the favelados' VC was negative, a
lower sale price might have to be arranged, or a higher resale price for their
units would have to be guaranteed.
If the lender's VC were negative it might
have to charge a larger interest rate, or participate at a higher rate.
Since the
120As was stated in the section on "criteria for a good outcome", each party
should gain but not necessarily by the same amount.
1 2 1 Cost reduction could also be investigated, although quality should not be
sacrificed.
158
components which make up each of the stakeholders' VC are already
separated, the VC can help when a reassessment of the alternatives are
necessary.
Even though all of the options in this case study generate positive NPVs, each
option, should be reviewed against the three sets of criteria outlined in the
beginning
of this
chapter:
risk/return
efficiency,
efficiency
incentives
and
omni-enforceability.
Risk/return efficiency:
This is taking advantage of comparative ability to
bear different categories of risks.
All of the options fill this criteria.
The
construction cost risk is allocated to the developer, he is the one stakeholder
who has knowledge in this area, yet the risk due to inflation is hedged by the
use of an indexed currency.
The problem in all cases is that a land owner is
not and may not be a developer. 1 2 2
contracted by the land owner.
In this case a developer/builder will be
He will either be able to participate as an
equity partner, and thus bear the cost risk or the owner will have to incur this
risk.
All of the options have reduced the risk of the sale price of the units, to
the developer, with
the contract for retail financing.
The bank along with
the developer has guaranteed resale financing for the favelados.
Finally, by
utilizing the VC method which incorporates the risks explicitly having
positive present values illustrates that risks and returns are matched.
1 2 2 Although through out this thesis I have referred to the owner also as a
developer, in some cases.
159
Efficiency
This criteria refers to
Incentive:
consistent and efficient project management.
an agreement which
encourages
In the case of STEP agreements
it would refer to quality and cost efficiency, as well as meeting time schedules.
All of the options appear to have these qualities as long as inspection
guarantees are developed and designs are specified before hand (with input
form all the stakeholders).
Both the land sharing and relocation within the
same area have an added efficiency with respect to time and quality.
If the
location and physical appears of the low-income units have an impact on the
sale price of the high income units then the closer the low-income units are to
the high-income units then more care needs to be taken to ensure aethetics
and quality of the low-income units.
Also, if part of resale financing has been
guaranteed by the developer and the lender for the low-income units, it is an
incentive for the developer to make sure that these low-income units will be
worth at least the guaranteed amount.
With all of the relocation options,
inside or outside the area, the pressure to build the low-income units on time is
increased; the market units can only begin construction upon the rehousing
of the favelados.
"efficiency
Thus the relocation within the area meets the highest
incentive"
Omni-enforceability:
all outcomes.
criteria.
The ability of an agreement to be self-enforcing
across
One of the best means of testing this criteria is to test each
option with respect to sensitivity analysis.
positive over various
The option which can remain
different outcomes would be considered omni-efficient.
The highest VC within each option, for each of the stakeholders has been
tested with respect to the following changes:
1)increase in interest rates,
160
2)increase in participation rates, 3)decrease in sales price, 4)increase in
construction costs and 5)decrease in the sale value for the low-income units.
161
7
Table
11:
Original
Values
Relocation
Sensitivity Analysis (in OTN)
Variables
2% Increase in Double
20% Decrease
Interest Rate
Participation Rate Mkt Sales Price
within
20% Increase
Const Costs
20% Decr in Sale
Price Low-Income
Area
Owner
$25,455
$23,697
$25,066
$17,424
$21,729
$26,017
Lender
$17,664
$18,488
$18,225
$17,664
$17,664
$17,664
Favelados
$24,450
$24,450
$24,450
$24,450
$24,450
$5,340
Relocation
outside
the
Area
Owner
$8,996
$8,409
$8,866
$6,319
$7,754
$9,089
Lender
$17,664
$18,488
$18,225
$17,664
$17,664
$17,664
Favelados
$12,150
$12,150
$12,150
$12,150
$12,150
$3,510
($1,603)
($1,170)
$3,747
Land
Sharing
Owner
$2,905
$1,942
$2,450
Lender
$13,920
$14,402
$13,779
$13,920
$13,920
$13,920
$24,420
$24,420
$24,420
$24,420
$24,420
$1,770
$9,200
$4,111
$6,374
$9,681
Favelados
Three
Parcels
Owner
$9,423
$8,790
Lender
$21,320
$22,191
$21,817
$21,320
$21,320
$21,320
Favelados
$23,610
$23,610
$23,610
$23,610
$23,610
$3,420
162
From the table above, the relocation within the area, as well as relocation
outside of the area, exhibits the least amount of sensitivity to the changes
The decrease in sale price and the increase in construction cost
tested.
produce the largest changes in the VC of the owner.
For the two relocation
options, percentage decrease in the VC due to the decrease in sale price and
the increase in construction costs are 30% and 40%, respectively;
whereas the
decrease due to these factors in the land sharing option are 150% and 140%;
and for the three parcel option 56%
options
are less sensitive
changing
and 30%.
and therefore
Thus both of the relocation
will be more enforceable
under
conditions.
For the favelados the only change in their VC is due to a decrease in the resale
price
of the low-income unit. 1 2 3
the decrease of their VC.
economic changes.
The decrease in resale price is mirrored in
The stability in their VCs reflects a small exposure to
For the lender, there is no one option which is more
sensitive than another with respect to the variables tested above.
1 2 3 1t
is assumed that the interest rate will not change for the favelados.
163
Based on the omni-enforceability
criteria either of the relocation options is
the least sensitive to the changes tested above.
If there were miscalculations
due to the model or any changes in the economy the agreement will not
automatically be unfeasible if either of these options are chosen.
Between the
two relocation options, the relocation within the area should be chosen due to
Based on the criteria laid out in this section the most feasible
a higher VC.
option is the relocation within the area.
Formalizing
the
Agreement
2 4
Once a consensus has been reached, there are two steps in formalizing it.
First, the consensus must be approved by the Zoning Board.
Even though a
spokesperson from the government has participated in the STEP process, that
person was never vested with the authority to make final decisions for the
Zoning Board.
His role, rather, has been to enable the other parties to reach a
1 2 4 The
formalization of the agreement might be considered an additional risk,
in which case an additional probability would need to be worked out as to
whether or not the proposal would be accepted by the zoning board. Since,
there is practically no experience available on which to base this probability,
it is not considered an additional risk. It is assumed, if all of the stakeholders
agree on the project and they have all participated during the negotiation
process that the zoning board would accept the proposal. It is also assumed
that the government office negotiating would receive informal feedback from
the zoning board during the negotiation,
thus the options would not become
totally unacceptable after a consensus was reached.
this nature
have been tried, a probability
After several projects of
of acceptance
and rejection might
need to be added to the analysis.
164
consensus.
Second, the consensus must be put in writing and signed by all the
stakeholders.
If all parties are in consensus and can illustrate that to the Zoning Board
through an explanation of the process, a written agreement, and their united
physical presence, the Board should have no problem approving the
agreement.
As stated above, the Board will have difficulty approving a
proposal if they perceive any of the following:
each party is not represented;
the parties are not in agreement; the Board's action will set a precedent.
Through a STEP process and consensus, these potential obstacles can be
overcome.
If all parties still perceive the risks to be high--that the Zoning
Board will say "no"--then preliminary approvals from or informational
sessions with the Zoning Board can be arranged to avoid any unpredictable
outcomes.
In the worst case, any disagreement can be negotiated as long as
each stakeholder has something to gain.
165
CHAPTER SIX: CONCLUSION
By utilizing the STEP process, that incorporates a change in zoning as an
incentive to all the stakeholders within a negotiation process, insecurity of
tenure for all the stakeholders can be resolved in an efficient manner in Sao
Paulo, Brazil.
This thesis has utilized the case study area of Parais6polis, a
favela in Sio Paulo, to illustrate a land tenure dispute resolution process.
a useful case study because:
incentive law;
It is
a) the city has already enacted some type of
and b) the Parais6polis favela has a substantial amount of
illegally-occupied privately-owned land, as a result of squatter invasions and
years of litigation.
STEP asserts:
It has been shown that STEP is an alternative to litigation.
the only way that an agreement and implementation of a
settlement can be reached is through a consensus-building process, resulting
in a negotiated agreement in which all the parties involved in the conflict are
included in the process, i.e., the favelados, the government, and the disputing
landowners.
The case of Parais6polis presents some peculiarities--high level of favelado
organization, long length of tenure, confusion of ownership, high
development pressure, remote location, and larger, yet less dense, than most
favelas.
These factors may make the case less generalizable, although it has
been one of the most difficult cases in the city to resolve.
Therefore, if an
agreement could be accomplished in Parais6polis, a simpler case situation
could utilize this solution more easily.
The effects of these variables will have
to be developed in the future, preferably after several negotiations have taken
166
place to understand their true impact.
I have illustrated the potential and
logical impact of these factors in the section of elements of STEP.
Suggestions
for
Eliminating
Insecurity
In general, all of the stakeholders need to keep several things in mind in
initiating and achieving a successful agreement.
on interests and not on positions.
All parties must try to focus
The goal should be to address their own
interests and fears, as well as those of their counterparts.
