Financing Urban Development in Mexico City: A Case Study of Property Tax, Land Use, Housing, and Urban Planning [Reprint 2014 ed.] 9780674423138, 9780674423114

Citation preview

Fl N A N C I N G IN

URBAN

MEXICO

DEVELOPMENT

CITY

Harvard Law School International Tax Program

C A S E

OLIVER

S T U D Y

OLDMAN

RICHARD

M.

BIRD

/

O F

P R O P E R T Y

HENRY

/

J.

STEPHEN

T A X ,

AARON

L.

KASS

Translations of Laws L A W R E N C E

M.

H E R R M A N N

/

L A W R E N C E

D.

LEE

L A N D

USE,

H O U S I N G ,

AND

U R B A N

P L A N N I N G

FINANCING URBAN DEVELOPMENT IN MEXICO CITY HARVARD

UNIVERSITY

CAMBRIDGE,

PRESS

MASSACHUSETTS

1967

© Copyright 1967 by the President and Fellows of Harvard College All Rights Reserved Distributed in Great Britain by Oxford University Press, London Library of Congress Catalog Card Number 67-20878 Printed in the United States of America

iv

PR EFA CE

This case study of certain aspects of financing urban development in one of the world's less developed countries focuses on the fiscal aids and restraints affecting land use in Mexico City. The book examines in some detail the property tax, other burdens on real property including rent control, private credit sources, and mechanisms for financing land development. Also, the problems of planning and controlling land use patterns in Mexico City are reviewed, but in less detail. A brief summary appears at the beginning of each chapter, and the major conclusions of the study are grouped together at the end. A selective bibliography is provided, and an appendix contains translations of Mexican laws relevant to the study. Some years ago a colleague, Charles M. Haar, and I sought to combine our longstanding interests in urban land use planning and urban property taxation. The Harvard Law School made research funds available to us through the Faculty Research Committee and the International Legal Studies Program to cover the costs of travel and of research collaboration by skilled lawyers'and economists. The incident which triggered the present study was an exploratory conference, held at the Harvard Law School in February 1962 and organized by Professor Haar. That conference examined the strains upon and methods of strengthening the legal and economic structure during the process of urban growth which inevitably accompanies economic development. The conference reached a consensus that further study was needed of the property tax as a tool of financing urban growth and as a factor in patterns of land use. Mexico City was selected for the study because it is a large and rapidly growing urban area which has faced and is facing the full range of property tax problems with respect both to revenue yields and to tax effects on land use. Professor Haar, Dr. Richard Bird, and I then planned an investigation for the summer of 1962. Dr. Bird, then staff economist of the Law School's International Tax Program and an instructor in the University's Department of Economics, and I went to Mexico in June to begin the study. We met an enthusiastic welcome by Mexicans in and out of official circles and they made offers of help and collaboration which were generously honored as they were drawn upon. Dr. Bird remained the entire summer. During the 1962-63 academic year, we wrote up the summer's investigation and formulated future research plans. It became clear that we needed more complete and precise legal information than we then had. Lawrence D. Lee, teaching fellow at the Law School, collaborated with us by preparing a first draft of a translation of large portions of the property tax laws applicable in Mexico City. Meanwhile, in 1963, Professor Haar and his associates in another endeavor were pursuing investigations of Mexican land use planning. Early in 1964 a review of gaps in the work already done in Mexico led to the organization of a group to spend the summer of 1964 in Mexico to complete the gathering of information for this study. Stephen Kass, who had been in Mexico in the summer of 1963 and who was graduated from

v

the Harvard Law School in June 1964, was to spend a full year during 1964-65 working on the study. Dr. Henry Aaron, then a staff economist in the International Tax Program and an instructor in the University's Department of Economics, also spent the summer of 1964 in Mexico and devoted to the study a portion of his research time thereafter until its completion. Lawrence D. Lee spent the summer of 1964 in Mexico and participated in a number of discussions thereafter in Cambridge. Brief trips to Mexico were also to be made by Professor Haar and me and on one occasion by our colleague, Lewis H. Weinstein. During the academic year 1964-65 first drafts of all parts of the study were prepared. Much of the material in the first two parts of Chapter One originated in a draft prepared in 1963 by Dr. Bird; the rest of the chapter was largely drafted by Mr. Kass. Chapter Two originated in material prepared in 1963 by Dr. Bird and me, but this material was subsequently largely rewritten by Dr. Aaron and me in the light of further investigations undertaken by him, Messrs. Kass and Lee and me. The first two parts of Chapter Three represent the combined efforts of Mr. Kass to prepare the descriptive material interwoven throughout and of Dr. Aaron and myself in analyzing and presenting it. The material on rent control, the third part of Chapter Three, is primarily Dr. Aaron's work. Chapters Four and Five were originally drafted by Mr. Kass. He revised them after discussions with Professor Haar and after spending a week in Mexico with me in July 1965. After Professor Haar commented on this revision, Dr. Aaron and I rewrote these chapters. Chapters Four and Five were to have been the final responsibility of Professor Haar. No doubt these chapters suffer from his inability to participate as had been planned. But he became deeply involved in the difficult and time-consuming activities of serving as Chairman of President Johnson's Commission on Natural Beauty and of preparing the groundwork for the new Department of Housing and Urban Development. These activities culminated in his appointment as the new department's Assistant Secretary for Metropolitan Development in January 1966, when the manuscript was at the crucial stage in which positions are finally taken and conclusions are finally stated. Professor Haar, to the regret of all of us associated with this study, was unable to participate in these final decisions and should not be held responsible for them. Nevertheless, his part in planning the several stages of this study and in discussing its problems throughout the period of the study has meant that his influence on the outcome has been important and pervasive. As the study neared completion, the preparation of the final manuscript required the services of an American, trained in law, who had a firm command of the Spanish language. Lawrence M. Herrmann, immediately after his graduation from the Harvard Law School in June 1965, had worked with Lawrence D. Lee in translating the Mexican Laws which appear in the Appendix of this study. During much of the academic year 1965-66, Mr. Herrmann checked the accuracy of the text against citations, footnotes, and new material which became available, often through his efforts. He also did additional research in Spanish language source material. Many of his suggested changes in the text and footnotes were adopted by the authors. He also supervised the typing of the final manuscript. The

vi

accuracy of all citations to Spanish sources is Mr. Herrmann's responsibility. All of us associated with the study owe him a large debt of gratitude for staying with the study to the end at considerable personal inconvenience. Earlier versions of portions of Part I of Chapter One, Parts I and II of Chapter Two, and Part III of Chapter Three appeared previously in the following articles: Richard M. Bird, "The Economy of the Mexican Federal District," Inter-American Economic Affairs, 17:19-51 (Autumn, 1963); Oliver Oldman, "Mexico City's Property Tax Problems," in National Tax Association, Proceedings of the Fifty-Eighth Annual Conference on Taxation, 471-81 (1966); and Henry J. Aaron, "Rent Controls and Urban Development: A Case Study of Mexico City," Social and Economic Studies, 15:314-28 (December, 1966). As the text and footnotes make clear, this study would have been impossible without the cooperation of Mexicans both in and out of government. The Mexican Government did not ask us to do this study; yet officials at every level of government could not have been more helpful, frank, and genuinely interested in facilitating our research. It is clear that former Mexican students of the Harvard Law School, particularly those who participated in the International Tax Program, and Mexico's experience with the Harvard Law School in preparing and producing the World Tax Series volume, Taxation in Mexico, had a good deal to do with the cooperation extended to us by many Mexicans. Mention must be made of Lie. Ernesto Rubio del Cueto, the only one of the former students who had worked in the Treasury of the Federal District. His constant readiness to lead us to new sources of information and to arrange the right meeting at the right time made a substantial contribution to the study. The Treasurer of the Federal District, Lic. Octavio Calvo M., must be named as the principal Mexican collaborator. He gave of his time and his staff more generously than could have been most optimistically anticipated, and he opened doors that otherwise could hardly have been budged. Readers should not necessarily attribute to him any of the views expressed in this study, though we hope that he holds some of them. Within the Treasury there were a great many officials who cooperated with us unstintingly and were patient with even our most foolish questions. Not all these officials can be named here because neither space nor memory is adequate to the task. They include: Ing. Benigno Cannona R., Lic. Salvador Hinojosa, Ing. Fernando Luna Ochoa, Arq. José Luis Rosas López, Lic. Roberto Ríos Elizondo, and Sr. J. Guadalupe Sa lazar Vie jo. Outside the Treasury, Lie. Julian Bernal M. of the National Mortgage Bank (BNH, see Abbreviations) was our principal collaborator. He, his associates at BNH, and those to whom he introduced us provided much of our information about Mexico City's housing, banking, and land use planning. Lie. Sealtiel Alatriste, Jr., former Treasurer of the Federal District, initially encouraged our efforts to study the property tax and later, as Director of the Social Security Institute (IMSS, see Abbreviations), shared with us his knowledge of public housing policies. Lie. Carlos del Río R. and Lie. Margarita Lomelí Cerezo, and Lie. Enrique Helguera S. before his sudden death, devoted considerable effort to getting us to understand the operation of the Federal Fiscal Court. Ing. Gilberto Valenzuela gave valuable advice in the area of urban planning and development. Lic. Fernández

vii

Hurtado and Sr. Marcelo Javelly G. patiently explained the policies and techniques behind the program of the Bank Discount and Operational Fund for Housing (FOVI, see Abbreviations). Ing. Antonio Alvarez, Sra. Angela Alesio Robles, Ing. Luis Villanueva, and Arq. Armando León Cortés provided explanations of urban planning. Lie. Luis Quintanilla graciously permitted our use of the National Housing Institute (INV, see Abbreviations) data on land values throughout the Federal District. Lic. Octavio Calvo A. made many valuable suggestions and assisted us in innumerable ways, including bringing two of us to Cuernavaca to study the property tax there with such officials as Ing. Pablo Ballesteros Jurado and Ing. Luis Aguilar Enciso. Many persons outside government helped us generously with their information and advice. Dr. Victor Urquidi, Ing. Victor Vila, Ing. Luis Unikel Spector, and Sr. Luis Lesur are among those who contributed to our understanding of planning problems. Sr. Mariano Alcocer, Jr., Lie. Gustavo Galindo G., Lie. Francisco Gallasteguí, Lic. Jesús Velasco, and Lie. Agustín Rodríguez were especially helpful in describing and analyzing the operations of Mexican banks. Padre Lie. Carlos Talavera, Arq. Luis Lopezllera, and Sr. Sacramento Guerrero vividly portrayed the Caja Popular movement of credit unions and housing cooperatives. Sr. Bernardo Eckstein described housing finance problems from the perspective of the private developer. Lic. J. Rafael de Regil, Sr. Juan Pezet, and the members of the Asociación de Industriales del Estado de México generously assisted us in distributing and responding to our questionnaire concerning the role of tax factors in industrial location decisions. Many busy lawyers in private practice in Mexico met with us. Lie. Joaquín B. Ortega and Lie. Ernesto Flores Zavala introduced us to the Mexican legal system and the problems of tax litigation. Lic. Rodolfo Cepeda Villareal and his associates rendered detailed aid on many technical matters and introduced us to Lie. Francisco Vázquez Pérez, the notary who so fully informed us about the notarial system. Finally, from the very first to the last and rushed verifications, Richard J. Graving, Esq., selflessly devoted himself to solving a large number and wide range of our problems, including providing secretarial services, helping us exercise difficult judgments, and participating in the analyses of troublesome legal points. OLIVER OLDMAN

Cambridge, Massachusetts December, 1966

ONTENTS

ONE:

MEXICO'S FEDERAL DISTRICT

I. ECONOMIC AND GEOGRAPHIC SURVEY

A. B. C. D. E. F. G. H. I. J.

1 4

Introduction Population Territorial Growth of the Federal District The State of Mexico Economic Structure Agriculture Services Industry Construction Income and Welfare

I I . FEDERAL DISTRICT FINANCES

4 5 8 11 13 14 16 16 18 20 25

I I I . T H E GOVERNMENTAL STRUCTURE OF THE FEDERAL DISTRICT

33

A. The Department of the Federal District (DDF)

33

B. The Treasury of the Federal District

36

I V . T H E FEDERAL FISCAL COURT TWO:

THE

REAL

PROPERTY

39 TAX

49

I . DESCRIPTION

A. B. C. D. E.

F. G. H. I.

J.

51

Taxable Property Tax Base and Tax Rates Assessment: Rental Basis Assessment: Appraisal Basis Assessment: Special Situations 1. Changes of Basis 2. Dividing and Joining of Properties 3. Subdivision of Unimproved Land Tax Payment Appeals Penalties The Property Tax Office: Organization and Functions 1. Personnel 2. Valuation Branch (Departamento de Avalúos y Estimaciones de Rentas) 3. Topography Branch (Departamento de Topografía) 4. Tax Roll Branch (Departamento de Padrones) 5. Assessment Branch (Departamento de Liquidación y Giro) 6. Technical Branch (Departamento Técnico) Note on Appraisal Procedure

I I . ANALYSIS

51 53 54 57 58 58 59 59 60 62 64 65 65 66 66 67 68 68 68 75

A. Taxable Property and Exemptions B. Tax Base and Rates 1. The Tax Rate

ix

76 79 79

C.

