Value in the air: How São Paulo finances urban infrastructure

Infrastructure is capital-intensive, and the costs must be borne before any revenue can be generated. Transport corridors, social housing, drainage systems, or public spaces must be financed years before higher land values and economic growth expand the tax base. Borrowing can help smooth this gap, but it is often limited by debt rules and weak revenue bases. Cities, therefore, face a persistent timing problem: they need large sums up front, but their fiscal systems deliver funds gradually.

How air rights work as a land value capture tool in São Paulo

São Paulo is one city that has managed to overcome this problem through the mechanism of air rights – an underused land value capture (LVC) instrument that charges developers for building beyond a basic floor area ratio (FAR). The conceptual foundation of air rights in Brazil lies in the notion of solo criado (literally, ‘created land’). 

This legal framing transforms vertical development potential – the ‘air’ above land – into something municipalities can monetise. Any construction capacity beyond the baseline FAR is treated as a public asset.

São Paulo operationalised this principle through two distinct instruments:

1. The charge for additional building rights (Outorga Onerosa do Direito de Construir – OODC)
    
2. Certificates of Additional Construction Potential (Certificado de Potencial Adicional de Construção – CEPACs)

Between 2004 and 2022, they generated more than USD 4.5 billion in earmarked revenue through these instruments, roughly 8% of annual property tax revenue over the period. The revenues were then used to finance the infrastructure that both enables and justifies higher density, from transport systems and housing provision to environmental improvements. 

Although the two instruments share the same conceptual foundation, they differ sharply in their design, incentives, and fiscal performance. Based on a recent IGC case study on raising municipal revenue through air rights, this post delves into how these tools have raised funds and shaped development, while also considering their administrative feasibility.

The charge for additional building rights: A citywide and redistributive instrument

The OODC applies across most of São Paulo. Developers who wish to build above the basic FAR pay a charge calculated using a formula defined in the city’s master plan. The price per additional square metre depends on land values set by the administration and adjustment factors that reflect planning priorities. 

These are coefficients that vary by location and policy objective, allowing the city to raise or lower charges in specific areas to reflect infrastructure capacity, development priorities, or social goals. This design gives OODC a distinctive fiscal profile, combining stability and redistribution with clear trade-offs.

What works

✓ Because the charge is embedded in routine permitting and paid at the time of licensing, revenue collection is continuous and predictable. As long as construction activity continues, revenues accrue.
✓ For this same reason, the instrument remains administratively straightforward. It operates through the existing building permit system and does not require complex financial instruments or specialised market infrastructure, making implementation comparatively low risk.
✓ Its citywide application reinforces this stability. By capturing value from thousands of projects of varying sizes and uses, revenues do not hinge on a handful of large developments or a single booming district. Collections instead reflect overall construction activity, smoothing localised booms and downturns.
✓ The instrument’s design allows for a strong redistributive dimension by pooling revenues into a municipal fund that can finance projects across the city. In practice, resources raised in high-demand central districts have supported housing, transport, and infrastructure in both central and peripheral neighbourhoods, channelling value from buoyant property markets towards underserved areas.

Trade-offs

✗ Yet the same features that generate stability also limit revenue upside. Because prices are formula-based and administratively determined, they may diverge from market conditions if land value tables are not regularly updated.
✗ Without competitive bidding, OODC cannot fully capture surges in demand in prime districts. Fiscal performance depends heavily on how closely pricing parameters reflect real market values.
✗ Moreover, while pooling enables redistribution, it weakens the direct link between where revenue is raised and where it is spent. When infrastructure benefits are less visible locally, developers may perceive a weaker connection between payment for air rights and returns on investment.

Certificates of Additional Construction Potential: Targeted, high-yield, and market-sensitive

On the other hand, CEPACs operate only within specially designated planning areas known as Urban Operations (UOs). Within these perimeters, the city may issue a fixed number of tradable certificates granting the right to build above the baseline density. Developers who wish to exceed this baseline must purchase them through public auctions. The municipality sets a minimum price, but the final price is determined competitively.

What works

✓ The capped supply, combined with competitive auctions, allows the city to capture high demand in prime real estate markets. Despite covering only 2% of São Paulo’s zoned land, CEPACs generated USD 2.6 billion between 2004 and 2022 – around 58% of total revenues from air rights over the period.
✓ The instrument’s design also creates a strong local reinvestment link. Because revenues must be spent within the same UO perimeter, payments are tied to visible infrastructure improvements in the area. As these investments raise local land values, developers benefit directly, reinforcing their willingness to pay for additional building rights and sustaining a feedback loop between development and public investment.

Trade-offs

✗ Their reliance on markets makes CEPACs inherently more volatile. Revenues depend on auction timing, market cycles, and minimum price setting.
✗ The instrument is also more administratively demanding. It requires legal frameworks, securities regulation, feasibility studies, and ongoing monitoring of development rights.
✗ Finally, because revenues must be spent within the UO perimeter, redistribution across the city is constrained.

Aligning private incentives with public finance

São Paulo’s experience illustrates how regulatory authority over density can support revenue mobilisation. By treating air rights as a public asset, the city mobilised substantial upfront resources for infrastructure – particularly in high-demand areas where developers’ willingness to pay is strongest.

At its core, the idea is that the right to build above a defined baseline has economic value, and that this value can be captured for public purposes. The specific tools used in São Paulo – whether formula-based charges or auctioned certificates – are only one institutional expression of that principle.

In other cities, the same idea could take different forms. The design will need to reflect policy objectives, legal frameworks, and administrative arrangements. What ultimately matters is recognising that private willingness to invest in urban development can, under the right rules, help finance the public goods that make cities productive and liveable.

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