In addition, all
stakeholders should search for someone to fulfill the function of an
intermediary as outlined in
contribution.
Chapter 3, and value his or her potential
Finally, each party should develop the skills and purchase the
expertise necessary to incorporate the tool of a financial model, in order not
only to understand the values and tradeable elements but also to incorporate
systematically the intangible factors in any negotiation.
At the same time,
each of the stakeholders should not preoccupy himself with searching for the
exact values or numbers, to the extent that any financial model becomes the
focus of the negotiation instead of a tool to reach an agreement.
Mistrust abounds and shareholders feel insecure.
Thus, each party needs to
pay attention even to the details which may be important for other
stakeholders,
but insignificant
for themselves--for
example proper meeting
times and accessible locations--that will help to build trust and support among
all of the stakeholders.
Each party must never forget that it is dependent on
167
the other to reach and carry out a successful agreement.
Finally, in utilizing
the idea of dispute resolution, the conflicts and goals must be clear.
I have
asserted that the problem is not that each person should "get a house", but that
each person should have secure tenure.
This work is not a solution to the
housing problem, and it is not designed to stop the creation of new favelas.
General Advice to Each of the Stakeholders
Government:
Flexibility is the key.
The government should not assume that
to achieve fairness and enforce equality, the same solution will hold for each
case.
The solutions lie in the differences.
If flexibility is the key, and case by
The
case analysis is the goal, the problem of precedent-setting will be avoided.
government, as much as any one party, must acquire the expertise needed to
evaluate each of the aspects of any project, including not only the urban and
architectural
qualities, but also the feasibility of the project and its value to
the government, i.e. the costs and benefits.
The creation of minimum levels of
payment for changes in zoning will not suffice, because each case will, in
reality, be different.
The government should be open to deal even with
disputing land owners, in order to make the process truly an alternative to a
court
proceeding.
Occupants:
position,
The occupants should organize themselves for a proactive
and know their and others' varied interests.
solutions, look for intermediaries,
They should initiate
and search for funds from non-
168
governmental
organizations
to
support
full-time
spokespersons
or
The favelados should take their fate in their own hands, not wait
researchers.
for the government or anyone else to offer a solution.
The favelados are all
capable of learning and gathering the information necessary to "play ball."
Land
Owners:
The land owners need to be more cooperative and show more
flexibility in the solutions that are put forth and in the manner in which they
are put forth.
They need to estimate the values of the various alternatives and
value all the subsidies which they are receiving.
The land owners must be
willing to deal with the favelados as a group, if an efficient process and
outcome are desired.
The land owner should utilize the strength and control of
the entire group of favelados and their resources.
The land owner should not
be put in the position to pay X to 29 favelados and have to pay 100 X to the 30th
favelado on the last day.
The land owner should not make unilateral deals with
only the government for removal of the occupants.
The government will
either not agree to this or will agree but not be able to carry out the task.
In
addition, any unilateral agreement will only make the implementation of
vacating the land more difficult, thus jeopardizing the stability of a contract
on which the land owner worked hard to achieve, and in some cases may have
paid dearly for.
approval.
return.
The land owner should not be hostage to governmental
He should not trade something unless he is getting something in
Most of all, the land owner should force the group to keep track of the
tally, in writing.
169
Finally, the land owner should remember that the other stakeholders are
capable citizens like himself or other home owners/buyers.
If they are not
supplied with the correct information to make a decision, they will not make a
decision. Thus it is in the land owner's interest that each of the parties
understands the information necessary to make a decision, just as a home
buyer needs to understand the financing in order to decide whether or not he
will buy one of the land owner's apartments.
time and effort
The land owner should put the
in to transmitting the information
stakeholders to arrive at a rational decision.
necessary
to
enable
It is not necessarily an advantage
for the land owner if the other negotiating stakeholders do not possess
adequate
information. 1 25
Criticisms of Secure Tenure Production
In the course of researching and developing the ideas in this thesis, many
criticisms have arisen.
Some are legitimate and some are not well-founded.
First, some have criticized the use of financial models because the value of
land, along with some other values, is very hard to predict.
exact numbers need not be a prerequisite
model.
This is true, but
for incorporation of a financial
Benchmark figures are acceptable if a financial model is used only to
understand where there is movement in the process of packaging, as has been
12 5
Susskind and Cruikshank also point out the importance of these concepts.
170
suggested in this thesis.
Disagreement about the validity of values should not
jeopardize the efficiency of incorporating a financial model.
Second, some critics have asked, "Why should society sacrifice density in order
to resolve the problem of insecure tenure?".
sacrifice of green open space.
are occupied parcels.
There U. a sacrifice, but it is not a
All of the parcels which I have tried to address
The reality is that people do inhabit supposed green
areas, even if the areas are legally non-existent.
will not take away open green space.
Thus, densifying the area
On the contrary, by densifying the area,
some green open space may be created.
The problem of insecure
The sacrifice is development and increased density.
tenure was brought about by many city wide problems; therefore, the city
If the city does not have
somehow needs to defray the costs of this problem.
the resources to alter laws to create lower standards of subdivision, or build
housing or infrastructure (including transport), it must look to other
resources which it does have to resolve the problem.
This may not be the best
alternative, but it does reflect reality.
Third, some argue with the premise that STEP will not solve the problem of
insecure tenure for the favelados, that it is only a ploy to pay people off.
The
argument asserts that the favelados will sell the new piece of land or dwelling
and take the money and return to another favela.
This may be the case with
some of the favelados, but at least they will leave with their pockets full, full
enough to possibly enter into a new living situation which ha.
secure tenure.
171
Remember, an educational process has taken place during negotiations, one
which will hopefully help in the favelados' next purchase of a residence.
the other hand, dispute resolution is a long process and intense one.
On
It has
been found in Thailand that some people will not move for any price after
devoting a great deal of energy, time and money in achieving a secure tenure
agreement.
126
It must also be remembered that the favelados will have input
into where they would like to be located.
As a result, the probability that they
will want to move will be lower.
The fourth criticism asserts that as a consequence of STEP, invasions will be
encouraged as a means to receive a house or money.
The purpose of STEP is to
help find solutions to existing situations of insecure land tenure.
It is on. of
many options designed to find solutions to existing situations of insecure land
tenure.
It has never been stated in this thesis that a STEP process would stop
invasions; but, it certainly will not be the sole reason for increased invasions.
Given that a STEP consensus takes more than two days to negotiate (it may take
years),
the time and commitment needed to achieve a STEP consensus can act
as a deterrent to quick invasions for quick gains.
One technical way of avoiding the potential problem of continued invasions is
to define, on the day the law goes into effect, those areas that are eligible for
STEP. This was done in the case of the Lei Desfavelamento; only favelas
recorded in the 1980 census are eligible.
Predetermining eligible favelas
based on length of existence has two disadvantages, though.
12 6 Angel and
First, some
Boonyabancha.
172
recently
occupied areas may be experiencing
more development pressure
than older areas. Denying a subsidy to these areas may hinder an agreement
where a market incentive exists.
Second, the problem of defining the
stakeholders is complicated by the need to determine the exact number of
occupants who can participate before negotiations begin.
Undoubtedly, there
will be a different number of occupants at the time of negotiation than was
recorded in prior years:
missing
what do the stakeholders do with the additional or
occupants?
The fifth criticism of the STEP process is the potential added cost of the
intermediary.
Who will pay for this person and how much should he be paid?
It is a well-founded concern, but both costs and benefits will result from the
decision to use and pay for an intermediary.
The intermediary will need to
spend a considerable amount of time laying the groundwork for a negotiation
process (e.g., bringing the stakeholders to the table).
As Susskind and
Cruikshank posit, the intermediary will need to make an up-front investment
of his own time in order to sell his services, much in the same way that a
contractor bids for a project.
Once the possibility of negotiating a consensus is
apparent and the stakeholders are convinced that the intermediary can help
achieve it, arrangement for payment must be addressed.
All stakeholders should contribute to the payment of the intermediary,
although not necessarily in the same proportion or in the same manner.
The
value of the intermediary should be viewed in a manner similar to that of the
additional parcel of land premium, outlined in Chapter Five.
The intermediary
173
should be paid the equivalent of his added value to the project.
An estimation
of the contribution of the intermediary could be made utilizing the VC
analysis.
If the STEP project could not have occurred without the
intermediary, then the intermediary's value would be equal to the VC each of
the parties.
If a lower value project could have been achieved without the
intermediary, then the added value due to a STEP project with the
intermediary's help would be an estimation of his value.
The VC of each of the
stakeholders can also give an indication as to the proportion each stakeholder
should contribute to the payment of the intermediary.
If the developer's VC is
two times that of the favelado, then he should contribute twice as much as the
favelados to pay the intermediary.
Affordability also needs to be factored in for each of the stakeholders, as it is a
function of the means of payment as well as the timing.
The intermediary
might have to accept an apartment as payment from the favelados, in lieu of
cash.
The developer may not be able to pay the negotiator until he has an
approved agreement.
Thus, the negotiator would work on a contingency basis.
In the interim, some form of payment may need to be agreed upon, whether in
barter or as a salary from the government or an NGO.