D. E. F. III.

2. Proportionality 3. Site Valuation Valuation: Rental and Appraisal 1. General Comments 2. Rental Basis 3. Appraisal Basis a. Cadaster b. Separate Valuation of Land c. Replacement Cost and Other Valuation Methods d. Assessment-Sales Ratio Information e. Reappraisal Appeals and Equalization Property Tax Office Note on Municipal Investment and Property Values

80 81 82 82 85 87 87 88 88 90 94 97 99 101

N O T E ON P R O P E R T Y T A X R E F O R M IN CUERNAVACA

THREE:

OTHER

TAXES

A N D

CHARGES

ON

102 URBAN

LAND

I . SPECIAL ASSESSMENTS

107 109

A. Introduction B. Planning Tax 1. History 2. Scope of the Planning Tax 3. Assessment Zone 4. Assessing Individual Properties 5. Payment 6. Exemptions 7. Review Procedures C. Cooperation Fees 1. History 2. Scope of Cooperation Fees 3. Assessment Zone 4. Properties Assessed 5. Payment 6. Exemptions 7. Review Procedure D. Proposals for Reform

109 111 111 111 113 114 116 117 118 119 119 120 121 121 122 122 123 124

I I . T H E T R A N S F E R O F R E A L P R O P E R T Y IN T H E F E D E R A L D I S T R I C T : T A X E S , C H A R G E S , AND PROCEDURES

A. B. C. D. E. III.

126

Real Property Transfer Tax Notarial and Recording Fees Note on the Federal District's Property Registry Federal Stamp and Capital Gains Taxes Transfer Costs and Efficient Land Use

R E N T CONTROL

127 129 130 132 133 134

A. Introduction B. Description and Analysis of Rent Control in Mexico City 1. Description 2. Extent of Rent Control 3. Magnitude of Rent Restriction C. Economic Effects of Rent Control D. Program to End Rent Control 1. Decontrol: Step 1

x

134 135 135 137 139 140 145 147

2. Decontrol: 3. Decontrol: 4. Decontrol: E. Note on Rate F. Conclusion

Step 2 Step 3 Step 4 of Rent Decontrol

148 148 149 150 153

FOUR: FINANCING PRIVATE HOUSING

155

I.

PRIVATE AND P U B L I C H O U S I N G IN M E X I C O

157

II.

P R I V A T E HOUSING C R E D I T INSTITUTIONS

163

A. Private Banks 1. Mortgage Banks a. Credit Qualifications Before the 1962 Reforms b. Credit Qualifications After the 1962 Reforms c. Foreclosures d. Mortgage Certificates and Bonds e. Housing Certificates 2. Savings and Loan Banks 3. Savings Departments B. FOVI and FOGA C. Membership Groups 1. Credit Unions 2. Unions 3. Cooperatives 4. Mutual Associations III.

M O B I L I Z I N G P R I V A T E C R E D I T FOR L o w C O S T H O M E S

A. Acquiring the Subdivision Site B. Urbanizing the Subdivision Tract C. Improving the Subdivision 1. Where the Developer Improves Individual Lots a. Current Obstacles to Credit b. Areas for Possible Reform or Further Research Credit Ratings Mortgage Insurance Administration Expenses Mortgage Foreclosures FOVI's Role in Financing Social Interest Housing 2. Where Each Occupant Improves His Own Lot a. Current Obstacles in Securing Mortgage Credit b. Possible Reforms D. Note on the Federal District's Subdivision Regulations E. The Role of Membership Groups 1. Unions 2. Cooperatives a. Some Advantages of Housing Cooperatives b. Difficulties of Developing Self-Organized Housing Cooperatives c. Experience with Housing Cooperatives in the United States 3. Evaluation of Group Financing 4. Ad Hoc Membership Groups and Cajas Populares F. Complementary Public-Private Financing Techniques

xi

163 163 163 164 165 166 167 168 170 171 173 173 175 176 176 177

178 179 180 180 180 183 183 183 184 184 184 186 186 188 189 191 191 192 192 192 194 195 196 198

FIVE: I.

C U R R E N T ISSUES I N D E V E L O P M E N T FOR MEXICO CITY

PLANNING

A N INSTITUTIONAL F R A M E W O R K FOR D E V E L O P M E N T PLANNING

203

A. Current Planning Institutions for the Federal District B. T h e Search for New Institutions

203 209

I I . L A N D U S E C O N T R O L S AND U R B A N G R O W T H

A. Introduction B. G o v e r n m e n t Control in a Free Land Market 1. C u r r e n t Limitations on Ejido Land Use 2. Preserving Land for Public Use 3. Limited Proprietary Controls 4. Open Space Planning and the Property Tax C. A Federal District L a n d Bank 1. Purposes 2. Land Acquisition 3. Disposition Techniques 4. Relationship to Other G o v e r n m e n t Agencies III.

C I T I Z E N PARTICIPATION IN L A N D U S E PLANNING

A. Current*Attitudes and Practices B. T h e Potential Contributions of District Residents to U r b a n Planning C. A n Institutional F r a m e w o r k for Citizen Participation in U r b a n Planning IV.

SIX:

201

LAND T A X E S AND L A N D U S E C O N T R O L S

210

210 212 212 213 215 216 217 217 218 219 221 222

222 223 224 227

A. Zoning Restrictions and the Property T a x 1. C u r r e n t Relationships 2. Mixed Use Zoning and Land Use Charges a. T h e Statutory F r a m e w o r k for Mixed Use Zoning b. Zoning Goals and Their Achievement B. Subdivision Requirements and Special Assessments

227 227 230 230 232 233

C. Coordinating Land Use and Fiscal Policies

236

SUMMARY

A N D

CONCLUSIONS

BIBLIOGRAPHY APPENDIX:

237 244

TRANSLATIONS O F L A W S *

247

Finance Law of the Department of the Federal District Planning Law of the Federal District Regulation for Sections I, V, and VII of Article 3 of the Planning and Zoning Law of the Federal District, Insofar as It Refers to Industrial Zoning Regulation for Articles 6, 56, and 59 of the Planning and Zoning Law of the Federal District Subdivision Regulation for the Federal District General Law of Credit Institutions and Auxiliary Organizations Rent Control Decree

249 301

INDEX

313 318 319 330 344 347

*A detailed table of contents appears at the beginning of each part of the Appendix. xii

TABLES

Table 1.

Localities, by N u m b e r of Inhabitants

5

2.

Population Growth in the Federal District

6

3.

Population G r o w t h in the Federal District by

4.

Occupational Structure, Federal District

5.

Occupations and Classes, Federal District, 1956

15

6.

Regional Shares in Industrial Production

17

7.

Structure of Industry in the Federal District

17

8.

Buildings Completed in the Federal District

19

9.

Distribution of Average Family Incomes, Federal

Delegaciones

9

District, 1960 10.

14

20

Wholesale Price Indices, Mexico City

21

11.

Some Indicators of C u r r e n t Welfare

23

12.

G oOffice v e r n m e n t Expenditures of the Federal District by

26

13.

Expenditures, Appropriations, and Revenues of the Federal District

27

14.

G o v e r n m e n t Revenues of the Federal District

29

15.

Ordinary Revenues of Governmental Units, 1963

31

16.

Organization Chart for the Treasury of the Federal District

37

17.

Rent Estimation, Capitalization Rates and Deductions

56

18.

Personnel of the Property Tax Office, 1965

65 7j

19.

Appraised Values per Square Meter of Structures

20.

Frequency Distribution of Observed Assessment/Sales Ratios

92

21.

Assessment/Sales Ratios by Date of Appraisal

92

22.

Assessment/Sales Ratios by Value of Property

23.

Population Affected by Rent Control

138

24.

Prices in Mexico City

139

25.

Organization of the Office of Public Works of the DDF Rank List of Factors Affecting Location in the State of Mexico Rather than D.F.

26.

xiii

93

206 229

G L O S S A R Y

1. Amparo: A procedure for obtaining judicial review of laws or of acts of government officials. See discussion in Chapter One, Part IV. 2. Delegaciones: The twelve geographic subdivisions of the Federal District of Mexico. See discussion in Chapter One, Part III. 3. Ejido: Small agrarian communities, created by government land distribution, in which the land is generally individually parceled, but is sometimes farmed collectively. See discussion in Chapter Five, Part II-B (1). 4. Jefe: The Head, or Chief Executive Officer, of the Department of the Federal District, appointed by the President. 5. Plano Regulador: As used in the text, refers to the Regulatory Plan Branch of the Office of Public Works of the Department of the Federal District, and not to the regulatory plan itself. 6. Prescription: The Civil Law equivalent of the bar of the statute of limitations. 7. Property Tax Office: A short title for the office within the Treasury of the Federal District denominated as "Dirección General de Catastro e Impuesto Predial." 8. Social interest housing: Private housing, the unit value of which does not exceed M$80,000 in urban areas and M$30,000 in rural areas. (See Note 1 at end of this glossary.) See discussion in Chapter Four, Part II. 9. Urbanization: The process of providing such land improvements as streets, sidewalks, water mains, public lighting, and storm and sanitary sewers. Note 1:

Note 2:

Note 3:

All monetary figures given in Mexican pesos are preceded by "M$." The exchange rate of M$ 12.50 to U.S.$1.00 (one Mexican peso equals eight U.S. cents) has been the same since 1954. The nomenclature for the administrative hierarchy within the Department of the Federal District has been simplified by the use of the following English equivalents: "Office" for "Dirección General;" "Suboffice" for "Sub-Dirección General;" "Branch" for "Departamento" and "Oficina" as subsections of an Office or Suboffice; "Unit" for "Oficina" as a subsection of a "Branch." 1 Kilometer (km) = 0.621 mile. 1 square kilometer (km 2 ) = 0.386 square mile.

xiv

ABBREVIATIONS

BIJ: BNH: DDF: DF: FOGA: FOVI: IMSS: INV: ISCJN:

ISSSTE:

Boletín de Información Judicial (Unofficial Supreme Court case reports and selected Circuit Court case reports). Banco Nacional Hipotecario Urbano y de Obras Públicas, S.A., the National Mortgage Bank. Departamento del Distrito Federal, the Department of the Federal District. Distrito Federal, the Federal District of Mexico. Fondo de Garantía y Apoyo a los Créditos para la Vivienda, the Guarantee and Credit Assistance Fund for Housing. Fondo de Operación y Descuento Bancario a la Vivienda, the Bank Discount and Operational Fund for Housing. Instituto Mexicano del Seguro Social, the Mexican Social Security Institute. Instituto Nacional de la Vivienda, the National Housing Institute. Informe rendido a la Suprema Corte' de Justicia de la Nación (Annual Report of the Supreme Court with summaries of the most important decisions). Instituto de Seguridad y Servicios Sociales de los Trabajadores al servicio del Estado, Social Security and Service Institute for Federal Employees.

PRI:

Partido Revolucionario Institucional, the political party in power in Mexico, under its essentially one-party system. Sem. Jud.: Semanario Judicial de la Federación (Official weekly containing all Supreme Court case reports).

xv

CD *

0) (Ü

-*->

O 0)

sz

cu Q. (1) c o M

00 e

in +->

ro c.

o cu JZ h» a> Q. c/)

c ro


X S

a> c o NI

TD

C

xvii

xviii

CHAPTER ONE MEXICO'S

FEDERAL

DISTRICT

2

FINANCING

URBAN

DEVELOPMENT

Most outsiders, especially Americans, attempting to study tax and land use policies of Mexico's Federal District find that some of the terminology and much of the political, legal, and economic setting are unfamiliar. Mexico's revolution is little more than f i f t y years old and a revolutionary spirit still pervades her political and economic life to a far greater extent than is true in the United States or most other countries. Mexico's legal system is rooted in the civil law rather than in the common law with which Mexico's northern neighbors are more familiar. Mexico is a semideveloped country that has compiled a record of sustained, rapid economic growth surpassed by no country in the western hemisphere and few countries in the world. Finally, the unusual geography of the Federal District creates both problems and opportunities for her leaders. These "differences" do not, however, destroy the relevance for other countries of the Federal District's experience in dealing with the problems of urban development. Most of the problems which the Federal District has faced—how to make property taxation and special assessments effective, how to use her court system imaginatively in tax administration, how to manage rent

MEXICO'S

FEDERAL

DISTRICT

control, how to finance private residential construction, plan urban development—have developing

how to

been or will be faced by cities in

countries throughout Latin America and other parts

of the world. A study of Mexico's prove useful to other Although

solutions and mistakes will

countries.

the special aspects of the Federal District do not

destroy the usefulness of its experience

to others, it does mean

that a survey of the District's present economic

condition

geographical setting will be a helpful introduction

to an examina-

tion of its tax and urban development

Also,

One analyzes government sources.

the District's

most directly

finances concerned

policies.

Chapter

and the two branches with control

and

of

of these re-

The first, and at present much the most important, is

the Department

of the Federal District (the DDF) and its finan-

cial arm, the Treasury. The other, and at present of much smaller significance, is the Federal Fiscal Court. Succeeding chapters discuss constructive ways in which this court's role can be expanded. As in many of the world's capitals, there exists no separate legislative organ for the Federal District.

3

F I N A N C I N G

l

URBAN

ECONOMIC

D E V E L O P M E N T

AND

GEOGRAPHIC

SURVEY

A. INTRODUCTION "In Mexico, all roads lead to the capital of the country; for the Federal District is the political and governmental center of the nation. Moreover, it is the economic, industrial, educational, social, and cultural center of Mexico. . . . Its influence is all-pervasive. Other areas are satellites of greater or less magnitude, held in their orbits by the central sun." 1 Observations such as these appear frequently in writings on modern Mexico by foreign observers, and even to a casual visitor they ring true. Since the early days of the colonial regime, Mexico's center has struggled to control outlying areas. Partly for this reason, the country has long consisted of what most consider an oversized, directing head on a relatively wasted body. Much of Mexico's political history since the wars of independence in the early nineteenth century reflects the struggle by the outlying regions to throw off central domination and by the center, in turn, to suppress regional autonomy. Not until just before World War II did regional revolts cease. Now the Mexican government is encouraging development outside the center in the belief that such a policy will permit more rapid and sustained national economic growth.2 The aim of this chapter is to describe the role of the Federal District in the Mexican economy today.3 The survey outlines in some detail the extent and nature of urban growth within the Federal District in recent years, then looks more specifically at the District's industrial 1. William P. Tucker, The Mexican Government Today (Minneapolis: University of Minnesota Press, 1957), p. 409. 2. By far the best study yet done on regional development in Mexico is that by Paul Lamartine Yates, El Desarrollo Regional de México, 2nd ed. (México, D.F.: Banco de México, 1962). It has been relied on extensively for this book. For a general survey of political and economic development see Raymond Vernon, The Dilemma of Mexico's Development (Cambridge, Mass.: Harvard University Press, 1963). See also Howard F. Cline, Mexico, Revolution to Evolution: 19401960, (New York: Oxford University Press, 1963). 3. The geographical area of the Federal District of Mexico includes Mexico City proper and a dozen other administrative units called delegaciones. See Table 3. The area referred to in the text as "the metropolitan area" includes, besides the Federal District, a number of municipalities and unincorporated centers in the state of Mexico which are contiguous to the Federal District. In this book, the expression "Mexico City" is more often used to refer to the Federal District than to Mexico City proper.

