PEUC and Progressive IPTU in the Municipality of São Paulo

Owners of up to 15 (fifteen) fiscal modules located in border areas may have their titles definitively legalized, based on the project approved by the Constitution, Justice and Citizenship Committee (CCJ) on November 5th of this year. Each module varies from 5 (five) to 110 (one hundred and ten) hectares, according to the municipality, and the border area is defined by the Constitution as up to 150 kilometers wide, along the borders with neighboring countries.

The approved text conditions the ratification of real estate registrations relating to areas larger than 2,500 hectares to the approval of the National Congress – a provision that, in fact, repeats what is foreseen in article 188, paragraph 1, of the Constitution and revokes Law 9871/1999.

Under the terms of the revoked law, owners would have to send a ratification request to the National Institute for Colonization and Agrarian Reform (INCRA) within 2 (two) years in order to definitively legalize the title. If this deadline passes without a request from the interested party, or if they are unable to fulfill all the requirements stipulated in the aforementioned law, INCRA (National Institute for Colonization and Agrarian Reform) would be authorized to cancel the title and register the property in the name of the Union.

The São Paulo City Hall began, in the last week of October, sending notifications to owners of properties considered idle, instructing them to subdivide, build on, or make rational use of the property, under penalty of suffering a progressive increase in IPTU (Property Tax) or even losing ownership of the property if they fail to do so within the stipulated timeframe.

Compulsory Subdivision, Building and Use (PEUC) is one of the main instruments introduced by the City Statute (Law 10.257 of 2001) in the pursuit of fulfilling the social function of property. The application of this institute is outlined in the Master Plan of each municipality. In São Paulo, the latest Master Plan was published on August 1, 2014, and the social function of property is addressed in Article 90, I, of said plan.

The concept of the social function of property has long existed in the national legal system. However, its applicability is slow, as the search for instruments to make it truly efficient is constant.

The 1998 Federal Constitution ended the historical debate on urban policy, which previously assigned excessive responsibilities to the Union, to the detriment of municipal autonomy. Article 182 determines that municipalities are responsible for promoting their transformation and development, considering that urban expansion has encroached upon the fundamental rights of human beings and the preservation of the environment. The Master Plan is the instrument of this commutation, adapting, of course, to the general norms established by the Union.

Despite the PEUC’s predictability in the Master Plans, as well as in article 8 [1] of the City Statute, there has been no progress in its implementation. This is because the wording of the aforementioned article may lead one to believe that the application of the PEUC is a discretionary power of the municipality, which, through its Master Plan, may or may not exercise this option. This reading is erroneous, as it disregards the principle of the social function of property, a condition for the legitimacy of property. In other words, the municipality must act to ensure that the principle is respected.

Urban property, under the terms of §2 of article 182 of the Federal Constitution, fulfills its function when it meets the fundamental requirements for the organization of the city expressed in the master plan [2]. The exercise of municipal autonomy is expressed through a power that must be exercised, especially when it comes to defending fundamental rights. That is, given the evident objective conditions, namely, excessive valuation that hinders access for the economically disadvantaged or, alternatively, the low supply of properties on the market, the municipality must provide the appropriate instrument to remedy this condition, subject to unconstitutionality by omission.

The purpose of the PEUC, as established in the Decree, is to stimulate urban development and the proper use of properties located in the municipality. To this end, and based on the concepts of undeveloped and unused properties contained in article 92 of the Master Plan, it determines, as follows, the deadlines and expected conduct. Undeveloped properties are understood to be those with an area greater than 500m² with a utilization coefficient equal to 0 [3]; underutilized urban land is defined as lots and plots with an area greater than 500m² with a utilization coefficient lower than the minimum defined in the zones in which they are located [4]. It also establishes that properties with a utilization coefficient equal to or greater than that established in the zones in which they are located and which have at least 60% of their built area unoccupied for more than 1 year are considered unused [5].

Thus, according to the Decree, the owners of properties considered undeveloped or unused must, within the deadlines described below, provide the following:

i) 1 year for the owners of undeveloped, undeveloped or underutilized properties, from the date of receipt of the notification, to file a request for approval and execution of a project for the subdivision or construction of the property and 2 years for the start of the works, from the date of issuance of the building permit, having up to 5 years to complete the subdivision of the land or construction; and

ii) 1 year for the owners of unused properties, from the date of receipt of the notification, to occupy the property, extendable for the same period, if there is a need for regularization of the building.

If the obligations established in the notifications are not fulfilled within the deadlines determined by the regulation, the City Hall will apply the progressive IPTU rates, with a maximum period of 5 consecutive years, until the maximum rate of 15% is reached. The rate to be applied will be double the value of that applied in the previous year.
After 5 years have elapsed without the regularization of the obligation to build, subdivide or use the property, according to the specific case, the municipality may proceed with the expropriation of the property using public debt securities as payment.

The notification will initially be carried out in the Special Zones of Social Interest – ZEIS 2, 3 and 5, as well as in the areas within the perimeter of the Centro Urban Operation and the Água Branca Consortium Urban Operation, basically, the central region of the capital. To date, 78 properties have been analyzed by the city hall and considered idle, as can be seen in the published list [6].

With the publication of Decree 55.638/14, a new phase begins, in which the legality of constructions in the municipality will be verified against property rights. However, many factors still require attention. Delays in licensing, legal issues with the property, and difficulty in obtaining the necessary capital, for example, can hinder densification within the intended timeframe. It must also be borne in mind that the creation of social housing for low-income citizens requires high-cost, large-scale financing and also depends on the success of the National Housing System.

Real estate speculation, which occurs when the owner waits for the area to appreciate in value, accumulating debts with the public authorities in order to sell the property at a high price to construction companies, may come to an end, because, given the risk of losing the property, proposals will have to be evaluated more quickly, without harming public funds.