In any case, the value of
the intermediary should not be underestimated.
The last criticism is one which i. well-founded, although not without faults.
The argument proceeds as follows:
in creating parcel-to-parcel cross-
subsidies, the price of the market units have to be inflated in order to carry
the cost of the low-income units.
As a result, the cost of housing is inflated.
174
This is partially true.
The market units will be inflated, but only to the point to
which the market can bear the increase.
Any costs from the low-income units
which cannot be passed on to the market will represent a reduction in profits
for the developer.
Such a reduction will supposedly be subsidized by the
increase in the number of units which the owner can sell, and any reduction
in the risk of the project.
The resulting prices should reflect only an increase
which the market can bear.
Areas for
Further Research
There are many areas which can be identified for further research as a result
of my experience.
First, perceptions as well as real risks of all the
stakeholders need to be studied.
Further research relating to the
transformation of an owner of a parcel of land into a developer;
that is to say
does an inhertiant also develop land their own land, and what are the
necessary incentives to bring the land into development.
Second, change in
land values due to change in zoning should be studied, as well as the impact
that low-income units have on land values in close proximity to different
types of market developments.
The impact of low-income residential units
near a shopping mall might be different than the effect of low-income units
near a high-income residential project.
For example, in the Parais6polis case
study, the reason that the land sharing option (one of the four examined) may
not have been the most favorable is that another type of market project (e.g., a
shopping center) was not included in the deal.
Third, more information needs
175
to be compiled as to the beta's of different types of construction projects.
Fourth, analysis of past projects should be conducted with the Valuation by
Components method in order to show how its use would have helped resolve
the conflict.
Fifth, research on the impact of inflation on construction costs
and means for mitigating its influence would be valuable.
Also, methods for
estimating and incorporating inflation into a financial model should be
developed.
Finally, alternative types of financing structures for the low-
income units should be researched (e.g., co-operatives, as well as alternative
sources of financing).
As was stated in the introductory paragraph of this
chapter, research on the impact of following variables in negotiating an
agreement merits attention:
the level of favelado organization, length of
tenure, confusion of ownership, development pressure, location of parcel, size
of parcel and density of parcel.
Applicability to Other Tenure Disputes in Brazil and Other
Developing
Countries
The assumptions about the role of the stakeholders in this thesis have been
considerably "conservative".
This thesis has tried to set-out a process for
resolving land tenure conflicts.
The situation need not be between only two
land owners and one group of favelados.
The same process could be utilized in
a situation where the land owner with an occupied parcel could find another
parcel, also occupied, and define an option for occupants from both parcels to
move to one parcel.
There could be a parcel which is owned by a group of
favelados without enough funds to develop housing.
The favelado group could
176
approach another land owner, whose parcel is occupied, and create an option
for all the occupants to move to one parcel.
Thus, this thesis has attempted to
convey that a flexible negotiation process is the most prudent approach to
resolving land tenure disputes.
STEP has potential in other developing countries and in other cases of tenure
disputes.
If all of the political, economic, social and financial considerations
presented in Chapter Two are analyzed, it will become apparent that there are
economic as well as political and social bases for its application.
The process
may need to be adapted but the basic considerations should hold beyond Sio
Paulo's
borders.
Although the thesis has focused on the application of STEP and dispute
resolution for the case of occupied private land, most of the ideas represent a
synthesis of policies of affordable housing, linkage, and transfer of
development rights outlined in developed countries for both private and
public lands, 1 2 7 as well as the extensive work of Shlomo Angel on land
sharing on public property in Thailand.
In the most basic sense, the key for
the application of STEP and a STEP consensus on public land lies in the correct
analysis of who holds the risks.
127Urban Land Institute.
"Downtown Linkages", presented at Education
Forum, (New York: 11 April 1985), outlines the definitions and experiences in
the developed world.
177
Appendix:
Description of the Financial Model and
Simulation
Results
This Appendix will discuss in detail the VC method and develop the VC utilized
in the thesis case study.
Most of the detail will focus on the developer's and
lender's VC due to the complex nature of these parties' roles in a STEP solution.
A discussion of the results has been presented in Chapter five in the text, thus
this Appendix will focus on the mechanics and estimation used to simulate the
result.
The VC Method:
Traditional cash flow methods of analysis generate a present value (PV) or an
internal
rate of return (IRR) which dictate whether or not a project is
feasible.
(A traditional model is defined as estimating the expected cash flows
for each year and discounting the total periodic cash flows back to the present
value, using the average weighted cost of capital to determine the discount
rate.)
12 8
Once a traditional model is devised, it is difficult to disaggregate the
12 8 From James Paddock, class notes "Construction Finance", MIT, Spring 1988.
1) representation
The three criteria used in assessing a financial model are:
of the time value of money, 2) explicit incorporation of risk and 3) a clear and
The traditional methods have problems in
consistent analysis for a decision.
meeting these criteria.
The IRR Method calculates the discount rate which sets the present value of
the expected net operating cash flows equal to the present value of the
investment expenditures: 1) the IRR applies discounting, but assumes a
constant interest rate, 2) it incorporates risk explicitly in the use of a riskadjusted hurdle rate and the expected net operating cash flows, 3) decision
rule--compare the project IRR to the hurdle rate and accept project if IRR is
larger, reject if smaller.
However, the IRR can give ambiguous results due to:
a) some projects' cash flow sequences can return multiple roots, thus multiple
IRRs; b) the IRR implicitly assumes a reinvestment rate of all profits at the
178
cash flow components within the project to understand their weights, and how
shifts in risk can alter their values.
On the other hand, the Valuation by Components method is more flexible,
transparent,
and the only theoretically correct method.
VC is a simple approach which takes advantage of the fact that present
values are additive. The VC of a project is the sum of the present values
of the basic project cash flows, each discounted with an appropriate
risk-adjusted rate. . . The VC method is more powerful than a NPV
because it explicitly identifies and evaluates financial contributions to
the value of a project separately, something very useful for the
appraisal of different risk elements and for the contract negotiation
process itself, when special concessions may be granted which increase
the value of the project to the company. 1 29
constant rate of the IRR in order to realize the IRR itself; this may not be
possible; c) depending on the sequence of the cash flows, the IRR can be the
same for two different projects, thus making it impossible to decide between
two projects; and d) the risk-adjusted hurdle rate is constant over the life of
the project. This may not be the case, particularly on the construction and
operation of a project.
The Net Present Value (NPV) calculated with the average weighted cost of
capital (WACC): calculate the present discounted value of the investment
expenditure and net operating cash flows using a pre-selected risk-adjusted
discount rate (WACC). Where the
WACC= [Proportion of equity][cost of levered equity]+
[proportion of debt][after-tax cost of debt]
The NPV/WACC: 1) does incorporate discounting, but usually assumes a
constant discount rate. 2) The NPV/WACC incorporates risk explicitly in the
risk-adjusted discount rate(WACC) and by using the expected net operating
cash flow. 3) decision rule--if the NPV is positive, accept the project, if
negative reject the project. However, the use of the WACC can give ambiguous
results: a) cash flows of new projects may not be of the same risk class as the
firm's average risk. All of the estimates of cash flows need to be either all real
or all nominal. All the cash flows must have the same (perpetual) time
horizon. b) The debt related to new projects must be assumed to be issued in
perpetuity. The new project may not have the same capacity as the firm's
average project or may not be constant overtime. c) The new project may not
be tax deductible at the same (constant) tax rate, which is implicit.
12 9 Charles Blitzer, P.E. Cavoulacos and J.L. Paddock. "Risk Bearing and
Contract Design: Are Stable Contracts Feasible?" in K. Khan, ed. Petroleum
179
Below is an equation defining the major components of a VC analysis for a
land sharing deal.
By separating cash flows, VC allows different means for
estimating the cash flows.
It is necessary to identify the three separate means
of estimating components: 1 30
1) debt equivalents
2) equity equivalents
3) options
In the following application to land sharing, in the case of Parais6polis, the
first two methods have been utilized. 1 3 1
Resources and Development: Economic. Legal and Policy Issues for Developing
Countries. (London: Belhaven Press, 1988), p. 175.
130 Donald Lessard,
E. Flood, Jr, and J.L. Paddock. . (1986), To be published.
131The option theory can be utilized to determine the option value of the land.
It has not been used in this analysis due to lack of information.
180
VC =
expected
expected
12
investment
revenues
--
expenditures
expected
expected
income taxes
operating
- 1costs
T
(1+A)T
T
(1+B)T
Interest
debt
principal
payments
inflow
T
(1+D)T
T
(1 +C)T
T
Debt
-- rincipal
on operations
--
(1+C)T
Interest
+
repayment
T
(1+D)T
T (1+D)T
T
(1+D)T
In the equation above each of the components is expected, i.e., the mean of its
probability distribution, thus accounting for both the unsystematic and
systematic risk of each flow.
The second step in defining a VC is to distinguish the contractual cash flows
from the non-contractual cash flows--that is, flows fixed by a contract versus
those that are not.
Typically, all equity positions are non-contractual and most
debt positions are contractual.
In the case of a real estate venture, such as
land sharing, the pre-sale of market units would also be considered a
contractual flow and the costs of construction would be considered a noncontractual.