MEXICO'S

FEDERAL

DISTRICT

structure and at certain measures of the income and well-being of its inhabitants. The remainder of the chapter discusses the political and legal structure of the Federal District and its public finances. Some reference is made to the differences between the Federal District and other state and local government units in Mexico.

B. POPULATION Since 1910, Mexico has steadily become more urbanized. In that year only 22.3 per cent of the population was classified by the census as living in centers of over 2,500 inhabitants. 4 By 1960, however, the census found 50.7 per cent of the Mexican population to be in such "urban" centers. Most of these semi-urban centers (see Table 1) consist merely of collections of farmers and thus do not possess the characteristics of communities of similar size in the United States.5 Table 1 shows

TABLE 1. LOCALITIES, BY N U M B E R OF INHABITANTS.

Category

Mexico City Large Cities Cities Urbanized Towns Semi-Urban Hamlets Clusters Isolates Rural

Size

Over 1,000,000 100,000-999,999 20,000-99,999 Over 20,000 2,500-19,999 2,500-19,999 500-2,499 100-499 1-99 Under 2,500

Number

of

localities

1950

1960

1 9 57 67 916 916 7,538 24,979 65,090 97,607

1 16 93 110 1,351 1,351 9,498 27,098 51,555 88,151

Population

1950 2,234.7 1,665.8 2,304.7 6,205.2 4,805.2 4,805.2 7,265.0 5,753.0 1,772.2 14,790.2

(xIOOO)

1960

Change (%)

2,832.1 26.7 3,680.1 120.9 66.6 3,839.4 10,351.6 66.8 7,353.4 53.0 7,353.4 53.0 9,249.5 27.3 11.4 6,410.2 1,558.3 —12.1 17,218.0 16.4

Source: 1950 data from Howard F. Cline, Mexico: Revolution to Evolution, 1940-1960 (New York: Oxford University Press, 1963), p. 103; 1960 data from Secretaría de Industria y Comercio, Dirección General de Estadística, Vili Censo General de Población 1960: Resumen General (México, D.F., 1962), p. 59.

4. Edmundo Flores, Tratado de Economía Agrícola (México, D.F.: Fondo de Cultura Económica, 1961), p. 365. 5. Nathan L. Whetten, Rural Mexico (Chicago: University of Chicago Press, 1948), pp. 34-36.

5

6

FINANCING

URBAN

DEVELOPMENT

that rapid urbanization continued into the 1950's. It also shows that, while Mexico City without question has grown rapidly and remains the dominant metropolis of the country, the number and size of secondary urban centers are growing even more rapidly. Table 2 shows the growth of population in the Federal District since 1895. Although the earlier data are not entirely reliable, the trend is clear. In the last sixty years the population of the District has increased almost tenfold. In the last thirty years it has quadrupled while that of the country has only doubled. Continued rapid urbanization since the wartime upsurge is especially notable. While the estimated annual rate of increase in Mexico's population was 3.5 per cent from 1950 to 1960, the rate for all urban areas was 6.1 per cent, and for the Federal District 6.0 per cent, somewhat lower than that recorded during the immediate postwar period. While in recent years other urban areas in Mexico have grown much faster than has Mexico City and slightly faster than has the Federal District as a whole, the latter still contained 26.3 per cent of the total urban population of Mexico in I960. 6

TABLE 2. POPULATION GROWTH IN THE FEDERAL DISTRICT.

Census Year

D.F. Population

1895* 1900 1910 1921 1930 1940 1950 1960

476,413 541,516 720,753 906,063 1,229,576 1,757,530 3,050,442 4,870,876

Average Annual Increase (%) from Previous Census

2.3 3.3 2.4 5.1 4.3 7.3 6.0

D.F. as Percentage of Total Population 3.8 4.0 4.7 6.3 7.4 8.9 11.8 13.9

Source: Calculated from Secretaría de Industria y Comercio, Dirección General de Estadística, Anuario Estadístico de los Estados Unidos Mexicanos: 1958-1959 (México, 1960), pp. 36-38, and Secretaría de Industria y Comercio, Dirección General de Estadística, Compendio Estadístico: 1960 (México, D.F., 1962), p. 12. "Year of first general census

6. Calculated from Secretaría de Industria y Comercio, Dirección General de Estadística, Compendio Estadístico: 1960 (México, D.F.: 1962), p. 15, excluding the 4.2% of the District's population classified as rural by the 1960 census.

MEXICO'S

FEDERAL

DISTRICT

The disparity in rates of increase of the Federal District and Mexico as a whole was not due to different rates of natural increase. In 1960, for instance, the crude birth rate in the District was 43.2 per 1,000 persons, which together with the crude death rate of 10.3 yields a natural rate of increase of 3.3 per cent for the year. Both rates were slightly below the national average, so that the natural rate of increase was about the same. The great urban upsurge is thus due to migration. Between 1940 and 1960, for example, about 58 per cent of the increase of 3.1 million in the Federal District population resulted from net migration, and only 42 per cent from natural increase. Over 37 per cent of the people in the District in 1960 had migrated from elsewhere in Mexico since 1950.7 Virtually every part of rural Mexico was represented in this huge inflow, though most of the migrants came from the areas closest to the District.8 The population statistics in Table 1 suggest that officials in other cities and towns will be subjected to strains at least as serious. Mexico City is by far the largest city in the country. In 1960 its population was greater than that of the next twelve largest cities combined. The Federal District as a whole was almost twice as large in 1960 as Mexico City alone. For the metropolitan area, the estimated 1960 population was from 5 to 5.5 million. By 1980, Yates has estimated that if present trends continue, the metropolitan population will triple, most of the expansion taking place outside the borders of the Federal District proper. Population projections are always treacherous, but if in less than twenty years over twenty million people are concentrated around the capital, serious political, economic, and social problems will have to be faced. 9 The probable locations of this future expansion can be understood from the following examination of present patterns of land use and population distribution within Mexico.

7. Yates, Desarrollo Regional, pp. 116-17. 8. For a discussion of these population movements on the basis of 1950 data, see Nathan L. Whetten and Robert C. Burnight, "Internal Migration in Mexico," Rural Sociology, 21:140-51 (June 1956), also Laura Randall, "Labour Migration and Mexican Economic Development," Social and Economic Studies, 11:73-81 (March 1962). For further comments on the causes of this migration and the problems arising from it, see Julio Durán Ochoa, "La Explosión Demográfica," in México, Cincuenta Años de Revolución, Vol. II: La Vida Social, (México, D.F.: Fondo de Cultura Económica, 1960), pp. 13-15. 9. Yates, Desarrollo Regional, pp. 118-19. For a somewhat similar fear on the growth of regional population imbalance, see Durán Ochoa, "La Explosión Demográfica," pp. 27-28, and Visión (Mexican edition), July 27, 1962, pp. vi-ix.

7

8

F I N A N C I N G

URBAN

D E V E L O P M E N T

C. T E R R I T O R I A L GROWTH O F T H E F E D E R A L DISTRICT Mexico City and its environs grew slowly in the centuries before 1900. From its settlement in the early sixteenth century by the Spaniards, the area did not increase greatly until the Revolution of 1910. Then the rate of growth of the population and occupied land was speeded up. In 1910 Mexico City covered about 40 square kilometers. By 1930 the figure was 81, and by 1950 it was 242; in 1958 the area had grown to 273 square kilometers. 10 In speed and direction the expansion of the city was not uniform. It grew in a series of more or less concentric ellipses. The outer ellipse is now about 27 kilometers at the north-south major axis and about 21 kilometers at the east-west minor axis. The entire area centers on a point near the intersection of the two main avenues—Insurgentes and Paseo de la Reforma. Because the drained basin of Lake Texcoco to the northeast of the city is less favorable for urban development, expansion took place more rapidly toward the south and southeast parts of the city. Within the last decade, however, the dry lakebed has become the home of a large population cluster of perhaps one million people. Until 1930 the urban area expanded mainly in response to the demand of the well-to-do for residential accommodations as the newer and poorer immigrants went to the deteriorating older districts. Practically all of the expansion crystallized around the major roads leading into the old area from the south. During World War II industries grew up, especially to the north of the old city, close to railway transport facilities and worker-inhabited areas, where land prices were relatively low. With industrial expansion came also the growth of paracaidismo, or squatting, especially in the early 1950's. More recently the number of paracaidistas, or squatters, has declined as legal title and eviction procedures have become effective, but the housing conditions typical of squatter villages persist in many areas. The population in the less 10. Flores, Economía Agrícola, pp. 200-01. His Chapter 8, especially pp. 200-20, is the most recent account of urban growth in Mexico available and has been relied on heavily in this section. Other useful information is contained in Consejo de Planeación Económica y Social en el D.F., Catálogo de Cartogramas (México, D.F., 1958). For an interesting collection of over 150 maps and views of Mexico City from its earliest days, see Manuel Carrera Stampa, "Planos de la Ciudad de México," Boletín de la Sociedad Mexicana de Geografía y Estadística, 62:265429 (March-June, 1949).

MEXICO'S

FEDERAL

DISTRICT

favored northern areas grew rapidly up to 1950 because of the growth of industry, but the city also expanded in other areas as industry spread south and as the better-off continued their southward trek. Table 3 shows the growth in population of the different political subdivisions of the Federal District from 1950 to 1960. Mexico City proper had by far the lowest rate of increase of any of these delegaciones. Of the six others that did not at least double their population in the decade, five are agricultural areas. The other, Atzcapotzalco, is an industrial area, much of it occupied by the Pemex refinery and several large cemeteries. The most striking growth took place in the three industrial suburbs to the north and east of the old city, Villa Madero, Ixtacalco, and Ixtapalapa, and in two largely residential areas to the south, Villa Obregón and Coyoacán, thus indicating that the trend of growth described above is continuing. The major population gains in the next decade seem likely to take place to the north and east of the city. The movement of the better-off to the south will probably continue, but at a slower rate as distances get

TABLE 3. POPULATION GROWTH IN THE FEDERAL DlSTRICT BY DELEGACIONES.

Delegación

1950

I960

Increase (%)

560,752 300,079 166,866 215,768 29,228

G. A. Madero Atzcapotzalco Ixtacalco Ixtapalapa Tlahuac Milpa Alta Xochimilco Tlalpan Coyoacán Magdalena Contreras Obregón Cuajimalpa México

204,833 187,864 33,945 76,621 19,511 18,212 47,082 32,767 70,005 21,955 93,176 9,676 2,234,795

60,735 54,409 162,433 31,494 198,218 19,844 2,832,133

173.8 59.7 391.6 181.6 49.8 30.6 29.0 66.0 132.0 43.4 112.7 105.1 26.7

Federal District

3,050,442

4,870,876

59.6

23,ne

Source: 1960 preliminary data from Dirección General de Estadística, supplied through courtesy of the Banco de Comercio, S.A.

9

FINANCING

URBAN

DEVELOPMENT

longer and attractive sites scarcer. They may also turn northwest of the District to the State of Mexico, where a number of suburbs, including the very large Ciudad Satélite, have been built recently. Industry is now expanding most rapidly to the east within the District. There has also been considerable industrialization in the areas of the State of Mexico bordering the District on the north. As the city spread outwards, bordering haciendas and ejidos were displaced, often to the enrichment of their owners. Edmundo Flores has advanced the notion that the real estate market acted as a partial substitute for weak capital markets. The wealth acquired by the owners of haciendas on the urban fringe, which were generally not expropriated in the early land reforms, went partly into industry, he contends, although the immediate result was an upsurge of real estate speculation. 11 Little of this "unearned increment" was appropriated by either the District or the federal government. While peripheral expansion was going on, the older inhabited areas were changing from residential to commercial uses. For example, Avenida de los Insurgentes was a residential street until 1940. Since then it has become one of the leading commercial arteries. As Flores puts it: "The establishment of a Sears-Roebuck store on land formerly occupied by the Colegio Americano precipitated the crystallization of one of the most prosperous commercial zones of the city." The old commercial district in the center, though still important, has lost ground in the last few years, largely because parking facilities are inadequate and motor traffic is choked by narrow streets. The pattern is also familiar in the United States. The merchants have opened more accessible branches, mainly to the south where the greater purchasing power, if not the greater population, is now located.12 In the north the working class suburbs have grown so rapidly that the next new commercial center probably will arise there. In general, large parts of the older areas of the city, located immediately to the west of the Plaza de la Constitución (the Zócalo), converted to more intensive uses as the city grew. These changes are reflected in commercial land values in different parts of the city. The most valuable land is found within a few blocks 11. Flores, Economía Agrícola, pp. 203-11. 12. For an account of the central business district, see Clyde Eugene Browning, "The Structure of the Mexico City Central Business District: A Study of Comparative Urban Geography" (unpub. diss., University of Washington, 1958). Based on a 1954 study, this dissertation still gives a fairly reliable account of the central district; but since Browning wrote, there has been a tremendous upsurge of suburban business outlets, along lines familiar in the United States.

