João Manuel Carvalho Economist, MAS Urban & Regional Planning, PhD Urban Planning,

1. REAL ESTATE AND MUNICIPAL GOVERNANCE – THE CASE OF THE MUNICIPAL DEVELOPMENT TAX (MDT) IN THE LISBON METROPOLITAN AREA (LMA)18 th ERES CONFERENCE, Eindhoven, 15-18 June 2011 João Manuel Carvalho Economist, MAS Urban & Regional Planning, PhD Urban Planning, Professor at Universidade Técnica de Lisboa / Faculdade de Arquitectura

2. THE BASIC DEFINITIONS • The MDT was first introduced in the Portuguese planning law in 1984 as a land development tax (urbanization tax); • Its role was to provide for private urbanization negative externalities; • It evolved to a municipal tax on real estate development. • The LMA is the most developed region in Portugal, comprising a population of 2,75 million in 2.944 km2; • It is divided into 17 municipalities; • The municipalities are autonomous as far as the definition of MDT rules and amounts is concerned. MDT LMA

3. CONTENTS • LMA as the universe of analysis – relevant features • MDT – history and arguments • The role of MDT in municipality funding • Object and methodology • Outcomes and conclusion

4. CONTENTS • LMA as the universe of analysis – relevant features • MDT – history and arguments • The role of MDT in municipal funding • Object and methodology • Outcomes and conclusion

5. LMA AS THE UNIVERSE OF ANALYSIS – RELEVANT FEATURES REAL ESTATE MARKET DIFFERENCES (RESORTS, HOUSING SEGMENTS, SECOND HOMES, INDUSTRIAL ESTATES) DIFFERENT URBAN PLANNING PROBLEMS (NEW URBAN AREAS, SPRAWL, DECAY) POLITICAL DIFFERENCES (MUNICIPAL GOVERNMENT’S STANCE TOWARDS BUSINESS, VOTERS’ IDEOLOGICAL PREFERENCES)

6. LMA AS THE UNIVERSE OF ANALYSIS – RELEVANT FEATURES REAL ESTATE MARKET DIFFERENCES (RESORTS, HOUSING SEGMENTS, SECOND HOMES, INDUSTRIAL ESTATES) Right bank of the Tagus (Northern LMA) includes Lisbon and well known resorts and historical areas; preferred by developers; higher prices; Left bank includes coastal municipalities with a strong second home market and inland municipalities with low cost housing and huge industrial estates. Municipalities

7. LMA AS THE UNIVERSE OF ANALYSIS – RELEVANT FEATURES DIFFERENT URBAN PLANNING PROBLEMS (NEW URBAN AREAS, SPRAWL, DECAY) Municipal governments either aim at providing new urban territories (LMA outer peripheries), or at regenerating inner cities or industrial areas through redevelopment, or at rehabilitating buildings, or even at deterring development.

8. LMA AS THE UNIVERSE OF ANALYSIS – RELEVANT FEATURES POLITICAL DIFFERENCES (MUNICIPAL GOVERNMENT’S STANCE TOWARDS BUSINESS; VOTERS’ IDEOLOGICAL PREFERENCES) • Left leaning municipalities’ concern with public space and services, with the survival of small businesses and with the provision of low cost housing; • Traditional left’s ideological stance against gains through land development or redevelopment; • Social role of municipalities reinforces funding needs.

9. CONTENTS • LMA as the universe of analysis – relevant features • MDT – history and arguments • The role of MDT in municipal funding • Object and methodology • Outcomes and conclusion

10. MDT – HISTORY AND ARGUMENTS • From an externality compensation under the name of “urbanization tax” the MDT evolved to a development tax on land development business (i.e., allotment business) with a non-stated raison d’être; • Developers started circumventing the MDT by introducing allotment business as a building development business (later on, once the land development business was over, they would pass the business through); • By 1999 municipalities had decided that every (i.e., whether land or building) real estate development business should pay MDT;

11. MDT – HISTORY AND ARGUMENTS • MDT co-exists with other real estate development dues, such as providing the land for public purposes associated with the development (e.g., land for public green space and for social premises) and compensating (“perequação”) land owners with construction rights under the average, when the development takes place within an urban plan. • Though targeting each and every real estate development, MDT splits itself into MDT for allotment (land development) and MDT for construction (building development). As corresponding to two different business stages, in fact these MDT add up to building development.

12. MDT – HISTORY AND ARGUMENTS • MDT value is based on several criteria, ranging from municipal costs for permit analysis, to period along which private works occupy street space, including size of development and cost of works. A municipal devised “€” multiplier is applied to physical quantities. • MDT could be calibrated to serve funding needs, urban planning strategies and political / ideological purposes, though it would most probably be “either…or”. • Municipalities can’t anyway forget that MDT is real estate developer originated and the latter is a business-minded entity, dependent on the market.