The need to define these different categories of flows is linked to
181
the risk and, thus, affects the discount rates, which will be explained in after
the definition of the components. 1 32
Estimation of
the Components
I have adapted the VC method to produce a financial model for the case of
Parais6polis.
Many assumptions have been set out in order to construct the
financial model and to define and estimate the necessary data.
These
assumptions will be defined with the final goal of estimating the cash flows
and present value of four alternative projects.
The analysis will be done from
the point of view of each of the stakeholders:
the land owner, lender,
government and favelados.
Particular attention is devoted to the developer's
point of view, for if the project is not feasible it will not be undertaken. 1 33
Due to restriction of time during my research, sufficient data on the taxes of
the properties were not gathered, thus the government's and favelados' VC
will be estimated conceptually and not numerically.
The four scenarios to be tested are presented first.
the stakeholders is then developed.
The cash flows for each of
The developer and lender's perspective
will be shown by an example of a completed VC. The
following section will
define the tested financing schemes which appear in the example and discuss
their effects.
As well the definition and explanation of the discount rates and
13 2 Paddock,
class notes.
to lack of time, information was not gathered on real estate taxes.
According to interviews with developers, taxes are not a significant cash flow
factor for the developer, thus lack of this information should not invalidate
Gonealves interview.
findings.
13 3 Due
182
incorporation of the risk analysis will be addressed in the following section,
but first the four possible STEP agreements and the cash flow components.
In the case of Parais6polis four scenarios will be tested along with four
different
financing
schemes:
1) The traditional relocation solution:
both held privately.
away.
Two pieces of land will be developed,
One will be in Parais6polis and the other will be further
The piece of property off site will house thirty favelados on it and the
other will contain an apartment building for sale at market rates.
The object
is to build housing off site and then build the market rate units in Parais6polis.
2) Land Sharing Scheme:
One occupied parcel of land in Parais6polis will be
shared between the market units and thirty low-income units.
3) Two pieces of land are to be developed:
One will house thirty favelados on it
The
and the other will contain an apartment building for sale at market rates.
present land situation, one parcel has a low market land value because it is
poorly located within Parais6polis yet it is vacant;
the other parcel has a
higher potential market value because it has a good location, yet has thirty
favelados on it.
The object is to build apartments for the favelados on the low
market value land and then construct market rate units on the higher valued
land.
4) Three pieces of land are to be utilized. all within Parais6polis: two are
vacant and one is occupied.
The highest potential market value property is
occupied, and the two vacant parcels are poorly located.
The goal is to relocate
the favelados temporarily on the one poorly located property and build the
183
low-income units on the other poorly located parcel and the market units on
the well located parcel simultaneously.
The Cash Flow Components:
Assumptions:
From Owner's point of View
(see Exhibit I)
Equity--Column 1&2
Depending on the financing option equity is based on two factors-1) Paying out of pocket the cost of the low-income units, or if financed-through
debt
or with
the purchaser's
credit--paying
the
difference
in
the
cash flows between the debt and the income from the project.
2) Equity is also the value of the land used to build both projects.
This has been
calculated by defining first the size of the two parcels:
Low-Income Parcel
size 441m 2
Market Parcel
size 2000m 2
In the case of land sharing, the market parcel is net of the low-income parcel.
Next, the value of the two parcels was estimated.
By developing the property,
the owner is investing the cash amount of the sale value of each parcel: as the
project progresses these values change.
The methodology used for estimation
of the property values have been outlined in the text, in chapter five.
The
benchmark land values were taken from the following survey of land prices
in the area of Parais6polis.
184
Table 12:
Land Values in the Area of Parais6polis
Land Values In Area of Paralsopolls 1981, 1984, 1988
Year
Location
1981 very good
good
bad
bad
1984 good
bad
1988 very good
OTNs/m2
(Potential value) a
14.35
9.56
4.68
3.52
2.4
1.4
4.2 - 4.9
2.1 - 2.8
17.5
Source: 1981: Estado de Sao Paulo
1984: IMURB
1988: Estado de Sao Paulo
Notes: (a) potential value is the potential market value
estimated by the state
Land Values Used in STEP Options:
Relocation within the Area:
The high income parcel, which is well located yet occupied, was calculated to
be worth 7 OTN/m 2 before an agreement.
The low-income parcel was
calculated to be worth 7 OTN/m 2 also before the agreement, it is assumed to be
poorly located and vacant.
After the agreement the high-income parcel was
assumed to have a value of 15 OTN/m 2 . Thus the value added premium is 9/m 2 .
The attractiveness premium is then assumed to be 6 OTN/m 2 , based on the fact
that there are several vacant parcels within the area that the would be
185
acceptable to the favelados.
Thus the low-income land is calculated to be 13
OTN/m 2 .
Three Parcel Option:
The same values were used as the above relocation option.
The third parcel for
holding purposes was calculated to be worth 7 OTN/m 2 .
Relocation out of Area:
Again the high-income parcel was calculated to be worth 7 OTN/m 2 before the
agreement and 15 OTN/m 2 after, yielding a valued added premium of 9 OTN/m 2 .
The low-income parcel is estimated to be worth 7 OTN/m 2 .
The attractiveness
premium was determined to be only 4 OTN/m 2 due to the acceptability of
several alternative sights outside the area.
Thus the final price for the low-
income property is 11 OTN/m 2 .
Land
Sharing:
Assuming that the presence of the low-income units on the same parcel of the
low-income units, will reduce the potential sales price of the high-income
units, land values are adjusted.
OTN/m
2
It is assumed that the parcels now
are worth 7
. It is assumed that the high-income parcel will be worth 10 OTN/m 2
after an agreement.
Thus the value added premium is 3 OTN/m 2 . The
attractiveness premium is the full value of the value added premium, 3
OTN/m 2 , due to the fact that the favelados will not accept any other parcel
except that which is they presently occupy.
Thus the value of the low-income
property is 10 OTN/m 2 also.
186
These two values not only reflect the location and the occupation factors, but
also the fact that these two parcels are zoned with a floor to area ratio (FAR) of
(this indicates only a house is permitted)
only 0.29.
Once the favelados are
moved and the FAR is increased to 2.0, the value of the market property
increase to 15 OTN/m 2 .
When the low-income units are completed, the
developer will have made an added investment of the increase in value of his
land.
Technical
Note onEquity and Land Values:
column in Exhibit 1.
Equity is only an accounting
It includes the land value for the investment, as well as
the cash needed for the investment.
The result of a VC is a
=1_t1 present value.
The cash investment (part of the equity component) is not subtracted as a
separate component; it is accounted for by the cash shortfall in all of the other
components.
Thus, the equity column illustrates only the value the owner is
contributing to the project.
(The equity column(1) minus the land value
column(2)).
On the other hand, the investment of the land values and the increase in land
values are not cash outlays and cash incomes.
If they are not added/subtracted
as separate cost and income components, they will not be accounted for.
This
is the reason for making " investment land value" and "increase in land value"
separate components
summed in the final VC.
187
Exhibit 1:
Example of Owner's VC under relocation within area (in OTN)
1
Discount RateE
year
Present Value
Equity
(1)+(2)
0
$50,050
Totals
Monthly Costs
I."
00
00
2
67%
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
$65,118
$22,354
$2,817
$4,226
$4,226
$5,634
$4,226
$2,817
$1,409
$704
$704
$0
$16,000
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
3
67%
Investments
Increase in Vacant
Land Value on
Land Values
Comm and Low Commercial Prop
$27,026
$8,336
4
$35,733
$19,733
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$16,000
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$16,000
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$16,000
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
5
13%
67%
Debt
_
$112,458
$140,000
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$4,200
$11,200
$7,000
$7,000
$8,400
$9,800
$11,200
$11,200
$9,800
$9,800
$9,800
$9,800
$12,600
$14,000
$4,200
$0
13%
Arqu, Legal, &
Construction
Admin Costs
$40,860
$49,007
$1,396
$367
$551
$551
$735
$551
$367
$184
$92
$92
$0
$0
$11,935
$2,893
$1,808
$1,447
$1,808
$2,531
$2,531
$2,531
$2,170
$2,531
$2,170
$2,531
$2,893
$3,255
$1,085
$0
6
7
67%
67%
ow Income Cons Market Const
Costs
Costs
$19,022
000
$24,498
$1,225
$2,450
$3,675
$3,675
$4,900
$3,675
$2,450
$1,225
$612
$612
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$84,685
$241,087
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$26,520
$19,287
$12,054
$9,643
$12,054
$16,876
$16,876
$16,876
$14,465
$16,876
$14,465
$16,876
$19,287
$21,698
$7,233
$0
8
11
10
9
13%
13%
13%
NCI
Expected Low Commission
Expected
-(5)-(6)-(7)
Market Revenue Income Revenue Market Units
Price +(S)+(9)-(10)
_7%*Sale
__________
$222,044
$28,155
$3,954
$390,811
_
$500,000
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$49,118
$48,655
$11,089
$7,260
$4,669
$6,222
$10,584
$9,437
$9,727
$8,643
$11,669
$9,150
$12,175
$12,401
$14,099
$7,626
$267,477
$4,500
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$4,500
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$35,000
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$17,500
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$17,500
13
67%
13%
Loss in Value
Tax of Oper
Low-Inc Units
sum (9)*IT
$154,908
($2,621)
($2,817)
($4,226)
($4,226)
($5,634)
($4,226)
($2,817)
($1,409)
($704)
($704)
$0
$53,618
($7,300)
($11,092)
($6,602)
($6,421)
($7,641)
($8,824)
($9,970)
($9,681)
($7,992)
($7,739)
($7,485)
($7,232)
($9,779)
($10,854)
($692)
$249,977
12
(9)-LowSale
$40,097
($13,286)
$54,218
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$54,218
($25,500)
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
($25,500)
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Monthly Loan
Balance
0)
13%
Interest+
Insurance +
Points
$22,487
19
13%
Kicker Shield
18
17
16
15
14
13%
13%
13%
Principal
Interest Tax
Kicker
Shield
MIT*NT Paymt Part*PermFin IT*Kicker
$1,165
$3,328
$7,458
$103,538
$28,814
$140,000
$10,085
$4,500
$1,575
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$4,200
$15,400
$22,400
$29,400
$37,800
$47,600
$58,800
$70,000
$79,800
$89,600
$99,400
$109,200
$121,800
$135,800
$140,000
$140,000
$1,400
$109
$398
$579
$760
$977
$1,230
$1,519
$1,808
$2,062
$2,315
$2,568
$2,821
$3,147
$3,508
$3,617
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$140,000
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$10,085
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$4,500
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$1,575
20
NPV of Project
-(2)+(3)+(4)+(1 1)
-(1 2)+(13)-(1 5)-(16)
+(17)-(18)+(19)
$141,699.25
$33,802.85
Increase
in
Vacant
Land
Value
on
Commercial
Property--Column
3
The increase in the property value on the commercial property is calculated
as an inflow upon the removal of the favelados.