MEXICO'S

FEDERAL

DISTRICT

of the two major avenues west of the Zócalo, Juárez and Paseo de la Reforma. This entire area is commercial, but even here much of the land is not used intensively. This paradox arises because of the persistence of rent control, introduced during World War II, which restricts conversion of land to new uses. The second highest priced land is found to the south of Juárez and Reforma. Except for land in these two areas, property along the Avenida Insurgentes, to the south, commands the highest prices. Next highest land values are found in the run-down, old quarter of the city, to the east, northeast, and southeast of the Plaza. Farther from the center, land values fall and are quite low in the industrial and "proletarian" areas. Discussion here is based on Flores' Economía Agrícola, but land value information used by the Property Tax Office does not entirely agree with his account. In general, land prices have apparently gone up considerably more rapidly over the last thirty years than have the cost of living indices, which have increased ten times. Speculation in real estate values seems to have been profitable, at least until recently; after years of expansion, political doubts and tighter credit have led to a downturn in real estate prices. In what direction is the future growth of the capital city area likely to occur? Beyond the Federal District and even beyond the metropolitan area, there is the Valley of Mexico. The general impression is one of continued industrial and population growth in the north and east, of newly developing commercial centers in these areas to the northwest, perhaps even beyond the present industrial belt in that area. Mexican urban planners envisage industrial-agricultural zoning in the Valley, but seem to have few concrete suggestions for achieving their goals beyond transportation lines, primarily roads, marking off an urban reserve. There seems to be little recognition of the economic forces that affect the use of land. Both Yates and Flores suggest that the gap between planners' ideas and reality is too great for their work to have much operational meaning. That formal urban planning has had relatively little impact on actual development does not imply that no government actions have affected the scope and nature of urban growth. Nor does the inadequacy of past urban planning in Mexico mean that current efforts will not be fruitful.

D. THE STATE OF MEXICO The jurisdictional problems of metropolitan finance in the Federal

11

FINANCING

URBAN

DEVELOPMENT

District have been less severe than those of large cities in the United States because the economic affairs of the Federal District were not influenced by neighboring political entities. (The delegaciones do not have fiscal powers.) More recently only one neighboring political unit has influenced the growth of the metropolitan area: the State of Mexico. There seems every reason to expect this influence to grow. The State of Mexico surrounds the Federal District on three sides. For the Federal District, the most important part is a small region within the Valley of Mexico, an area which contains a good part of the population and much of the wealth of the State. Within municipalities, such as Tlalnepantla and Tultitlán, which border the Federal District, reside workers employed in industries located in the State of Mexico. Industrial expansion in the border region began about 1943. This expansion was unplanned and apparently merely accompanied the rapid industrial expansion in the District. That geographical proximity was dominant is shown by the fact that 94 per cent of all new investment in the State from 1946 to 1952 took place in six municipalities bordering the Federal District. To some extent development may have taken place in the State of Mexico rather than in the District because of tax exemptions offered by the state government. In 1945 there were 919 firms (aside from mining), with an estimated investment of 121 million pesos located in the State; in 1950, only five years later, there were 3,400 firms and over one billion pesos of capital investment. By 1955, 2.1 billion pesos was the estimated capital investment of firms exempted from taxes by the State; together with 1.2 billion in nonexempt firms, the total was put at 3.3 billion in that year—a remarkable growth in ten years, no matter how one qualifies the figures.13 The types of industry and different sectoral rates of growth were similar to those for the Federal District. Over half of the workers in these new factories, it was estimated in 1956, lived in the District. The extent of the State's fiscal gain from the expansion of industry within its borders is less clear, since sales of the exempt firms and purchases of their employees occur largely in the Federal District. The State thus loses on sales taxes as well as property taxes. Moreover, the increase in industry and population may impose additional expenses on governments in the State of Mexico. The economy of the rest of the State seems hardly to have been 13. Angel Bassols Batalla, El Estado de México: xico, D.F.: Editorial Stylo, 1956), pp. 116-19.

Panorama

Geoeconómico

(Mé-

MEXICO'S

FEDERAL

DISTRICT

affected by the postwar boom. Because of the growing regional disparity within the State, the State government in recent years has not granted tax exemptions in these border municipalities and has used these exemptions, with some slight success, to attract industry into the less favored areas. The only tax concession received for Ciudad Satélite was a reduction of the transfer tax from 2lA per cent to 1 Vi per cent, the same as the District's tax. There are reasons apart from taxes, however, for industrialists and subdivision developers to prefer the State of Mexico to the Federal District if the two are relatively evenly balanced in other respects. Primarily it is felt that there is less government interference and control than in the District. Some businessmen reportedly feel that the quality of certain urban services such as water supply and transportation are now even better in the State of Mexico than in the Federal District.

E. ECONOMIC STRUCTURE In 1960, 1.7 million persons, or about 35 per cent of the 4.7 million inhabitants of the Federal District, were classified as economically active.14 Table 4 gives the official estimate of the occupational distribution of the District labor force in 1950 and 1960. The growing importance of the service and industrial sectors and the decline of agriculture is clear. 15 It is unclear whether the decline in the number of workers in the miscellaneous category is due to regularization of employment or merely to improved census practices. Table 5 shows similar information for 1956, arranged to show occupational level and class. This table shows that the Federal District employs a disproportionate share of managers, of professional and technical personnel, of office workers, and of small tradesmen, the group Cline labeled "the upper and middleupper classes" of Mexican society. The figures for service employees 14. Secretaría de Industria y Comercio, D i r e c c i ó n General de Estadística, VIII Censo General de Población, I960: Resumen General (México, D.F.: 1962), p. 3 6 2 [hereinafter cited as VIII Censo, I960], T h e percentage of population in the labor force in M e x i c o has remained remarkably constant since 1930 at about 3 2 % , the proportion in the Federal District being always a little higher at about 3 5 % . See Guadalupe Rivera Marín, "El M o v i m i e n t o Obrero," in México, Cincuenta Años de Revolución, Vol. II: La Vida Social, p. 278, and VIII Censo, I960, p. 365. 15. Persons engaged in d o m e s t i c help are apparently not included in the Mexican labor force estimates. S e e Mary Catherine Megee, Monterrey, Mexico: Internal Patterns and External Relations, University of Chicago, Department of Geography, Research Paper N o . 59 (Chicago: by the author, 1958), p. 25.

FINANCING

URBAN

DEVELOPMENT

and manual laborers are lower than one might expect, because there are few farmers who live in the District and also because many service workers have risen to the ranks of the semiskilled.

F. A G R I C U L T U R E In 1960, agriculture was a minor factor in the economy of the District, employing only some 2.7 per cent of the labor force, as compared with the national figure of 58.3 per cent. The agriculture carried on by this small labor force is very productive. The value of agricultural production in 1960 was 18,850 pesos per agricultural worker, about four times the national average, and the third highest in the country. 16 The Agricultural Census of 1950 found 69 ejidos in the District, worked by some

TABLE 4 . OCCUPATIONAL STRUCTURE, FEDERAL DISTRICT.

Number Category

1950

Agriculture* 51,006 Extractive industries 5,615 Manufacturing 286,620 Construction 62,923 Public utilities" 8,117 Commerce 187,294 Transportation 59,954 Services 332,832 Miscellaneous 102,386 Total Labor 1,096,747 Force

Per cent I960

1950

I960

46,516 11,829 532,202 118,172 14,943 305,990 102,228 589,930 30,144

4.6 0.5 26.1 5.7 0.7 16.9 5.4 30.8 9.3

2.7 0.7 30.4 6.8 0.9 19.5 5.8 33.6 1.7

1,751,954

100.0

100.0

Source: Calculated from Secretaría de Industria y Comercio, Dirección General de Estadística, Anuario Estadístico de los Estados Unidos Mexicanos: 19581959 (México, D.F., 1960), p. 421. •Including forestry, hunting, and fishing. 'Electricity, gas, etc.

16. Data taken from Yates, Desarrollo Regional, pp. 51-55.

MEXICOS

FEDERAL

DISTRICT

18,058 members. Of the remaining rural properties enumerated by this census, only 395 were over five hectares (about 12.3 acres) in area; the other 41,257 were smaller. 17 In 1960 the number of ejidos was not listed, but the members then numbered only 3,640, a decline of nearly 80 per cent in one decade. 18

TABLE 5. OCCUPATIONS AND CLASSES, FEDERAL DISTRICT, 1 9 5 6 .

Category

Upper: Managerial/Directing Middle-Upper: Professional/Technical

Number Employed (xIOOO)

28.4

(%) D.F. Total

(%) Total Class

1.9

38.1

124.5

8.2

30.3

368.8

24.0

40.7

SMALL TRADESMEN

288.4

18.8

21.0

SUBTOTAL

781.7

51.0

29.0

487.0 127.7

31.7 8.3

24.6 13.7

614.7

40.0

20.7

13.1

OFFICE WORKERS

TRANSITIONAL:

Artisans/Semi-skilled Service employees SUBTOTAL POPULAR:

Manual/day labor

50.4

3.3

AGRICULTURAL

17.3

1.1

0.5

UNKNOWN

37.3

2.7

19.5

105.5

7.1

2.6

1,530.3

100.0

15.5

SUBTOTAL ECONOMICALLY ACTIVE

Source: Howard F. Cline, Mexico: Revolution to Evolution, 1940-1960 (New York: Oxford University Press, 1963), p. 120.

17. Flores, Economia Agricola> p. 229. Of course most of the food for the metropolitan area is grown outside the boundaries of the District. Flores, in Chapter 9, describes this "forage basin," with special attention given to milk. 18. VIII Censo, 1960, p. 441.

FINANCING

URBAN

DEVELOPMENT

G. SERVICES A recent study concluded that "the Federal District is, essentially, a city of services, that is, its inhabitants are devoted principally to commerce, business and personal services including government services."19 Tables 4 and 5 indicate the basis for this statement. In the 1960 census, for example, 33.6 per cent of the total District labor force were counted as engaged in service occupations, compared to a national figure of 13.5 per cent. The Federal District contains most of the government and other auxiliary employees of the country. In addition, new migrants to the city often engage first in service activities such as selling newspapers or lottery tickets or shining shoes. The productivity per worker has been estimated to be less than half of that in manufacturing. There are also a great many domestic servants in the metropolitan area. The Commercial Census of 1955 reports the existence of 67,546 sales establishments in the Federal District, over a third of the total for Mexico, employing some 168,146 persons. Since then, commercial sales in the Federal District have continued to increase slightly more rapidly than in the nation as a whole. From any angle, the District is clearly the service center of the nation.

H. INDUSTRY The Federal District is also the leading industrial center. Table 6 reveals its dominance in this respect. In 1960, with only 14 per cent of the population, it accounted for over 50 per cent of the total value added in all Mexican industry. Concentration at the center appears to be increasing, especially if the industrial production in the State of Mexico is included. The District's leading position as a producer of consumer goods is natural, since it is the greatest population center, and the average income there is almost twice the national level. The concentration of purchasing power measured in these terms is about ten times that of the next greatest urban center, Monterrey. Furthermore, since all roads and railways lead to Mexico City, industry located in the metropolis can cheaply ship goods all over the Republic. Location at the center of this transportation network is an important factor in explaining the Dis19. Yates, Desarrollo Regional, p. 120.

MEXICO'S

F E D E R A L

DISTRICT

T A B L E 6 . R E G I O N A L SHARES IN I N D U S T R I A L P R O D U C T I O N .

(%)

(%)

Share of Industrial Population 1950 (%)

(9.0)

(13.9)

(26.8)

14.8

19.4

13.6

Total Population 1940 1960

(Federal District alone) Federal District and State of Mexico Seven states with highest standard of living' Eight states with lowest standard of living' Rest of Mexico Total

Value Added Per Industrial Worker 1955 (pesos)

Share of Total Value Added 1940 1955

(37,800)

(37.0)

(48.1)

31.1

36,700

40.1

52.5

16.1

17.3

29,100

24.3

23.2

23.1 48.5

24.7 39.8

16.4 35.2

4,360 13,850

5.6 30.0

3.3 21.0

100.0

100.0

100.0

21,500

100.0

100.0

Source: Paul Lamartine Yates, El Desarrollo Regional de México, 2nd ed. (México, D.F.: Banco de México, S.A., 1962), pp. 49, 99. 'The seven states with the highest standard of living are: Sonora, Chihuahua, Coahuila, Nuevo León, Tamaulipas, Baja California Norte, and the territory of Baja California Sur. 'The eight states with the lowest standard of living are: Chiapas, Oaxaca, Guerrero, Tlaxcala, Hidalgo, Guanajuato, San Luis Potosí and Zacatecas.

T A B L E 7 . S T R U C T U R E OF I N D U S T R Y IN THE F E D E R A L D I S T R I C T .

Distribution of Force 1955

Value Added (1955 prices) Increase Share of (1945= 1945 1955 the (xl,000,000 Expansion 100) pesos) (%) Metals and metal products11 Chemical products Foodstuffs Textiles Petroleum and electricity Other industries Total

Distribution of Added 1955

Value 1945

Labor 1945

(%)

4,021 3,114 2,125 1,725 608 3,227

1,880 873 412 403 171 368

31.5 22.9 13.3 10.8 2.0 19.5

10.9 7.9 16.6 13.5 3.9 47.2

22.8 16.9 14.1 14.4 0.8 31.0

7.7 13.0 18.8 15.6 3.0 31.9

27.1 21.0 14.3 11.6 4.1 21.9

2,746

14,820

538

100.0

100.0

100.0

100.0

100.0

Source: Paul Lamartine Yates, El Desarrollo Regional (Mexico, D.F.: Banco de México, S.A., 1962), p. 122. 'Includes electrical equipment.

(%)

(%)

(%)

214 357 516 428 356 875

de México,

2nd ed.

F I N A N C I N G

URBAN

D E V E L O P M E N T

trict's dominance not only in consumer but also in producer goods production. Until 1955 most of the industrial growth in the Federal District came from the expansion of the metal products and chemical (including pharmaceutical) industries. Table 7 shows that in 1945 these two groups contributed about one-fifth of the value added in industry; by 1955 their share was almost one-half. Correspondingly, the relative importance of the industries supplying the basic human needs of food and clothing has diminished as the production of consumers' durables and intermediate producers' goods has expanded. Yates estimated that, if the overall rate of expansion were to continue, by 1985 production in the Valley of Mexico alone would be as great as in Italy of I960. 20 Certain industries are concentrated almost exclusively in the Federal District. As early as 1950, 96 per cent of the pharmaceutical industry, 94 per cent of the silk spinning and weaving, and 76 per cent of match production were located in the Federal District.21 Also, the average size of industrial establishments in the District was greater than that of businesses located elsewhere. In addition to the size of the local market and location at the center of the national transportation network, the metropolitan area offers the businessman: proximity to government offices, banks and financial institutions; a large, fairly skilled labor force; auxiliary services for industry, such as machinery repair; an agreeable climate and adequate recreation facilities; and better schools, hospitals, telephone service and other utilities than are found in most other cities and towns. Often the only place a businessman can obtain an import permit, for example, is in Mexico City. For these reasons, many important firms locate their general headquarters in the metropolitan zone, even when their main plants are elsewhere in the Republic.