13. MDT – HISTORY AND ARGUMENTS • However, MDT value is mostly based on cost criteria and normally bears no explicit relation with real estate prices or with real estate market dynamics. • For many years after 1999 MDT criteria were concealed from direct consultation from developers, to avoid simply deterring these through too high values. Personal contact was needed (sometimes with a high rank municipal officer) to know in advance the value of the expected MDT for an intended real estate development. • Even today some – now on-line – formulae seem quite esoteric for most real estate developers, leading them to consultations with the municipality prior to development decision.

14. CONTENTS • LMA as the universe of analysis – relevant features • MDT – history and arguments • The role of MDT in municipal funding • Object and methodology • Outcomes and conclusion

15. THE ROLE OF MDT IN MUNICIPAL FUNDING • MDT is classified as “current income” in municipal budgets. But, for instance in Lisbon, it is an emolument received through the municipal urban administration, while being, in a lot of other municipalities, an indirect tax; • This is not a neutral option and alerts to some “bad conscience” that might exist concerning MDT – the emolument option introduces MDT as related to the operation costs of the municipality, whereas the indirect tax option relates to the business of developers. • The share of MDT on current income ranges from 1% to 28%, though mostly in-between 2% and 16%. The average amount is 6 m €. • A great weight of MDT on municipal current income should make the municipal government worry about how to keep it stable. Small variations (namely negative ones) would therefore be expected in budgeted MDT values.

16. THE ROLE OF MDT IN MUNICIPAL FUNDING • The correlation between the weight of MDT on current income and the absolute value of variations of MDT in-between budgets is r= 0,375; i.e., the weight of MDT is not associated with budgeted stability of MDT values; • MDT and real estate development might be envisaged by municipalities as two entities apart, with their own separate rationales. • However, the highest MDT values and the greatest weights on current income may be the consequence of “hot” municipalities as far as real estate development was concerned; past the boom these are the territories where excess supply is greater and where real estate development has halted; MDT values and weights decreased accordingly; • The “hotness” may comprise a bad municipal land management, to allow for high MDT values. This possibility is at the origin of much criticizing of municipal funding through development related taxes.

17. CONTENTS • LMA as the universe of analysis – relevant features • MDT – history and arguments • The role of MDT in municipal funding • Object and methodology • Outcomes and conclusion

18. OBJECT AND METHODOLOGY • The hypothesis is that the connection between MDT rationales and real estate dynamics is weak. • This would be a rather inefficient circumstance for municipal management, requiring new municipal governance approaches. • The work on the hypothesis was based on the assessment of relations between a set of variables, namely: • MDT values on municipal budgets These are expected (i.e., budgeted) values and were taken as municipal averages for the economic crisis period 2008-2010. MDT budgeted amounts are expected to reflect the impact of the economic crisis on the real estate development business. • MDT proportion of municipal current income Represents the expected weight of MDT on municipal operation outcome and it might increase even if the absolute amount decreased.

19. OBJECT AND METHODOLOGY • MDT budgeted variation in the period 2008-2010 This variable represents the dynamic view of the municipalities concerning the MDT component of their operational income. • Land development MDT as a proportion of total MDT Land development stands for the allotment business and reasons can be found for it to be either fostered or slowed down. • MDT per sqm of gross construction area, as a cost to developers This is a way to spot specific municipal unfriendliness towards developers, as constructions costs tend to be similar along the LMA and low land prices tend to be associated with low prices of real estate final products.

20. OBJECT AND METHODOLOGY • Average housing price High housing prices appeal to developers, but this is just a starting point, as developers are expected to look for good business margins, and MDT may affect these. • MDT proportion of housing price per sqm This variable is indeed the indicator municipalities should use to monitor the feasibility of their budgeted MDT values. • Voters on right wing political parties as a proportion of total voters Mostly aiming to check at an exploratory level the role of political factors on MDT profile and to validate the underneath spatial model (real estate prices – population income – voters’ preferences). • Simple correlations were calculated for each pair of variables. • MDT had to be calculated ad hoc for the variables “Land development MDT proportion of total MDT”, “MDT per sqm of construction area” and “MDT proportion of housing price”.