Debt--Column 4 (see Exhibit 2)
This flow is calculated as an inflow to the developer.
The maximum debt which
can be taken, under the federal housing system, 1 3 4 is 80% of the direct
construction costs with a maximum limit of 3,500 OTN per unit.
Depending on
the scenario, 80% of the cost of the low-income units is financed and a
maximum of 3,500 OTN per unit is financed on the market units.
The debt for
each project is separate; one is paid off and then the other is taken out.
The
disbursement schedules are taken from the SFH estimates on a 15-month
construction
period.
Debt--Column 14,15,16
Debt is also calculated as an outflow when repaid (serviced).
the balance of the debt over time.
Column 14 shows
Column 15 shows the points paid, the
insurance and the interest on the debt.
It is assumed that points are charged
at 1% of the total loan amount and are paid up front. 1 3 5
at 1% per month and interest at 13% per year. 1 3 6
Insurance is estimated
Both interest and insurance
are calculated on the outstanding balance of the debt, although the payment of
134 SFH--Sistema
Financeiro Da Habitagdo which also provides permanent
financing
135 SFH
136 SFH.
The interest fluctuates from 12% to 15%, depending on the project.
191
both insurance and interest is one month behind the funds received, i.e.
interest is only paid on what has been received.
Column 16 show the pay-down of the debt.
the completion of each of the projects.
This takes place one month after
It is assumed that one month will be
necessary to legally transfer the property and pay off the last interest
payment.
192
Exhibit 2
Low-Inc Debt Disbursement
Months
% Dispursed
1
2
3
4
5
6
7
8
9
10
Total 80%CC
|
Market Unit Debt Disbursements
Months
% of Costs
3.00%
10.00%
8.00%
12.00%
22.00%
15.00%
18.00%
7.00%
3.00%
2.00%
100.00%
1
2
3
4
5
6
7
8
9
10
11
12
_
_
13
14
15
Total 80% Cost
3.00%
8.00%
5.00%
5.00%
6.00%
7.00%
8.00%
8.00%
7.00%
7.00%
7.00%
7.00%
9.00%
10.00%
3.00%
100.00%
193
Costs
Construction
All construction costs were assumed to increase 1% per month above the OTN
rate.
The cost of construction usually rises faster that the index of inflation.
These increases are applied over the construction period.
Note that the
financing was based on estimated cost of construction without inflation.
Architectural,
Legal
Construction
and
Administration
Fees--Col.
5:
The architectural fees were based on 5% of the estimated cost of construction
(without inflation) and paid up front, at the beginning of the low-income
project and the market project.
apartment
5% is a typical fee for the design of an
building. 1 37
The fee for administration of the construction, the legal work done on at
closing were estimated to be a total of
15% of the actual construction costs per
month, paid each month. 1 3 8
Low-income
construction
costs--Column 6: (see Exhibit
3)
It is assumed that a low-cost construction, (5-story walk-up apartments) would
be used as replacement housing for the favelados.
retail stores would be built.
It is also assumed that no
This is a simplification, but it is most likely that
some of the thirty people would prefer a shop or both housing and a shop.
It
was also assumed that no major infrastructure investments would be needed,
water and electricity are already present on site.
13 7 Oliveira
13 8
Gongalves
Again, this is a
interview.
interview.
194
simplification, but if the project is unworkable without these extra costs its
probability of success will be even worse with added infrastructure costs.
According to the Habitagdes de Interesse Social
(HIS) standards which relax
building standards if the units are destined for low-income families, as
estimated cost of construction is 20 OTN/m 2 .
Thirty units are required,
determined by the existing number of families which occupy the site.
On
average, 40 m 2 were allocated per unit, which is greater than the existing
average of 30 m2 . 1 3 9
Assuming that the buildable area needs to be 1212.75 m 2
(40m 2 multiplied by 30 units), and approximately 60% occupation of the site,
an FAR of approximately 2.75 is required.
Thus, the cost of construction would
be 24,255 OTN, (1212.75 multiplied by 20 OTN m2 )- The disbursement of
construction costs is estimated over a ten-month build-out period. 1 4 0 It is
assumed that there was not a great variation in the cost per square meter of
construction since there are limited amenities and no elevators.
13 9 Paoliello
and SEMPLA interviews.
from interviews with Gongalves and monthly tables of
construction costs in A Construcio.
14 0 Estimates
195
Exhibit 3
Low-income Const Schedules Market Units Const Schedule
% Spent
Month
% Spent
Month
1
2
3
4
5
6
7
8
9
10
Total
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
5.00%
10.00%
15.00%
15.00%
20.00%
15.00%
10.00%
5.00%
2.50%
2.50%
100.00%
Total
11.00%
8.00%
5.00%
4.00%
5.00%
7.00%
7.00%
7.00%
6.00%
7.00%
6.00%
7.00%
8.00%
9.00%
3.00%
100.00%
196
Market
Units
Construction
Costs--Column 7 (see Exhibit 3)
The market units construction costs are much more complex.
The amount of
buildable area is determined by the allowable FAR on the property.
The FAR
was first adjusted to reflect a uniform buildable area as a reflection of the costs
of the different parts of the building, i.e. the cost of constructing a garden is
not the same as constructing a bathroom.
Thus, an effective buildable area
FAR is used to calculate the total cost.
Table 13:
FAR
effective FAR
for Sale
f(Land Area)
effective FAR
for Area Cstr
f(Land Area)
Effective FARs
1
3
2
4
3.5
4.43
5.51
6.6
2.38
3.41
4.52
5.54
SOURCE: Jolo Rocha Lima, Jr. "Andlise do Beneffcio Gerado pela Legislagio do
Solo Criado." Unpublished paper, 1988.
It can be seen that the total buildable area is less than the FAR indicated by the
zoning code.
It is assumed that the FAR is an input. With an FAR of 2 , the
effective FAR multiplied by the land area equals the buildable area.
The
average cost of construction is estimated to be 35 OTNm 2 multiplied by the total
buildable area yielding a total construction cost of 238,700 OTN
(without inflation of 1% per month). 1 4
1
141 ibid.
197
Sales
Commission--Column
10
A sales commission has been calculated at 6% of the sale price, only for the
Half of the commission is paid at the beginning of construction
market units.
and the remaining half is paid at closing.
Loss in
Revenue Due to Low-Income
Units--column
13
The difference between the value of the low-income unit minus the sale price
received.
The value of the low-income units within the area of Parais6polis
was estimated to be 1,000 OTN per unit. 14 2
In the option of relocation outside
Parais6polis, the value of the unit was estimated at 500 OTN per unit.
This
lower value is due a less desirable market location.
Revenues-Market
Units
Revenues--Column
8
Based on the location of the parcels within the city, taking into account that
new favelado housing will be within the area, the size of the units--221 m2
gross--, with a total of 40 units in the building, and permanent financing of
5,000 OTN per unit--a sale price of 12,500 OTN was estimated.
According to
market research, the range of prices per square meter (based on the total
saleable area) in the area of Parais6polis is 43-75 OTN/m 2 , with an average of
58 OTN/m 2 .
Thus the sale price for the project units, which is 57 OTN/m 2 , is
approximately equal to the the average of the area.
14 2 Campana
and Gongalves interview.
198
Table
14:
Apartment
Sale Prices in Area
Market Price per Square Meter:
No. of rooms
3
3
4
4
Apt. size
(square m.)