I. CONSTRUCTION Table 8 presents data on construction in the Federal District over the last decade. From 1954 to 1959 the value of this construction rose from 20. Yates, Desarrollo Regional, pp. 123-24. 21. Gustavo Romero Kolbeck and Víctor L. Urquidi, La Exención Fiscal en el Distrito Federal Como Instrumento de Atracción de Industrias (México, D.F.: Tesorería del DDF, 1952), p. 30. Ernest López Malo, Ensayo sobre Localización de la Industria en México (México, D.F.: Universidad Nacional Autónoma de México, 1960), gives a detailed breakdown of industrial location by state.

MEXICO'S

FEDERAL

DISTRICT

414.7 million pesos to 955.6 million, with the biggest increase occurring in 1959. Nearly all the residences built were for owner-occupants. Only 5 to 10 per cent were sold or rented. Among the buildings classified as multifamily dwellings, a decreasing proportion, but still about 20 per cent in 1959, were of the type known as casas de vecindad or vecindades, a kind of tenement, typically crowded. Although most new buildings were one or two stories high, the number of taller buildings increased throughout the period, especially after 1956. In 1961, however, the number of buildings of more than two stories completed fell perceptibly. This fall is probably a result of the more uncertain state of the real estate market after 1959. According to Table 8 the number of industrial establishments built annually remained about the same throughout the period, although their value doubled from 1954 to 1959. Both the number and value of commercial establishments constructed

TABLE 8. BUILDINGS COMPLETED IN THE FEDERAL DISTRICT.

Year

Total No."

Residences

Multifamily Dwellings

Offices and Industrial Stores Establishments

1950

6,194

5,054

807

195

69

1951

6,571

5,361

896

165

75

1952

7,073

5,911

835

190

63

1953

6,292

5,025

899

200

72

1954"

24,730

22,135

1,907

346

204

1955"

12,175

10,303

1,382

339

84

1956

6,597

5,295

922

261

60

1957

6,764

5,201

1,144

301

73

1958

7,370

5,699

1,176

360

73

1959

8,353

6,270

1,519

424

75

1960

7,774

5,728

1,504

429

65

1961°

8,529

6,573

1,441

406

72

Source: Secretaría de Industria y Comercio, Dirección General de Estadística, Compendio Estadístico: 1960 (México, D . F . , 1962), p. 86, and Revista de Estadística, Feb. 1962, p. 196. "Includes some buildings not separately classified. "Includes "manifestaciones por regularización": these involve, apparently, buildings not recorded previously, mostly one-story houses built of boarding or concrete and occupied by the owner. 'Includes miscellaneous category totaling 37.

FINANCING

URBAN

DEVELOPMENT

rose considerably more than this in these years. The building industry was the eighth most important industry in the Federal District according to the 1950 census. During the decade of the 1950's more than half, perhaps considerably more than half, of all construction in Mexico took place in the metropolitan area. 22

J. INCOME AND WELFARE A brief examination of the standard of living of the Federal District inhabitants follows, comparing it to that of the rest of the Mexican people and to certain minimum standards. Table 9 presents some data on income distribution in the Federal District in 1960. The reliability of these figures, based on a government sample survey, is uncertain, especially since no account is apparently taken of income in kind, but they do provide a basis for some useful generalizations. Using data for 1956,

TABLE 9. DISTRIBUTION OF AVERAGE FAMILY INCOMES, FEDERAL DISTRICT, 1 9 6 0 .

Number of Families No. %

Income Group (monthly) 1 x s s than 4 0 0 pesos 401-750 751-1000 1001-2000 2001-3000 More than 3,000

52,026 165,231 179,719 262,734 126,773

Average Income Pesos

Income of Group Pesos % (xl,000)

Cumulated upwards % of Income Families %

17,363 97,191 158,269 403,514 320,400

0.8 4.7 7.7 19.5 15.4

5.4 22.5 41.1 68.2 81.3

0.8 5.5 13.2 32.7 48.1

5,903.26

1,070,284

51.8

100.0

100.0

2,135.00

2,167,021 100.0 a

5.4 17.1 18.6 27.1 13.1

333.73 588.21 880.65 1,535.83 2,527.35

181,304

18.7

967,'787

100.0

Source: Computed from Secretaría de Industria y Comercio, Departmento de Muestreo, Las 16 Ciudades Principales de la República Mexicana: Ingresos y Egresos Familiares (México, D . F . , 1962), p. 99, Table 6. "Columns m a y not add to total because of rounding.

22. Yates, Desarrollo

Regional,

p. 152.

MEXICO'S

FEDERAL

DISTRICT

TABLE 1 0 . WHOLESALE PRICE INDICES, M E X I C O CITY.

Year

1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963

210

Articles

72.5 89.9 93.2 91.4 100.0 113.6 118.9 124.0 129.5 131.0 137.5 138.8 141.3 142.1

Consumers' Articles only

Producers' Articles only

13.4 91.3 96.1 93.5 100.0 114.2 120.8 126.6 133.7 134.7 139.8 141.1 145.6 145.2

71.2 87.9 89.1 88.7 100.0 112.1 116.0 120.5 123.8 126.0 134.3 135.6 135.4 137.8

Source: Banco de México, S.A., Informe Anual: 1963 (Mexico, D.F., 1964), p. 79.

Ifigenia M. de Navarrete, for example, has estimated that the average monthly family income in the Federal District is 185 per cent of the average for Mexico as a whole. With some 13.5 per cent of the total number of families in that year, the District accounted for almost 25 per cent of the total money income received.23 Although the Federal District had the most unequal income distribution in Mexico, with the top 10 per cent of the families getting 40 per cent of all income and the top 3 per cent getting 21 per cent, the average family was still much better off than the average for Mexico as a whole in terms of money income. Average incomes of salaried personnel are another indication of relative income levels. Navarrete estimated that some 33 per cent of the 23. Ifigenia M. de Navarrete, La Distribución del Ingreso y el Desarrollo Económico de México (México, D.F.: Universidad Nacional Autónoma de México, 1960), p. 72, Table 6, and p. 75. For another approach, see Table 5, supra; Cline estimates that over 50% of the metropolitan population is above the poverty line and that another 40% is not far from this line on either side.

F I N A N C I N G

URBAN

D E V E L O P M E N T

families in the District received less than the M$700 (U.S.$56.00) a month she thought necessary to satisfy minimum needs. While high, the proportion below the poverty line was the smallest in Mexico. Using a different approach, Yates estimated per capita Gross National Product at M$9,950 (U.S.$795) in 1960 for the Federal District compared to the national average of M$3,800 (U.S.$320).24 Differences in real income are no doubt smaller because the cost of living in the metropolitan area is higher than in the rest of the country. Table 10 indicates the increase in this cost in the last decade for the Federal District. Recent price increases have more adversely affected the consumption of the upper and upper middle income classes than those of the less well off, because prices of food and clothing have been relatively stable. The official indices conceal these facts because the weights assigned to different goods are badly out of date. The pattern of consumption of the upper income groups has probably changed much more than that of the lower income groups since the base year of 1939. The rate of increase in recent years, as shown by Table 10, has been at the modest rate of 3 per cent a year. Table 11 presents a more comprehensive picture of the welfare of the District population than one can obtain from the income data alone. In addition to the figures for the District and for the nation as a whole, the highest and lowest figures among the other states are included in order to indicate the diversity within Mexico. Not only is the District almost twice as well off on this scale as the national average but also it is more than four times better off than the lowest state (Chiapas). Next to Baja California Norte, a state heavily influenced by its access to the U.S. market, the Federal District clearly leads Mexico in welfare terms. Other states in the north lead in one respect or another but, apart from Baja California Norte, none comes close to the Federal District. In the last twenty years, however, on the whole the increase in welfare in the District, and in the other leading states, has been considerably slower than in some of the backward states—at least as rated on this scale. Despite obvious inequities in the distribution of income and the extreme poverty of many, the standard of living in even the poorest areas of the city increased noticeably in most respects in the 1950's. According to Oscar Lewis, ownership of gas stoves and television sets is becoming widespread. Often these appliances are bought on time, lead24. Yates, Desarrollo Regional, p. 62. The only state with a higher per capita product than the District was Baja California Norte, presumably because of its proximity to the southern California market.

MEXICO'S

FEDERAL

DISTRICT

TABLE 1 1 . SOME INDICATORS OF CURRENT WELFARE.

Indicator

Federal District

General index" Mortality rate per 1,000 inhabitants, 1958 Elementary teachers per 1,000 children aged 6-14, 1957 Percent of population over 6 that is literate, 1950 Percent of residences with running water, 1950 Minimum urban salary in pesos per day, 1958-59 Percent of population with Social Security rights, 1958 Per capita consumption of sugar in kgs., 1958 Per capita K W H of electricity consumed, 1957 Per capita gasoline consumption, litres, 1958 Motor vehicle per 1,000 population

188

National Average

Highest State

100

204

Lowest State

43

10.1

12.5

6.4

17.4

20.2

12.8

28.0

7.6

81

56

81

93.1

43.4

63.4

8.8

31

12.00

8.29

23.00

5.40

23.7

2.9

16.9

0.6

50.5

28.9

45.7

10.0

485

229

603

9

253

131

500

335

44.6

20.2

101.0

0.9

Source: Paul Lamartine Yates, El Desarrollo Regional de México (México, D.F.: Banco de México, S.A., 1962), pp. 88-101. "The "general index" at the head of the Table is derived by assigning equal weight to each of the ten indicators listed taken as a percentage of the corresponding national average. No claim of perfect balance or accuracy is made for this arbitrary index, but the welfare index rating of 188 for the Federal District is roughly the same as the 185 per cent of the national average family income mentioned above.

F I N A N C I N G

URBAN

D E V E L O P M E N T

ing to increases in debt. Delinquency in the payment of rent is also becoming characteristic of lower class areas. 25 Even so, there is relatively less poverty in the District than in most other areas of the country. Urban poverty shows up clearly in housing, which seems to have improved slowly in recent years. Although housing is scarce throughout Mexico, the shortage is felt particularly in the Federal District. If the movement from rural Mexico to the capital city continues at the present rate, new construction seems unlikely to do more than slow the increase of overcrowding. Recent construction has consisted primarily of moderate and high price housing, of no help to the destitute new immigrants. With the exception of a few recent projects, public housing is far too expensive for these people, who crowd into existing slums. In 1961-62, of all housing units, 28.8 per cent shared a communal water supply; 9.4 per cent lacked any water supply; 20.6 per cent lacked windows; the walls, roofs, and floors were considered dilapidated in 27.4, 28.0, and 28.2 per cent of all units, respectively.26 Over 50 per cent of the dwellings in the Federal District were inadequate. Substandard housing has three basic categories: vecindades, jacales, and casas proletarias.21 Vecindades are tenements. These teeming old buildings are mainly found north and east of the older part of the city, in slum areas known as zonas de tugurios, and contain more of the urban population than any other kind of housing. They are characterized by overcrowding, inadequate urban services and communal sanitation facilities. Jacales are shacks made of cardboard, flattened gasoline tins, and the like. They are the worst type of human shelter in the Federal District. These squalid shacks are usually temporary and are so regarded by most of their inhabitants. This type of housing has become considerably less common in Mexico City, although there are large numbers of such structures in the State of Mexico. The colonias proletarias include about 300 residential areas in the 25. Oscar Lewis, "Mexico since Cárdenas," in Social Change in Latin America Today (New York: Harper & Brothers, 1960), pp. 327-28. For a vivid evocation of life in the slums of Mexico City, see Oscar Lewis, The Children of Sanchez (New York: Random House, 1961). 26. Instituto Nacional de la Vivienda, Investigación Nacional de la Vivienda Mexicana: 1961-62 (México, D.F., 1963), pp. 241-42. 27. Banco Nacional Hipotecario Urbano y de Obras Públicas, Estudios: 6 (México, D.F., November, 1952), esp. pp. 135-244. This study contains a full description of the housing situation by area and type.

MEXICO'S

FEDERAL

DISTRICT

outer urban belt, mostly north and east of the old city. One- or twofamily houses, referred to as casas proletarias, characterize these districts. They have sprung up more rapidly than any other kind of dwelling since the war. Formerly they were often the work of squatters, or paracaidistas, who occupied vacant land and built homes for themselves. Many of these houses have been gradually improved and now seem substantial in construction and adequate in many respects as living units, except for the frequent absence of basic urban services. More recently the number of squatters has declined as mushrooming land values have driven owners to assert and to maintain title to and control of their property.

i l

FEDERAL

DISTRICT

FINANCES

Just as the capital city is Mexico's economic and cultural colossus, so the government revenues of the Federal District dwarf those of other local and even state governments. The DDF collects more than four times as much in taxes, spends nearly twice as much on ordinary administration and nearly five times as much on public works as do all other municipal governments in Mexico.28 This relationship symbolizes the almost total absence of municipal governmental authority in Mexico outside the Federal District. The states play a somewhat more important fiscal role than do the cities and towns. Taken collectively, the revenues and expenditures of all 29 state governments in Mexico exceed those of the DDF by about 30 per cent. Over the decade from 1953 to 1963 revenues and expenditures of the DDF increased nearly five times in current prices and over three times in real terms. Moreover, certain revenue sources grew even more rapidly. Table 12 reports the level of expenditures in selected years for the period 1953-1962. Expenditures on education are conspicuously absent because the national government is responsible for education in 28. Sources on which succeeding statistical statements are based are: Banco de México, Informe Anual: 1963 (México, D.F., 1964), Tesorería del Distrito Federal, Informe General de Labores por el Ejercicio de 1963 (México, D.F., 1964); and statistics provided by the Secretaría de Industria y Comercio, Dirección General de Estadística.