21. OBJECT AND METHODOLOGY • To simulate MDT values, a standard development was adopted, which is taken as being attractive to most of the real estate developers (either large or small companies) operating in the LMA. • The profile of the standard real estate development is the following: • Housing development • Redevelopment of previous urban land • Land plot area (initial) = 2.500 sqm • Maximum gross construction area above ground = 2.500 sqm • Maximum number of lots = 3 • Maximum number of storeys = 8 • Average dwelling gross area = 120 sqm • Maximum number of dwellings = 21 • Required land to be assigned to public uses = 1.250 sqm • Mandatory parking area within the property = 937,5 sqm.

22. CONTENTS • LMA as the universe of analysis – relevant features • MDT – history and arguments • The role of MDT in municipal funding • Object and methodology • Outcomes and conclusion

23. OUTCOMES AND CONCLUSION • The statistical analysis show that the only significant correlations are the following. • Cost of MDT per sqm of construction area vs MDT proportion of housing price per sqm (r = 0,98) • This seems to be an expected outcome (e.g., the higher the cost the higher the proportion of price), but on the other hand these variables could well be independent – i.e., the MDT, mostly based on costs, would not vary when housing prices varied. The high correlation hints that the municipality looks at MDT more as a financial device than as a policy instrument – i.e., it wouldn’t use MDT to go against the market. • Having in mind that MDT values are budgeted (i.e., targeted) values, this high correlation points to the stretch municipalities are ready to bring to the developer’s business, once real estate prices seem to have gone up.

24. OUTCOMES AND CONCLUSION • Housing price vs political bias, as given by the share of right wing voters (r = 0,62) • This is expected, as the highest proportion of voters on “workers’ parties” is associated with large industrial estates and low cost housing and, therefore, with low housing prices, and vice-versa (which was the chosen path). • The correlation validates the idea of non-homogeneity of the LMA territory as far as the real estate development business is concerned and therefore the market fundamentals for MDT. • Importance of MDT for municipal funding (as given by the proportion of current income) vs variation of budgeted MDT (r = -0,49) • This is an unexpected outcome and it may point to the municipality not controlling this category of its current income. • MDT is conceived as a short-term financial device; when it is budgeted it doesn’t take into account (at least rightly) market dynamics.

25. OUTCOMES AND CONCLUSION • Importance of MDT for municipal funding vs housing prices (r = -0,44) • Low housing prices mean weak property taxes and small municipal shares of income taxes; the relative importance of MDT in current income tends therefore to be greater. This corresponds to a negative correlation. • The political bias may also reinforce MDT where housing prices are low, as these would tend to be left leaning municipalities (r = -0,41 for Importance of MDT vs Proportion of right wing voters). • However, MDT amounts should not be expected to be high where housing prices are low, as real estate developers would probably prefer business elsewhere. • The independence of variables (i.e., “r” very close to 0) was also taken into account for a possible meaning. The following cases have been chosen.

26. OUTCOMES AND CONCLUSION • Importance of MDT for municipal funding vs MDT cost per sqm and Importance of MDT vs MDT proportion of housing price • Any hypothetical link between MDT and the real estate market seems to vanish with the independence of these variables. • Importance of MDT for municipal funding vs the land development MDT proportion of global MDT • A meaningful correlation would allow for the hypothesis that a great importance of MDT on municipal funding could be attached to a strategy that would either privilege land development or building development. No such connection between the MDT role on municipal current income and a planning strategy seems therefore to exist. • MDT costs per sqm vs Political bias • This (i.e., MDT costs per sqm to the developer not being influenced by the political bias) might mean that the political influence on MDT is quite limited to the role it must have on municipal funding, whatever the cost to the developers.

27. OUTCOMES AND CONCLUSION • Land development MDT proportion of total MDT vs housing price • It seems to confirm the hypothesis of no planning strategy being served by MDT (e.g., a significant positive correlation could stand for a MDT role in enhancing housing supply). • Two main conclusions may be drawn: • The role of MDT as a planning device is, if any, a secondary one, while its financial role is primordial; • The link of MDT to the real estate market seems at most to be an indirect one, as, when fixing MDT as a cost to developer, the municipality does not ignore the level of prices in the real estate market. • These features raise, for municipality management, the issues of budgeted MDT feasibility, of its stability (which has to count on the association of MDT to urban planning) and of how to determine its probable amount.

28. OUTCOMES AND CONCLUSION • The importance of real estate knowledge for MDT budgeting purposes and the role of MDT in municipal funding, point at the need of enhancing real estate themes in municipal governance, namely: • Analysis of local real estate developments in search of types to use in the simulation of MDT values, to assess their feasibility; • Survey and analysis of past common development business margins, to determine a range within which MDT might be without, in normal economic times, deterring local development decisions; • Build a monitoring device directly linked to real estate prices, to validate regularly (e.g., yearly budget) the MDT value to include in the current income budget.