220
200
380
403
of Parais6polis
Neighborhood of Parals6polls
Total price
(OTN)
13,333
15,000
16,333
22,000
OTN/square meter
60.60
75.00
42.98
54.59
58.29 - mean
Source: Estado de Sao Paulo, October 16,1988
For the land sharing deal it was assumed that the value of the market units
would be approximately half of the value calculated for the other STEP options.
This is an estimation by the author.
the overall value of the option.
This value will be tested for sensitivity in
It is assumed that sharing the land will reduce
the sale value of the market units, by how much it is hard to say.
Knowing
that moderate income people buy units for 4-6,000 OTN in locations which are
less comparable to this, it would be safe to assume that the estimate of 6,000 OTN
would be a reasonable estimate. 14 3
The buyer is expected to be a move-up buyer, selling his previously owned
apartment , plus his savings to finance the difference between the financing
and the cost.
Two scenarios of inflows have been assumed:
1) A normal downpayment schedule:
20% of the unfinanced portion in the first month
20% of the remaining balance the second month
1.43% for the remainder of the months
143Apartments in Villa Nova Cachoeirinha sell for 4,500 OTN and have a
smaller area.
199
2) Only enough each month to cover the difference between the debt and the
construction costs and the interest on the construction debt.
Low-Income
Revenue--Column 9 (see Exhibit 4)
It is assumed that 25% of the monthly income could support a mortgage. 1 4 4
With a 5% downpayment and a 10-year mortgage the sale price of a unit would
be 150 OTN.
This would require 1.5 to 2 minimum salaries to qualify.
Again
this is a simplification, since there are families who could afford to pay more,
but without being able to directly identify the families a minimum sale price
has been calculated.
Different values can be charged for a similar unit
depending on the location and the end use within the building, even lowincome individuals perceive this difference.
It should be remembered that
there are different levels of ability to pay and willingness to pay for housing
even among lower-income families.
Accordingly, a sale price structure should
be devised to capture these differences in ability and taste. The potential for
cross-subsidization,and diversification, within the favelados is possible.
If the
group could bee seen as a cooperative, with both high and low risk clients, the
risk would be mitigated.
would be reduced.
higher.
As a result of one larger mortgage, service costs
Thus, it is entirely possible that this sale price could be
For simplicity's sake this has not been factored into the model, but
should be utilized in real life.
14 4 This is only a benchmark figure. Generally, 25% of net monthly income is
considered an affordable amount for servicing housing costs. Due to lack of
information, this figure is based on gross income.
200
Exhibit 4
Affordability Table
Minimum Salary per month *
Cruzados
1
$10,464.00
2
$20,928.00
3
$31,392.00
5
$52,320.00
10
$104,640.00
15
$156,960.00
OTN**
$5.23
$10.46
$15.70
$26.16
$52.32
$78.48
I_
25% Monthly
Annual
Morto Payment Income, OTNs
$1.31
$62.78
$2.62
$125.57
$3.92
$188.35
$6.54
$313.92
$13.08
$627.84
$19.62
$941.76
Est. Housing
Sale Price
2.5*Annual Inc
$156.96
$313.92
$470.88
$784.80
$1,569.60
$2,354.40
1 Minimum Salary-10,464.00 cruzados, Note: Diario Economico e Financeiro, August 23, 1988
*1 OTN-approximately 2,000 cruzados, August 1988
Mortgage Table
Sale Price
Downpayment
Principal
150 OTN
5%
142.5
5 years
#DIV/01
10%
11%
12%
13%
14%
15%
0~
15 years
10 year
60
120
180
20
240
($3.03)
($3.10)
($3.17)
($3.24)
($3.32)
($3.39)
($1.88)
($1.96)
($2.04)
($2.13)
($ 2 .21)
($2.30)3
($1.53)
($1.62)
($1.71),
($1.80)
($1.90)
($1.99)
($1.38)
($1.47)
($1.57)
($1.67)
($1.77)
($1.88)
11
Revenues-Expenses---Column
This column is the compilation of the present value of the sum of the revenues
of column 8 and column 9 minus the sum of expenses of columns 5, 6, and 7.
The calculation done in this way to allow different discounting rates for the
expense and revenues. (Details of the determination of the discount rates are
explained in the following section.)
Tax on Operation--Column
12
Taxes of operation are calculated at 35% of the Revenue-Construction Costs,
which includes the loss on the low-income units sold below costs.
Interest Tax
Shield--Column
17
This is calculated at 35% of the total interest payment.
The interest tax shield
is an inflow,( i.e., an outflow of taxes which did not have to be made) because
interest is a cost to the project.
Kicker to Debt--Column
18
Under the SFH financing system extra points are charged to the developer on
the difference between the total of the construction financing and the
permanent financing.
The points range from 7.5% to 15%.
It is assumed that
the maximum permanent financing on all the market units was taken and a
7.5% kicker was charged, regardless of the amount of permanent financing.
This is standard practice for SFH.
A likely explanation for this participation is
that bank realizes that the developer can charge a higher price for the units
202
with higher financing, and it is easier to sell the units with financing.
Thus
the bank is charging for its services.
Kicker
Tax
Shield--Column
19
The points charged by Caixa Econdmica Federal
are considered costs to the project.
for the permanent financing
Thus, the kicker, like the interest tax
shield, offers a 35% shield of income from taxes, (i.e., an outflow of taxes
which did not have to be made) This amount is an added inflow for the
developer.
NPV
of the Project--Column
20
The project with the highest positive net present value (VC) is the best project.
Lender's Point of View (see Exhibit 5)
Outflows:
o The investment of the loan amount
o The taxes paid on the income
Inflows:
o The income from the up-front points
o The income from insurance
o The income from the interest on the construction loan
o The income from the kicker
203
Exhibit 5:
Example of VC for Lender under Relocation within area option (In OTN)
13%
NPV
4:h
Months
Investment
$140,000
67%
Revenue Interest Revenue Kicker
13%
Taxes
NPV
$25,591
$1.887
1
2
3
$1.400
$109
$398
$0
$0
$0
$0
$0
$0
4
$579
$0
$0
5
6
7
$760
$977
$1.230
$0
$0
$0
$0
$0
$0
8
9
$1,519
$1,808
$0
$0
$0
$0
10
11
12
13
14
15
61
6
$2*0 6 2
$$0315
2.31
$2,568
$2,821
$3,147
$3.508
$0
$0
$0
$0
$0_
$0
$0
$3.617
$0
$0
$0
$0
$4.500
$9.814
$11,660
$17,664
1
Favelados' Point of View:
Outflows:
o The monthly payment for utilities, above that which they are paying now.
o Up-front costs, such as downpayments, if a mortgage exists.
o The monthly service for a mortgage, if there is one.
o The repayment of the mortgage at the time the resale value of the units is
calculated (if a mortgage is held).
o The forgone sale price of their present dwelling, exclusive of the land
because they do not own the land.
property taxes
Additional
o
Inflows:
o The resale price of the new unit. This price should reflect secure tenure.
o Mortgage, if given
o Any property tax exemptions, if given
Due to lack of information, a simplification of the favelados' VC calculation
will be based on the following: (see Exhibit 6)
Inflows:
o the resale value of the unit estimated at 1,000 OTN within the area of
Parais6polis and 500 OTN outside of the area.1 4 5 The unit will be sold after one
year.
Outflows:
o the amount of the mortgage, approximately 145 OTN for 15 years at an
interest rate of 10%, with a 5% downpayment.
14 5 According
to the
dwelling plus land is
also estimated by the
area of Parais6polis.
administration of the Lei de Desfavelamento, each
worth 1,000 OTN. The value of the low-income unit was
developer Gongalves to be approximately 1,000 OTN in the
Campana and Gongalves interview.
205
Example of VC for Favelado under Relocation within Area Op tion, (one unit.
3
4
5
1
2
10.00%
10.00%
10.00%
10.00%
10.00%
Discount Rate
Resale price
Repayment of
Mortoage
Service
Investment
Mortae
Received
Downpayment
$819
$115
$128
$18
$7
Discounted
Exhibit 6:
14
1_
16
$8
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$8
$0
$0
$0
$21
$0
$0
$0
$0
$0
$0
$0
$0
$0
-$0
$0
$0
$0
$2
$2
$2
17
$0
$2
18
$0
$0
$0
$0
$0
$0
$0
$2
$2
$2
$2
$2
$2
$2
1
2
3
4
5
6
7
8
9
10
11
12
13
19
2C
21
22
23
24
$143
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$143
$0
$0
$0
$141
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$1.000
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$141
$0
$0
$0
$0
$0
$0
$1,000
in OTN)
6
NPV
- (2) + (3)
- (4) + (5)
$815
Government's Point of View
Outflows:
o The cost of increased density or development of the area
o Infrastructure costs, if needed and if paid for by government
o Loss of property tax revenue due to tax exemptions, if any are given
o The cost of transferring the favelados
Inflows:
o The increase in property taxes from the market and low-income developed
properties
For simplicity sake the following assumptions have been made regarding the
government.