FINANCING

URBAN

DEVELOPMENT

Mexico. Prices rose 54 per cent over the decade, and population increased about 60 per cent.29 Expenditures by most government offices have increased only slightly in real per capita terms. The most striking aspect of Table 12 is the extremely rapid growth of investment (water works and public works) which nearly doubled in the last four reported years. Indeed, most of the increase in government expenditures in recent years has been accounted for by the two DDF offices responsible for public works and investment in water supply. The peculiar geography of Mexico City in part explains the growing outlays on water supply. Its location far from a source of water, at an altitude of more than 7,000 feet, makes heavy investment in water supply a necessary price of urban growth. Capital outlays form a part of expenditures far larger in the Federal District than in the budgets of local governments in the United States. Water and public works constituted 42 per cent of the Federal District budget in 1962, while capital outlays for these constituted only

T A B L E 1 2 . G O V E R N M E N T EXPENDITURES OF THE FEDERAL DISTRICT BY OFFICE.

Office

1953

1956 (millions

General Service Public Works Water Works Treasury Water and Sanitation Police Other Total Total excluding Water and Public Works

of

1962

1958 pesos)

171.5 24.6 27.7' 25.0 33.5 31.8 25.4 349.5

334.0 209.7 82.9 35.2 40.7 42.1 85.8 830.4

221.3 251.4 91.7 46.3 50.7 42.1 328.0 1,031.5

548.6 429.3 246.5 67.0 59.3 59.3 198.1 1,608.1

297.2

537.8

688.4

932.3

Source: Treasury of the Federal District, Cuentas Públicas, for each year. "Information refers to 1954. The division apparently did not exist in 1953.

29. The deflator used is the Banco de Mexico's price index of 210 commodities, both consumer and producers goods. See Banco de México, Informe: 1963, p. 79; see Tables 3 and 10, supra, on population and prices.

MEXICO'S

FEDERAL

DISTRICT

23.8 per cent of all municipal budgets in the United States.30 However, to compare budgets of U.S. municipalities with those of the DDF is likely to be misleading because of the greater relative importance of outlays on welfare programs and on education in the U.S. Two factors hamper analysis of expenditures. The first is the lack of any public information on criteria used in determining the size and composition of the District budget. Also, budget estimates are not made more than one year in advance. The budget is unavoidably a political document, but there is no necessary inconsistency between politics and long range planning. The second obstacle is the budget document itself. Table 13 illustrates discrepancies in budgeted expenditures, final appropriations, and actual expenditures for the period 1953 to 1962. Budgeted expenditures include only those items that can be foreseen with certainty. Final appropriations include a large number of expenditures which may not

TABLE 13. EXPENDITURES, APPROPRIATIONS, AND REVENUES OF THE FEDERAL DISTRICT.

Year

1953 1954 1955 1956 1957 1958 1959 1960 1961 1962

Budgeted Expenditures

370 400 425 500 675 800 850 1,000 1,100 1,200

Actual Final Appropriations Expenditures (millions of pesos)

528.2 537.4 778.9 1,084.9 1,251.2 1,223.6 1,149.7 1,508.6 1,741.1 —

349.5 400.0 517.8 830.4 1,048.1 1,031.5 775.9 1,184.9 1,234.7 1,608.1

Actual Revenues

388.1 525.4 632.0 797.7 816.7 938.7 1,020.5 1,345.5 1,524.0 1,697.5

Surplus f + ) Deficit (—)

+ 38.6 + 125.4 + 114.2 - 32.7 -231.4 - 92.8 +244.6 + 160.6 +289.3 + 89.4

Source: Data in columns (1) and (2) supplied by the Treasury of the Federal District. Data in columns (3) and (4) taken from Treasury of the Federal District, Cuentas Publicas, for the respective years.

30. The corresponding figure for cities over 1,000,000 was 21.4%. U.S. data are taken from U.S. Department of Commerce, Bureau of the Census, Compendium of City Government Finances in 1962, City Finances: 1962 (G-CF62-NO. 2) (Washington, D.C., 1963), p. 7.

F I N A N C I N G

URBAN

D E V E L O P M E N T

be made in the current year. As a result, a comparison of final appropriations with actual revenues gives a misleading picture of budgetary imbalance. Sometimes the apparent deficit does not occur, and there may be a large surplus, as a comparison of actual expenditures and actual revenues makes clear. The rapid increase of expenditures by the Federal District government was made possible by a tax system which has grown with extraordinary speed. Table 14 describes the evolution of Federal District revenues over the past ten years. Two taxes clearly form the backbone of the Federal District revenue system. One is the commercial receipts tax, the less rapidly growing of the two. It is levied at the rate of 3 per cent on commercial sales in the Federal District. This tax is levied under Federal Law. 31 It consists of two parts, a 1.8 per cent tax going to the national government, and a supplementary tax of up to 1.2 per cent, accruing to the states or to the Federal District. State governments may set the rate at the full 1.2 per cent or lower. The rate for the Federal District is set by the national legislature. As Table 14 shows, this tax has provided a bit more than 40 per cent of total Federal District tax revenue in recent years.32 In brief, the tax, levied at the manufacturing, wholesale, and retail levels, is a turnover tax whose ultimate burden on the consumer may be quite large. Numerous exemptions and 50 per cent rate reductions (e.g., on food, medicines and drugs, hospital services and other necessary items) probably inject an element of progressivity into the tax. The 1.2 per cent supplementary tax is collected in a state on its behalf only if the state renounces specified local taxes some of which in the past have obstructed interstate trade. The second major tax is the real property tax (impuesto predial), also providing about 40 per cent of tax revenue. Collections under the real property tax actually exceed those shown in Table 14 by about 60 million pesos because a portion of the 15 per cent additional tax is attributable to it. 33 Moreover, this tax has grown rapidly in recent years 31. Federal Commercial Receipts Tax Law (Ley Federal del Impuesto Sobre Ingresos Mercantiles), D.O., Dec. 31, 1947. 32. A full description of the commercial receipts tax is contained in Harvard Law School International Tax Program, World Tax Series, Taxation in Mexico, prepared by H. J. Gumpel and H. B. Margáin (Boston: Little Brown and Co., 1957), pp. 340-54; see also World Tax Series, Taxation in Mexico, 1961 Cumulative Supplement, (Boston: Little Brown and Co., 1961), pp. 49-56. 33. See Finance Law of the D D F (Ley de Hacienda del Departamento del Distrito Federal), Title 29.

MEXICO'S

FEDERAL

DISTRICT

and internal Treasury projections indicate collections will shortly surpass those from the commercial receipts tax.

TABLE 1 4 . GOVERNMENT REVENUES OF THE FEDERAL DISTRICT.

1953

Taxes on: Commercial Receipts Real Property Amusements Alcoholic Beverages Markets Transfers of Real Property Artesian Wells Planning Gasoline Yield of Capital 15% Additional Other c Total

a

1955

184.6 123.6 28.6 6.2 .4" 11.4 3.1

1957 1959 (millions of pesos)

248.8 156.0 33.2 12.8 .5' 16.0 2.6

1961

1963

4.8 18.6 5.7 136.9

4.2 32.5 6.2 400.8

5.9 6.7 39.6 6.7 528.8

299.5 211.9 37.2 13.6 1.0b 21.3 2.5 17.8 9.5 9.0 50.9 8.1 682.3

Fees for: Water 28.2 Cooperation (Public Works) 6.5 Licensing, etc. 4.2 6.7 Public Property Registry Other 15.4 61.0 Total

29.9 10.6 4.0 7.7 9.8 62.0

37.3 7.8 4.7 10.9 12.3 73.0

45.1 11.4 7.2 11.6 14.5 89.8

98.6 24.0 17.0 16.3 23.1 179.0

109.6 21.6 17.6 15.5 27.5 191.8

3.8

22.9

30.4

36.1

49.7

91.6

Miscellaneous: Back Collections 23.9 Share of Federal Revenues 163.5 9.0 Fines Surcharges 2.9 6.3 Other Total 205.6 338.1 Total Revenues

51.5 58.3 10.0 6.3 6.2 132.3 632.0

Rents, Prices, etc.

62.5 22.2 5.1 9.4 8.6 — —

—

—

—

—

402.2 478.0 312.8 398.1 43.0 40.9 27.1 29.3 27.5 27.7 23.9 25.2 21.7 22.4 31.9 21.3 11.6 12.5 11.7 12.4 73.8 91.9 14.7 17.6 999.8 1,179.4

59.6 70.6 122.3 173.8 98.3 117.4 72.2 83.9 16.9 28.3 32.9 34.5 8.4 11.3 20.7 28.7 18.1 24.3 21.2 20.5 177.6 212.2 295.4 378.7 816.7 1,020.5 1,524.0 1,841.5

Source: Treasury of the Federal District, Cuentas Públicas, for respective years. "The commercial receipts tax was listed under Miscellaneous: Share of Federal Revenues until 1954. b Market taxes were listed under "Rents, Prices, etc." 1955-59. c Automobile taxes have yielded approximately 28 million pesos in recent even numbered years, none of which appears in this table.

FINANCING

URBAN

DEVELOPMENT

The 15 per cent additional tax is added to all taxes established by the annual revenue law (Ley de Ingresos).34 In effect, this "additional" tax increases the rates. It originated as a Federal surcharge on local taxes, but it has been collected by the Federal District itself since 1949. It should be incorporated in regular tax rates, as its separate status serves no useful purpose, adds, however slightly, to office work, and understates true rates. Two-thirds of revenues under this tax come from additions to the real property tax. The other third comes principally from taxes on amusements, transfers of real property, the use of artesian wells, and the gross income of capital. The 15 per cent additional tax is not added to the commercial receipts tax. The total yield of the minor taxes has grown apace with the two major revenue sources, partly because certain taxes have been added (on gasoline, planning, and artesian wells) and partly because of rapid growth in base and rates (alcoholic beverages). The sharply increased taxes for the use of artesian wells and the higher fees for water were instituted in 1960. These increases resulted from concern about the rate at which water removal by wells was causing the city to sink and about the cost of piping water to the city. The planning tax and the cooperation fees are species of special assessments levied to meet the cost of public works. 35 The national taxes in which the Federal District's share is most important are those on gasoline (in addition to the separate Federal District levy), beer, automobiles, and tobacco. The Federal District gets less than 10 per cent of its revenues from national taxes other than the commercial receipts tax. By comparison, U.S. cities with populations over one million receive more than 20 per cent of their revenues from Federal and state governments. However, the national government in Mexico directly bears the cost of education and social welfare programs which American cities provide for themselves in large measure and which absorb 21 per cent of total local expenditures.36 Whether or not the Federal District should assume the cost of these programs is not evident from these data. Moreover, the answers to such questions involve complicated analyses of the geograph34. See D D F Finance Law, Title 29. 35. See ibid., Titles 9 and 10. 36. U.S. Department of Commerce, Bureau of the Census, Compendium of City Government Finances in 1963, City Finances: 1963 (G-CF63-No. 2) (Washington, D.C., 1964), p. 4. Expenditures on education, public welfare, and health and hospitals total U.S.$3,865 million out of total expenditures by local governments of U.S.$ 18,393 million.

MEXICO'S

FEDERAL

DISTRICT

ical impact and incidence of government expenditures and revenues and difficult judgments about interregional income redistribution. This survey of Federal District revenues shows that the property tax occupies a strategic position in the financial structure of the Federal District. It is the largest revenue source controlled mainly by local policy makers. Although property tax rates have remained constant, yields have grown rapidly in recent years because the tax base has expanded and administration has improved. The financial structure of the Federal District differs radically from that of the other subordinate units of government in Mexico. Table 15 presents statistics on the revenues of the national government, the Federal District, the states and municipalities. These figures make clear the relative insignificance of state and local revenues outside the Federal District. Revenues in the Federal District were about M$378, or U.S.$30.20, per capita. In the states they were only about M$64, or U.S.$5.16, per capita, and in the municipalities they were about M$41.2, or U.S.$3.30, per capita. These figures were derived by dividing 1963 revenues by 1960 population. It was assumed that municipal expenditures were all made in cities and towns with a population of 2,500 or more. Of course, these averages obscure large differences. The

TABLE 15. ORDINARY REVENUES OF GOVERNMENTAL UNITS, 1963.

Federal

Taxes on Income and Capital Income Tax Real Property Tax Taxes on Expenditures Commercial Receipts Other Taxes Total Taxes Shared Revenues Other Revenues Total Ordinary Revenues

6,865.8 3,105.6 —

5,747.8 1,524.8 271.9 12,885.5 —

1,730.0 14,615.5

Federal District (millions

States and Territories of pesos)

485.3

331.0

—

398.1 647.9 478.0 91.9 1,225.1 117.4 616.4 1,841.5

—

227.9 729.6 70.1 647.6 1,708.2 406.0 551.2 2,259.4

Municipalities

91.0 —

47.0 98.2 13.7 135.2 324.4 47.9 401.7 735.1

Source: Banco de México, Informe Anual: 1963 (México, D.F., 1964), pp. 131-34.

F I N A N C I N G

URBAN

D E V E L O P M E N T

per capita revenues of states and municipalities bordering the United States (Sonora and Baja California Norte) are relatively high, running as much as ten times the per capita revenues of the governments of the poorest states (Hidalgo and Oaxaca). 37 Even among big cities not bordering the United States, differences in per capita municipal expenditures were large. To some extent, the anemic condition of state and municipal finances outside the District is a logical result of political history. Mexico is a federation only in name. The states did not unite to create a federation; rather, a constitution created the states. The states lack sovereign rights; they may act only in areas where autonomy is explicitly granted. 38 Furthermore, the federal senate may replace state administrations which abuse their powers. The narrow scope of state and local government is characteristic of many underdeveloped countries. It is caused in part by a shortage of trusted local leadership and in part by a lack of sufficient independent revenue sources to support local government expenditures. 39 The low level of most local revenues and particularly of property tax collections is clearly shown by Table 15 if it is noted that property tax collections (including property taxes levied on agricultural land) in all municipalities and states taken together amount only to two-thirds of those in the Federal District. The Federal District's property tax is discussed in considerable detail in Chapter Two. This tax is vital to the finances of the Federal District. Its effective administration offers lessons for local officials elsewhere.

37. Banco de México, Informe: 1963, p. 137 and Secretaría de Industria y Comercio, Dirección General de Estadística, VIII Censo General de Población: Resumen General (México, D.F., 1962), pp. 68-69. 38. See, e.g., Raymond Vernon, The Dilemma of Mexico's Development (Cambridge, Mass.: Harvard University Press, 1963), p. 63. Other excellent discussions are Cline, Mexico, Revolution to Evolution: 1940-1960 (New York: Oxford University Press, 1962), pp. 139-40, and William P. Tucker, The Mexican Government Today (Minneapolis: University of Minnesota Press, 1957), pp. 73-82, 377-408. 39. See, e.g., Ursula K. Hicks, Development from Below (London: Oxford University Press, 1961), chaps, xxi, xxii.

MEXICOS

III

THE THE

FEDERAL

DISTRICT

GOVERNMENTAL STRUCTURE FEDERAL DISTRICT

OF

A. THE DEPARTMENT OF THE FEDERAL DISTRICT (DDF) Because of its immense importance to Mexico, the Federal District is directly controlled by the national government. The President of the Republic governs the District through his nominee, the Jefe of the DDF. 40 The Jefe has power to appoint or remove DDF officials, issue regulations concerning the DDF's internal organization, and generally adopt measures necessary for governing the DDF. 41 Legislation affecting the District is passed by the national Congress, and hence most regulations for the District are promulgated directly by the President of the Republic. 42 District residents elect to the Congress two senators and a number of deputies proportionate to the District's population. 43 The Federal District itself includes the City of Mexico and twelve delegaciones.44 The delegaciones are comprised of former municipios, haciendas, villages, and farms now included in the District. Although many of them have been entirely absorbed into the District's urban area, the principal town of each delegation is designated as the "head" (cabecera) of that delegation. The Jefe of the DDF appoints one delegate and as many subdelegates as necessary to each of the delegations. The function of these officials is to advise the DDF of any irregularities or deficiencies in the municipal services supplied to each region, supervise the compliance of local residents with DDF regulations, and suggest new DDF programs within their delegations.45 Thus delegates serve as administrative liaison officers between the DDF and each delegation rather than as popular representatives to the DDF.

40. Organic Law of the D D F (Ley Orgánica del Departamento del Distrito Federal), Arts. 5, 24, D.O., Dec. 31, 1941. The President can freely appoint and discharge the Jefe of the DDF, ibid., Art. 6. 41. ¡bid., Arts. 28, 29. 42. Ibid., Art. 2; see also Constitution of Mexico, Arts. 73 (VI), 89 (I), 92. 43. Constitution of Mexico, Arts. 52, 56. 44. Organic Law, Art. 8. See Arts. 7 and 9-21 for a description of the limits of the Federal District, the City of Mexico, and each of the delegaciones. For a list of the delegaciones see Table 3, supra. 45. Organic Law, Arts. 75, 76, 79.

F I N A N C I N G

URBAN

D E V E L O P M E N T

The Federal District body which most closely resembles a municipal legislature is the Consejo Consultivo, the Advisory Council established in the DDF's Organic Law, Article 64. It is composed of representatives from the Chamber of Commerce, small businessmen's groups, industrial organizations, various associations representing property owners, tenants, rural workers, professionals, public employees, and other workers' groups. Each recognized organization with 100 members and one year's existence may nominate a member for appointment to the Council by the Jefe. Where several groups have the right to only one representative among them, their joint nominee is elected by the groups involved (Arts. 64-66). The Council's function is to advise the Jefe concerning the economic and social condition of the District's residents, the desirability of expanding public services, the need to reform current legislation concerning the DDF's public service responsibilities, and any other important matters (Art. 69). The Jefe, of course, is free to disregard Council proposals (Arts. 73, 74). Note that this does not preclude the Jefe or DDF office heads from providing opportunities for democratic participation at other levels of municipal operations. This subject of citizen participation in the formation and implementation of DDF policy is considered in Chapter Five in relation to land use objectives. The DDF is responsible for a broad range of public services: police, fire protection, transportation, water supply, sewage, paving, road construction, street cleaning, street lighting, public markets, parks, gardens, government buildings, regulation and supervision of private buildings, zoning, urban planning, expropriation of property for public purposes, and generally, overseeing the District's well-being. In short, the DDF carries out most of the normal activities of a municipal government per Article 23 (I). The DDF also aids the federal government in matters concerning elections, regulations of monopolies, labor affairs, compulsory public education, and the solution of federal agency problems, per Article 23 (II). To perform these various tasks, the DDF is organized under Article 35 into thirteen Offices (Direcciones Generales), as well as a Police Department, a Controller's Department, and a Treasury, the largest of these various divisions. An Attorney General's Office and a Superior Court System, although not structural elements of the DDF, function for both the Federal District and the Federal Territories. The components of the DDF are:

MEXICOS

FEDERAL

DISTRICT

STRUCTURAL:

Jefe's Office and Staff

Advisory Council

Administrative Services Office Controller's Department General Services Office Government Office Labor and Social Welfare Office Legal Services Office Market Administration Office Medical Services Office

Police Department Public Works Office Social Action Office Sports Activities Office Transit Office Treasury of the DF Water and Sanitation Office Water Works Office

OPERATIONAL:

Attorney General for the Federal District and Territories Superior Court System for the Federal District and Territories. The Property Tax Office within the Treasury is examined in considerable detail in Chapter Two. The important Public Works Office, the Water Works Office, the Water and Sanitation Office, and the Transit Office are discussed in Chapter Five. These offices are primarily responsible for the installation of the DDF's public utilities and the promulgation and implementation of its land use controls. The Government Office (Dirección General de Gobernación) discharges a miscellaneous but important group of functions set forth in Article 36. These include supervising the delegations and ensuring that the DDF operates in accordance with law. The Government Office also supervises penitentiaries, public performances, the granting of certain licenses, and collection of such statistics as those on construction in the Federal District. The Labor and Social Welfare Office (Dirección General de Trabajo y Previsión Social) is concerned with labor matters within the Federal District, including the housing of workers (Art. 37). It works with the federal Ministry of Labor in administering the complex provisions of the Mexican labor laws. The Legal Services Office (Dirección General de Servicios Legales) provides general legal services to the DDF in nonfiscal matters (Art. 42). The Office maintains the Civil Registry (Registro Civil), which contains such records as those of births and marriages, and the Public Registry of Property and Commerce (Registro Público de la Propiedad y de Comercio), where property transfers and business in-

F I N A N C I N G

URBAN

D E V E L O P M E N T

corporations are recorded. The Legal Services Office also supervises public notaries. The Social Action Office (Dirección General de Acción Social) is responsible for a miscellaneous group of functions specified in Article 43, including the fostering of tourism and measures for civic improvement, such as adult and sports education. The sports grounds themselves are supervised by the Sports Activities Office (Dirección General de Acción Deportiva) under Article 46. Two minor sections of the District government are the General Services Office (Dirección General de Servicios Generales), in charge of general maintenance and of municipal cemeteries (Art. 45), and the Administrative Services Office (Dirección General de Servicios Administrativos) which looks after personnel, purchasing, and similar matters, under Article 44. The Medical Services Office (Dirección General de Servicios Médicos) provides clinics and hospitals (Art. 41), while the Market Administration Office (Dirección General de Administración de Mercados) supervises the numerous public markets throughout the City (Art. 45 bis). Regular police functions are discharged under Article 48 by the Police Department (Jefatura de Policía). The Fire Department (Cuerpo de Bomberos) forms a subsection of the Police Department. Finally, the Controller's Department (Controlaría General) is responsible for the supervision of contracts and assets of the DDF, as well as for general accounting and auditing functions and the investigation of any irregularities uncovered. The Controller of the DDF is directly responsible to the Federal Ministry of Finance and Public Credit (Art. 48 bis). B. THE TREASURY OF THE FEDERAL DISTRICT The Treasury is divided into four major sections within which there were, in 1965, 19 agencies concerned respectively with: taxes (Dependencias Impositivas); collections and payments (Dependencias Recaudadoras, Pagadoras y Auxiliares); technical services (Dependencias Técnicas); and administration (Dependencias Administrativas). Each of these is shown in Table 16. The taxing agencies consist of nine branches and offices concerned with the commercial receipts tax, the property tax, water fees, games and lottery fees, special assessments, market and meat fees, the alcoholic beverage tax, the real property transfer tax, and inheritance and capital taxes. These nine branches and offices employ about half of the

M E X I C O S

3 •a iE O 5

ö > - c fiiifli ® 5 co o c " i B >- a 2 o m 2

ss : o


U

r^*

.5 = fe

o

a)

c s

O 00 e c u .3 t j » i s er g 1> O o vft «o " c O i , fcS 2 o g 03

| 8 - S iE c O g X 03 co _ H co

o " c 5 O -S C C E o

c t 3 'S

&

a o ,

8 e O U M 3 ffl w X

X

03

a

a

«

o

6

— B

•5

v 2«

§ 0 3 ®

a

c OS x co H 2 £ a,

ft t. S1 ft O H

c o .a a = CO >

c O -y § | to W

c p

£ € o c S S

a CA ® u P-, u

s CO —. — O SÄ

" (fl

X ' S fflf

s. "

JS o

S J?

ö N

M

fi.PjS

C

^

J3 : a >i >- 00 co g

c _o

ft E 3

£ o

< v 3 CO CO CLi M r4

F I N A N C I N G

URBAN

D E V E L O P M E N T

Treasury's total staff. By far the largest office is the Property Tax Office, within which there are five branches, whose functions will be described in the succeeding chapter. They are the Technical Branch (Departamento Técnico), the Tax Roll Branch (Departamento de Padrones), the Topographical Branch (Departamento de Topografía), the Valuation and Rent Estimation Branch (Departamento de Avalúos y Estimaciones de Rentas), and the Assessments Branch (Departamento de Liquidación y Giro). The collection and payments agencies consist of three offices: the Collections and Payments Office (Dirección General de Recaudación y Pagos); the Delinquent Accounts and Enforcement Office (Dirección General de Rezagos y Ejecución); and the Budget Office (Dirección General del Presupuesto). The last of the three was formed in 1952 to centralize functions previously scattered throughout the Treasury. Within it there is a Budget Formulation Branch responsible for drawing up the Budget for the coming year and a Payment Orders Branch concerned with budgetary execution and control. The published Budget is far from comprehensive, and much of the staffs time is taken up with budgetary modifications. These changes all arise from executive, not legislative, decisions. Customarily the District Budget is submitted to the Federal Chamber of Deputies by the Minister of Finance toward the end of the legislative session and is approved without change. The technical service agencies consist of four branches. The Fiscal Attorney (Procuraduría Fiscal) is the Treasury's legal branch. It drafts laws and handles cases, including those brought by taxpayers before the Federal Fiscal Court (Tribunal Fiscal de la Federación) and amparo (see Part IV, infra) suits brought by taxpayers in the Federal Courts. The Fiscal Attorney also reviews applications for tax exemptions, principally relating to the property tax and the real property transfer tax. The other technical agencies are the Fiscal Fines Revision Branch (Departamento de Revisión de Multas Fiscales), the Fiscal Audit Branch (Departamento de Auditoría Fiscal), and the Fiscal Accounting and Statistics Branch (Departamento de Contabilidad y Estadística Fiscal). The administrative agencies consist of three branches: the Central Machines Branch (Departamento Central de Máquinas), the Billing Control Branch (Departamento de Control de Emisiones), two branches that work closely in making up bills for most taxes levied by the Treasury, and the Administrative Control Branch (Departamento de Control Administrativo).

MEXICO'S

THE

FEDERAL

FEDERAL

FISCAL

DISTRICT

COURT

Since 1946, the Federal Fiscal Court (Tribunal Fiscal de la Federación) has had jurisdiction over both DDF and federal government fiscal cases. It is therefore appropriate in describing the governmental structure of the Federal District to examine the Court's role.46 The Fiscal Court was severely criticized on constitutional grounds because it appeared to appropriate to the executive branch functions properly reserved to the judiciary under Article 104 of the Constitution. However, the Fiscal Court's usefulness has become increasingly apparent in recent years, and Article 104 (I) has been amended in order that the Constitution include at least one reference to administrative tribunals. Prior to 1946, Article 104 provided: "The Federal Courts have jurisdiction over: all dispute of a civil or criminal nature which arise out of compliance with and application of federal laws, or by reason of treaties made with foreign powers. Whenever said disputes affect only private interests, at the election of the plaintiff, the common law judges and local courts of the States and of the Federal District and Territories may also assume jurisdiction over them. Judgments in the first instance shall be appealable before the immediate superior of the judge initially assuming jurisdiction in the matter." In 1946 the following provision was added: "In trials in which the Federal government is interested, the law may provide for appeals before the Supreme Court of Justice either from judgments in the second instance, or from the judgments of administrative courts created by federal law, so long as said courts are endowed with complete autonomy to render judgments" (emphasis added). Building on these two factors, Mexican commentators have found new constitutional justifications for the Fiscal Court. 47 As an administrative tribunal, the Fiscal Court has no authority to

46. T h i s short survey of the Fiscal Court's jurisdiction, practice, and role within Mexico's judicial structure is taken almost wholly from Andrés Serra Rojas, Derecho Administrativo, 3rd ed. (México, D.F.: Librería de Manuel Porrúa, 1965), pp. 1111-47. For more specialized studies of the Fiscal Court, see Margarita L o m e l í Cerezo, El Poder Sancionador de la Administración Pública en Materia Fiscal (México, D.F.: Editorial Continental, 1961), and D o l o r e s H e d u á n Virués, Las Funciones del Tribunal Fiscal de la Federación (México, D.F.: Editorial Continental, 1961). 47. Serra Rojas, Derecho Administrativo, pp. 1113-14. See H e d u á n Virués, Tribunal Fiscal, pp. 4 5 - 5 2 and 88-91, for a recent discussion of the constitutional issues.