Outflows:
o There are no added costs due to density, or added infrastructure. 1 4 6
o It is assumed that the cost of transferring the favelados will be the same for
all of the projects, except the three plot scheme where transferring is
done twice, once to the temporary site and secondly to the new housing.
Inflows:
o The property taxes are seen as a function of the final sale price of all the
units, thus a function of location.
14 6 This
is not an over-simplification for the first project in the area of
Parais6polis. Future projects will have added costs. On the other hand, it is
assumed that if there are any costs they will be approximately equal for all of
the options.
207
Risk
Analysis
and
Packaging
with
Comparative Advantage
The Valuation by Components method incorporates finance theory under
uncertainty and specifically the Capital Asset Pricing Model(CAPM) which
identifies two different types of risks which impact on the value of any asset:
systematic
(non-diversifiable
risks)
and non-systematic
risks (diverisfiable).
The model finds that:
the total expected return on any risky asset can be disaggregated into
two components. The first component is the return on a risk-free asset.
The second component is a risk premium which is a function of the
covariance of the asset's return with the return on the market. ...The
only risk that matters in asset pricing (in the sense that it affects the
equilibrium expected return of the asset) is the extent to which the
nominal return on the asset moves with the nominal return on the
market,i.e. its beta. The component of the risk of the asset is called the
undiversifiable or systematic risk. The remainder of the asset's risk,
that is, the movement in the assets return that is not correlated with
movements in the return on the overall market is called the
diversifiable or non-systematic risk.
According to modern finance theory, the risk of an investment from
the perspective of a specific investor depends on the riskiness of the
investment when viewed by itself, and the extent to which that risk can
be diversified away in the investor's relevant portfolio of other
investment opportunities. The former will be the same for all investors,
Obviously, no
but the latter may vary significantly among investors.
investor can avoid systematic elements that derive from the economic
system and, therefore, affect all investments to some degree. The
additional required expected return--the risk premium--is the price of
risk-bearing and has important implications for investment
decisions. 147
Once the risk factor is known the discount rates can be determined.
Stemming
from this theory the first step is to analyze the systematic and non-systematic
risks.
Often times projects have different risks according to their phases and
as such should be analyzed differently to incorporate the proper discount
rates and thus risk-premiums associated with each phase.
14 7 Blitzer,
In the case of land
Cavoulacos, and Paddock, p. 174.
208
sharing there are two distinct phases which need to be addressed for purpose
of analysis and valuation, a negotiation phase and a development phase.
The
first being the development phase, the analysis of the value of the project as if
the negotiation were over.
The project itself is not necessarily anything other
than a cross-subsidized project of low- and high-income apartments and as
Once
such is dependent on the risk-premium associated with such projects.
this value is know the second analysis can take place--the negotiation phase-the value of the project which is to be negotiated over an expected time period,
which is a conditional value.
For this phase an expected VC can be calculated,
incorporating the probability of succeeding or failing to negotiate the project,
and discounted at the proper risk adjusted discount rate, reflecting the
systematic risk of during the negotiation stages.
With this value and the
incorporation of the costs of negotiation it can be estimated if the value of the
subsidy through zoning will make the project worthwhile, if so which project
is most feasible, and if not where there is room for further subsidy or
packaging.
Risk Analysis of the Project and Determination of the Discount Rates
and Comparative Advantage: The Project Stage
All projects consist of two types of risk, operational or business risk and
financial risk.
The operational risk, as described above, is risk attributable to
the operation of the specific project, without any financing involved.
risk always exists.
It is a factor in the equity position of a project.
This
Financial
risk is the risk attributable to the use of financing, it is the risk that the
project will not generate enough funds to cover its debts.
In project finance,
like real estate and land sharing deals, the ability of the project to pay its debt
209
is considered the financial risk.
This risk is carried both by the equity
investor and the debt supplier in project finance.
By separating the cash
flows from the project and the financing in the VC analysis and applying the
correct discount rates which correspond to these flows the financial risk and
the operational risk is decomposed. 1 4 8
In general there are several risks, all of which are systematic, that impact on
the inputs and outputs of any construction of apartments in Brazil.
In
defining the financing and structuring of a land sharing deal the systematic
risks should go to the party who has a comparative advantage in holding this
risk.
Below the risks will be outlined and assigned to the stakeholders who is
best able to "bear" and/or "manage" the risk.
Cost of Construction--the
developer/owner
Resale Price of Market Units--developer/owner
Determining
the Discount
and lender
Rates
For the purposes of this thesis, two basic types of discount rates utilized in the
VC analysis are those for the contractural and non-contractural
cash flows.
(Many more can be used but at least these two categories need to be
distinguished).
14 9
One important difference between a contractural and non-
contractural cash flow is in the risk surrounding the expected value of these
14 8 1n
the traditional WACC method of project analysis, these two risks are
averaged together and utilized in a uniform discount rate applied to the entire
project's cash flows, i.e. both debt and equity. Lessard and Paddock.
14 9 ibid.
210
flows.
In a STEP deal the following list identifies the contractual and non-
150 :
contractual cash flows for the VC of each stakeholder
Non-Contractural:
Developer--equity,
land values, construction costs, loss in value of low-income
units
Lender--kicker
to debt
These cash flows exhibit extreme amounts of uncertainty relative to the other
cash flows.
Equity for the developer is a function of the needs of the project
over time.
The construction costs have a high degree of uncertainty due to
inflationary problems in the Brazilian economy.
Equity can also be very
volatile due to preselling of units and the possibility of increase in the
15 1
construction costs over the estimated value.
Finally, land values are also
considered risky and equivalent to the equity put up in any project.
For the
lender, the value of the kicker is also considered to be a cash flow of a risky
nature.
buyers.
It is dependent on the final amount of financing taken out by the
For the favelados, a non-contractual cash flow would be the resale
value of their low-income units.
If a guarantee from the developer for the
15 0 There are no non-contractural cash flows for the government or for the
favelados, especially if there is a guarantee for the resale price or resale
financing provided for the low-income units.
151One might also argue that the income from the market units is also a noncontractual cash flow due to its dependence on the overall economic situation,
in order for the buyer to meet his obligation of the monthly downpayment. I
have assumed that it is not a problem to presell the units. One could factor in a
probability of buyers dropping out over the course of construction, although
it would not necessarily be incorporated into the discount rate.
211
resale price or resale financing is promised by the government then the
resale value would be considered a contractural cash flow.
"Both of these discount rates, contractural and non-contractural,
reflect only
the systematic risk of that cash flow whether contractual or non-contractual.
The interest rate on debt may give us a 'floor' on the discount rate." 152
Thus
the discount rate for the contractural cash flows was assumed to be equal to
the interest rate given for housing. 1 53
In determining the non-contractural discount rate, the CAPM is utilized.
The
beta of an average risk project is 1 and the return to this is based on the
following
formula:
Project Discount Rate=Minimum Required Rate of Return=
Real Interest Rate+inflation Premium+(project Beta*average risk
premium)154
where the average risk premium = Market Rate-Riskless Rate
In Brazil the following minimum required rate of return for an average
project is approximated by the return on the stock market, this value is
estimated to be 42% per year (in real terms) 15 5 .
The real riskless rate is
15 2 Paddock class notes.
153 This is not the market interest rate but a subsidized rate for housing
finance.
15 4 Lessard, Flood, and Paddock, and class notes
1 5 5 David Davies interview, 26 July 1988.
The return on the Brazilian stock
market is estimated to be between 2 and 5 percent (real) per month. Using an
212
estimated at 6%, this is the rate received on savings accounts in federal
Thus working the above formula backwards, utilizing a B=1 to
savings banks.
signify an average project, the average risk premium is determined to be 36%.
Minimum Rate of Return=Real Interest Rate+(project Beta*average[real]
risk
premium)
42%
42%
Therefore
36%
=
=
=
+[1*(market rate - 6%)]
6%
market
rate
average (real)
risk premium
If it is assumed that a STEP project, in which the occupants must be moved off
the site after the low-income housing is built the systematic risk is high.
This
is due to the increased possibility of the market moving away from the
estimated costs and sale prices.
Thus a project of this type might have a
B=1.7156, illustrating that the project is 70% more risky than an average
project, would yield a non-contractural real discount rate of 67%, for the
owner.
Minimum
Rate of Return=Real Interest Rate+(project Beta*average[real]
risk
premium)
67%
=
6%
+
(1.7*36%)
average of 3.5% per month yields an average real minimum rate of return on
the stock market of 42% per year.
15 6 These are assumed to be unlevered betas.
These betas are estimates by the
author.
213
In the case of the use of the three parcels of land, the systematic risk for the
owner is less because both the parcels for the low-income and high-income
parcels are free for use at the beginning of construction.
As such the market
units could be sold at the beginning of the project, and there is less of a time
lag during which the market may move away from the developer either on the
construction costs or the resale price.
Thus I have used a B=1.5, which yields a
discount rate equal to 60%.
The non-contractural
discount
rates for each
of the stakeholders
reflect the type of portfolio that they have access to.
should
For simplicity I have
assumed that all the parties have the same non-contractural
discount rates,
this is equal to the interest rate from the lender, 13%.157
The two options, moving occupants outside of the area or keeping them in the
area, in the development phase are assumed to have the same risk.
The only
difference between these two projects is the risk of the cost of the land for the
relocation of the occupants.
This has been calculated in the expected cash
flow component of the VC.
With these discount rates the following values can
be seen for all the stakeholders, assuming an increase of one FAR.
15 7
For example, the contractual discount rate for the favelados should be the
This value will probably be different
rate at which they can borrow funds.
than either the bank's or the land owner's. Due to lack of information and for
the purpose of simplicity, I have used the interest rate of 10% for the discount
rate for all of the cash flows for the favelados--the interest rate which will be
charged to the favelados. This is only the author's estimate for subsidized
housing finance for the favelados.
214
Table
Net
15:
Present
Values
During
the
Development
Phase
(in
OTN)
Relocation
within Area
Three
Parcels
10,780
141,699
100,517
17,664
13,290
17,664
21,320
12,150
24,420
24,450
23,610
Relocation
out of Area
Land
Same
150,227
Lender
Favelados
Owner
(30
Sharing
Parcel
Units)
It can be seen from the above table that all of the projects have positive VCs.
Thus each project would be feasible.
alternate types
option. 158
of financing
The variation between the projects due to
is relatively small
except in the land
sharing
More importantly, the type of project appears to offer a greater
deviation in the value of the project.
As was stated in Chapter five, these
values only reflect each STEP option if the project were agreed upon, i.e.,
during the development phase.
The expected negotiation value of each project
still needs to be calculated to understand which option would be the best for all
of the stakeholders.
Expected
Negotiation
Value
Before the project can be developed it has to be negotiated.
This requires
additional estimates of the VC, the expected negotiation value of each of the
options.
The systematic and non-systematic risks need to be accounted for as a
function of the probability of negotiation a consensus as well as a function of
15 8
The impact of financing will be analyzed
in the section, Financing Effects.
215
the time in which the a consensus will be reached.
These variables can be
incorporated in the valuation process by calculating a expected negotiated VC.
This has been done in Chapter five.
The Financing Effects:
Once the components have been defined the next step is to identify the
financing combinations under each option and to show the effects of the
different combinations.
This is an important to understand the financing
needs that contribute to the creation of viable options for each of the
stakeholders.
In addition, each party needs to understand the impact it may
have in structuring the deal.
The goal is to identify the financing structure
that produces the highest VC within each STEP option.
In the highest VC for
each option is used in the expected negotiated value.
Returning to the owner's VC several financing combinations were simulated
for each of the STEP options.
They were tested to understand the necessary
financing needs and the best possible combination according to the developer
and the lender, assuming an affordable sales price and financing for the lowincome units .
The tested combinations were chosen based on the norms of the
industry (as defined in the components section) in order to avoid complication
of the profile of the final buyer. 1 59
15 9 As
outlined in the components section, construction and permanent
financing for the market units is normal if the sale price is within the limit of
the SFH finance system. If the sales price is higher, the buyer is usually able
to purchase the unit with cash and thus finance the construction with these
downpayments. In all cases, it is assumed that the sale price falls into the
category of a buyer who would need to have permanent financing.
216
Diagram
Lov4ncome
4
Market rte
FINANCING OPTIONS
BANKIDEBT
BUYER
(A1) ownerlequity
8ANKI DEBT
(82)
OWNERIEQUITY
TOTAL
PROJECT
BANK IDEBT
(B1)
bankldebt
(02)
The four STEP options can be financed utilizing a combination of the following
sources of financing (as illustrated in the above diagram):
the downpayment of the market units.
portion of the project;
debt, equity and
Concentrating first on the low-income
financing can be obtained from equity (Al) or debt
(A2).
The market units need to be financed with debt (a traditional mortgage), but
due to the limits for financing on units in higher sales price brackets, as these
have been estimated to be, additional financing will come partially from the
217
monthly installments of the buyers of these units.
developed within this scheme.
typical downpayment schedule.
Two scenarios have been
The buyer can pay what would be considered a
With this scenario the project still lacks
The shortfall in financing is due to the restrictions on
financing.
construction financing, only 80% of the construction costs.
The remaining
20% is reduced through monthly buyer downpayments from the presale of the
units.
It is traditional for the buyers to pay a fixed monthly amount over the
life of the project.
The shortfall in funds is thus due to a mis-match in the
sequencing of the funds paid out over the life cycle of the construction
project.
Thus the shortfalls each month can either be made-up through
equity (B2) or the developer passing on the total shortfall to the buyers each
month (B1).
16 0
The following permutations, in the table, define the financing options tested
in the above simulations, for the land sharing scheme, relocation within the
area and relocation outside the area.
16 0 1f
the developer were to pass on the total amount to the buyer, the buyer
would not be paying more for the unit overall. He would be paying only more
upfront. In any event, the buyer ends up paying the total 20% shortfall in
construction funding.
218
16: VC Results of Financing Simulation for Developer (in OTN)
Low-income
Market
Within Area
Outside Area Land Sharing
$133,851
$142,501
$1,061
Debt/Equity
Case 2--A2,B2 Debt
Table
Case 3--A2,B1 Debt
Debt/Buyer
$132,914
$141,565
$10,780
Case 4--A1,B1 Equity
Debt/Buyer
$141,699
$150,227
($2,945)
Case 5--A1,B2 Equity
Debt/Equity
$139,403
$148,046
($14,935)
The value added by different financing combinations is much greater for the
land sharing scheme than for the relocation schemes.
Among the relocation
options, the added value due to financing produces a range of 8,000 OTN from
the lowest value to the highest.
On the other hand, the influence of financing
in the land sharing case is strong.
sharing option is 25,000 OTN.
The range of values among the land
The numbers illustrate that if debt financing is
not obtained for the entire project, then the land sharing option is not viable,
as represented by the negative VCs.
The valued added by financing for the
other options, however, does not affect their viability.
There is a larger difference between the VCs of the various options than there
is due to financing within any one option.
The highest VC for the owner,
under both relocation options, is the equity and debt/buyer financing
combination.
For the land sharing scheme the highest financing
combination is the debt and debt/buyer combination.
Two financing schemes were tested for the three parcel option.
The bank
would finance the entire project and the owner(B2) or the buyer (B1) would
finance the shortfall during construction. (shown in diagram below)
219
Diagram
5
BANK IDEBT
(B 1)
BANK XDEBT
(B2)
'WONER I EQUITY
Table 17: VC Results of Financing Simulation for Developer (in OTN)
Case 6--B2
Debt/Equity
Case 7--B1
Debt/Buyer
$100,517
$96,671
Under this STEP option, the highest VC for the developer is to have the owner
and the bank finance the project.
This analysis shows once again that there is
a small difference in the VC due to the financing combination.
From this analysis of the owner's VC , the different financing options do not
appear to have significant impact on the final VC of the project.
It is only in
the Land Sharing Option with the use of bank and buyer financing that a
substantial change in the owner's value is created.
Thus one might conclude
220
The lender's VC must also be reviewed under the various options.
The table
below shows the VC for the various financing combinations.
Table 18:
Present Values for the Lender
Financing Combinations (OTN)
Within Area/ Land Sharing Three Parcel
Outside Area
Case 2&3
$17,229
$13,920
Debt: low & Market units
Case 4&5
Debt: Market units
$17,664
$11,573
Case 6&7
Debt: Low&Market units
$21,320
The highest VC for the lender is the three parcel option.
lower discount rate ind a shorter built-out period.
the relocation options.
This is due to the
The next highest values are
Both of these values are higher than the land sharing
scheme due to the kicker component--the sale value of the market units is
higher in the relocation scheme.
Conclusions:
This analysis has shown that for all the options the different
means of financing, among the combinations tested, produce very small
additions to the VC of either the lender or the owner for all the options except
the land sharing option, i.e., land sharing is sensitive to financing
combinations for both the owner and the lender.
Therefore, other than the
221
the land
sharing option, i.e., land sharing is sensitive to financing
combinations
for both the owner and the lender.
Therefore,
other than the
land sharing option, the financing could be done in any of the
ways.
aforementioned
financing
within
This analysis shows that there is flexibility in regard to
each of the
options, except
for land
sharing, thus depending
on the owner's position, i.e whether or not he has cash, a deal can be
structured without significant value changes in his VC,
Table 19:
Financing
as well as the lender.
The Highest VC for Each Option as a Function of
(in OTN)
Sharing
Three
Parcel
Relocation
outside
Relocation
within area
Land
(a)
(b)
150,227
8,996
141,699
25,455
10,780
2,905
100,517
9,423
Lender
17,664
17,664
13,920
21,320
Owner
Note:
(a) This is the expected development VC for the owner
(b) This is the expected negotiated VC for the owner
Based on the VC criteria, the best option is the VC with the highest value, there
is a discrepancy
between the best option for the lender and the best option for
the owner, i.e.,
Relocation within the area is the best for the owner yet the
three parcel options is the highest VC for the lender.
As stated in the text of
chapter five, the relocation within the area is also the preferred option of the
favelados and the government.
In order to bring the option of the lender in
line with the other preferences of the stakeholders,
an increase in the
interest rate or an increase in the participation rate would have to be
arranged.
222
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EMPLASA.
228