F I N A N C I N G

URBAN

D E V E L O P M E N T

decide the constitutionality of laws.48 The Court's principal function is to examine the legality of challenged administrative acts or decisions according to the relevant statute or regulation. Thus, the Court's jurisdiction is limited to contencioso de anulación, which is perhaps best understood by common law lawyers as dealing with actions to nullify administrative determinations. Nevertheless, the Supreme Court has recognized that the Fiscal Court may take notice of the constitutionality of administrative acts or regulations.49 Again, although the Court's jurisdiction does not permit it to modify administrative decisions,50 Fiscal Court decisions nullifying particular administrative acts or procedures must indicate the standards for a new determination, and thereby do set forth guidelines for acceptable administrative conduct. 51 The effect of these guidelines on administrative actions is illustrated in Chapters Two and Three. The Fiscal Court's jurisdiction extends to suits which challenge: 1. determinations of the Ministry of Finance and Public Credit, its dependencies, the Treasury of the DF, IMSS, or other fiscal agencies, which involve the fixing of a tax liability without further administrative recourse; 2. determinations of the executive branch establishing fiscal responsibilities for federal or DDF employees; 3. administrative determinations definitively imposing fines for violations of federal or DDF laws, where further administrative relief is not available; 4. any fiscal determinations other than those mentioned above which cause injury which cannot be remedied through administrative proceedings; 5. administrative enforcement proceedings where the injured party alleges: 48. Serra Rojas, Derecho Administrativo, p. 1115. The Fiscal Court even refuses to declare laws unconstitutional when Supreme Court jurisprudence (as opposed to a particular Supreme Court decision in the very case under review) clearly establishes a constitutional violation. See Juicios Nos. 725/57 (Pleno), Decided Jan. 8, 1964, and 4691/55 (Pleno), Decided Jan. 15, 1964 (Tribunal Fiscal de la Federación). 49. See Revisión Fiscal 65/51, Maria Escobeda Vda. de Campanella, Decided Mar. 2, 1955, [April 1955] BIJ 181; Revisión Fiscal 136/53, Francisco Sanvicente Ciprés, Decided Sept. 22, 1955, [Oct. 1955] BIJ 526; Amparo en Revisión 2596/64, Oscar Vásquez Vela, Decided Aug. 13, 1964, [Sept. 1964] BIJ 460. 50. Serra Rojas, Derecho Administrativo, pp. 115-16. 51. See Federal Fiscal Code, (Código Fiscal de la Federación), Art. 204, D.O. Dec. 31, 1938.

MEXICO'S

FEDERAL

DISTRICT

a. that the asserted liability has been discharged (other than by prescription), b. that the actual liability is less than that asserted, c. that he is a possessor in the capacity of an owner of the property levied upon, or that he is a preferred creditor with seniority over the fiscal authorities, or d. that the foreclosure proceedings were not in accordance with law; 6. refusal by proper authorities to refund a tax, fee, or other payment illegally collected; 7. administrative decisions favorable to an individual (applies to cases brought to the Fiscal Court by the Ministry of Finance and Public Credit); 8. determinations denying or reducing civil service pensions, social security benefits, or pensions or other benefits of members of the armed forces and their dependents; 9. determinations made with respect to public works contracts entered into by the Executive Branch of the Federal Government; 10. payment of Federal or DDF claims on bonds; and 11. determinations jurisdiction over which is conferred on the Federal Fiscal Court by a special law.52 The primary example of such a law is the one conferring jurisdiction over the D D F s fiscal determinations. 53 Once the Fiscal Court assumes jurisdiction over a case, the grounds upon which it may nullify the challenged administrative determination are: 1. lack of authority of the official making the determination; 2. failure of the administrative agency to comply with procedural formalities; 3. failure of the administrative agency to apply the proper legal provisions in reaching its decision; or 4. excessive penalties imposed for violation of the fiscal laws.54 The Court is composed of twenty-two judges (magistrados) appointed for six-year terms by the President of the Republic upon ratification by the Senate. The President of the Court is elected by the twenty-two appointees and serves one year. The judges sometimes sit as 52. Federal Fiscal Code, Art. 160, as amended by Decree of Dec. 29, 1965, published in D.O. Dec. 31, 1965. 53. Serra Rojas, Derecho Administrativo, p. 1112. 54. Federal Fiscal Code, Art. 202.

F I N A N C I N G

URBAN

D E V E L O P M E N T

a full court (en pleno), but mostly in seven chambers (salas) of three judges each; the twenty-second judge is the President of the Court. 55 A quorum of thirteen judges is sufficient to constitute a full court. Each chamber exercises the Court's full jurisdiction, but where one chamber renders a decision conflicting with another chamber or with the jurisprudencia of the Court, the full court reviews the case upon motion of the injured party. 56 Under this system, when a question of statutory interpretation comes up for the first time, the case is decided by a single chamber of the Court, no matter how important the issue. It might be wiser to introduce greater flexibility into this review procedure. Thus, whenever the judge assigned to write an opinion in a case decides that the matter is of great importance, he could suggest to the other members of his three-judge chamber that the matter be considered by the full bench. If either of the other two judges in his chamber agreed, the matter could be considered by the full court. Despite the emphasis commentators have placed on the Fiscal Code's provisions for oral argument before the Court, 5 7 most chambers decide cases on written submissions (which include pleadings, proof, and briefs) rather than the adversary arguments characteristic of courts in the United States. Ex parte conferences with the parties' lawyers are on occasion permitted. Such conferences are regarded as helpful, at least by private counsel, and are limited to clarifying the reasoning behind legal assertions in the briefs. In D D F cases, however, the Treasury rarely takes advantage of this practice, apparently for fear of adverse public reaction. Even where an oral argument is held to resolve conflicting testimony, the Treasury rarely appears to contest the taxpayer's view of the facts. 58 Each case is assigned to one of the three judges of a chamber to consider and write a draft opinion (ponencia). This judge (the ponente) researches the relevant legal provisions with the aid of an experienced lawyer, who serves as his permanent clerk. If the other two judges agree with the ponencia, the judge who prepared it now writes the court's opinion in final form. If the other two judges disagree with 55. Serra Rojas, Derecho Administrativo, pp. 1119-20. 56. Ibid., p. 1135. 57. See Ibid., pp. 1128-29. In Roman Law countries the "trial" is limited to the "hearings." A secretarial clerk of the court may read the written submissions orally to satisfy the formal requirements of a hearing. 58. These comments are based on a personal observation of the Fiscal Court's practices and interviews in July, 1965 with Lie. Carlos Del Río Rodriguez, the President of the Federal Fiscal Court, and Magistrada Margarita Lomelí Cerezo, a Judge of the Court.

MEXICO'S

FEDERAL

DISTRICT

the ponencia, a conference is held to resolve disputed issues, and the opinion is written by the majority. Procedure before a full court varies considerably. The President appoints the ponente on a rotation basis. This ponente, who never listens to ex parte arguments, circulates a draft opinion among the other twenty-one judges prior to the weekly meeting of the Court. In these sessions, a good deal of lively debate may occur before important cases are resolved by majority vote. One interesting feature of these debates is that they are open to the public. Copies of Fiscal Court opinions are filed at the Court and separate copies are sent to the Treasury and the taxpayer. While opinions may be examined at the Court, in the past little effort was made to publish opinions promptly. From time to time, the Court publishes a Revista containing short abstracts of cases judged significant by the Court's staff. Recently, the Court has made noteworthy efforts to update its Revista. A substantial private market may exist among practicing lawyers for an even fuller publication of Fiscal Court opinions. In cases involving federal government taxes, either federal authorities or the taxpayer may appeal Fiscal Court decisions directly to the Supreme Court, except where the sum involved is less than M$20,000. In cases involving DDF taxes, until recently only the Treasury of the DDF could take such direct appeals. 59 Taxpayers, however, could appeal adverse Fiscal Court decisions on DDF taxes through amparo suits brought in the local Federal Court, while the Treasury, as a government agency, lacks standing to seek amparo relief.60 Although the amparo route to relief is more time-consuming, the appellant may raise constitutional as well as legal issues upon review.61 59. Serra Rojas, Derecho Administrativo, pp. 1141-43. Decree of Dec. 29, 1965. 60. Serra Rojas, Derecho Administrativo, pp. 1140-41. An amparo suit is brought in Federal Court by an individual seeking redress for the impairment of his fundamental human rights, or individual guarantees, as established by the first twentynine Articles of the Mexican Constitution. The subject of the complaint may be a law or legislative act, the act of a government official or agency, or the act of a judge or court, in civil, penal, labor, or administrative, including fiscal, matters. In certain cases, interested third parties may intervene to oppose the complaint. The redress granted affects only the individual complainant in the suit at hand; it does not in any way modify the law or act complained of. See generally, Héctor Fix Zamudio, El Juicio de Amparo (México, D.F.: Editorial Porrúa, 1964). For a description of amparo, in English, see Alexander T. Edelmann, Latin American Government and Politics (Homewood, 111.: The Dorsey Press, 1965), pp. 467-69. 61. Serra Rojas, Derecho Administrativo, p. 1143. For a probing analysis of the difficulties raised by these different appeal procedures, see Héctor Fix Zamudio, "Reflexiones sobre la Naturaleza Procesal del Amparo," Revista de la Facultad de Derecho de México, 24:999-1006 (1964).

FINANCING

URBAN

DEVELOPMENT

Apparently some doubt has existed whether or not the Fiscal Court is bound by the Supreme Court's jurisprudencia,62 Jurisprudence is established in Mexico by five consecutive Supreme Court decisions holding the same way on the same question of law.63 Individual decisions, while dispositive of the particular cases in which they are rendered, suggest the direction of judicial thinking but have no binding effect on future controversies. Generally speaking, even Supreme Court jurisprudence is binding only on the federal and state courts specified in the Amparo Law, not on the executive branch as a primary legal obligation.64 This conclusion has provided a basis for the view that the Fiscal Court, as an administrative tribunal, is not directly affected by federal jurisprudence. However, the Supreme Court has held at least once that the Fiscal Court is bound by the law as interpreted in the Supreme Court's jurisprudence. 65 As indicated in Chapters Two and Three, Supreme Court decisions have significantly influenced the DDF's tax administration. In other areas of urban development, it appears that judicial review has been of little importance in reforming administrative practices. Several lawyers and land use planners have suggested that amparo proceedings serve merely to delay major municipal projects. It is said that a property owner whose land is condemned is able to delay a municipal project for several years through an amparo suit challenging both the compensation award and the legality of the project itself. Administrative officials, frustrated by such delays, are said to withhold information on public projects in order to avoid amparo suits by dissatisfied residents. Such reports do suggest the need to reexamine amparo procedures in the urban development field. The mere allegation of insufficient compensation would not seem to justify a court's enjoining the project itself pending a decision on the compensation issue. Where the legality of the entire undertaking is challenged, it would seem appropriate to 62. Serra Rojas, Derecho Administrativo, p. 1136, citing a Fiscal Court o p i n i o n to the effect that such jurisprudence is not binding o n the Court. 63. A m p a r o Law (Ley de Amparo), Arts. 193, 193 bis, D.O., Jan. 10, 1936; Organic Law for Articles 103 and 107 of the Federal Constitution (Ley Orgánica de los Artículos 103 y 107 de la Constitución Federal), D.O., Jan. 10, 1936. See discussion in Ignacio Burgoa, El Juicio de Amparo, 5th ed. (México, D.F.: Editorial Porrúa, 1962), pp. 730-37. 64. Interview with Lic. Héctor F i x Zamudio, July, 1965. 65. A m p a r o Administrativo en Revisión 3404/49, "Escocia, S.A.," D e c i d e d Oct. 20, 1949, Sem. Jud. 102:540 (1950). For a recent Fiscal Court a c k n o w l e d g m e n t of the binding quality of Supreme Court jurisprudence, see Juicios N o s . 725/57 (Pleno), D e c i d e d Jan. 8, 1964, and 4 6 9 1 / 5 5 (Pleno), D e c i d e d Jan. 15, 1964 (Tribunal Fiscal de la Federación).

MEXICO'S

FEDERAL

DISTRICT

develop a summary procedure designed to check administrative compliance with required procedural formalities prior to the implementation of municipal programs. In most cases, compliance with appropriate procedural safeguards should be adequate assurance that the project is within the agency's authority. Where the existence of a valid governmental purpose for the project is challenged, a court might find that open consideration of the agency's plans provides sufficient protection to municipal residents to deny an injunction restraining the project's continuance.66 Another problem associated with amparo suits in the urban development field is the absence of an administrative tribunal like the Fiscal Court to translate Supreme Court jurisprudence into primary obligations for administrative officials. One view holds that constitutional jurisprudence is binding on administrative officials; this view seems not yet to be shared by the executive branch. For example, the DDF's zoning regulation provides that the crucial factor in limiting "nonconforming" uses in the District's "urban area" is whether or not they produce a molestia, defined as a nuisance to neighbors caused by noise, vibration, smoke, dirt, smell, etc. 67 Although the Public Works Office, through its Plano Regulador Branch, adheres to this nuisance standard in investigating neighborhood complaints, Plano Regulador, which also certifies that proposed uses conform with the plan before the Public Works Office issues building permits, applies quite different standards in deciding whether or not to approve a proposed land use in the first place. Interviews with zoning administrators indicate that Piano Regulador considers not only whether or not a proposed use will inconvenience the community at large but also whether or not the use is economically justified. Thus an application to locate a supermarket in a residential area will be evaluated in terms of Piano Regulador's estimate of the region's need for another market. Since both the zoning plan and Piano Regulador's administrative standards remain unpublished, permissible land uses are determined by ad hoc decisions based 66. In Bogotá, Colombia, s o m e safeguards are provided by entitling property owners to appoint an architect or engineer (paid f r o m assessed taxes) to represent them w h e n municipal authorities budget for public works, apportion taxes, and expend the funds. Harvard Law School International T a x Program, World Tax Series, Taxation in Colombia, prepared by G. J. Eder, J. C. C h o m m i e , and H. J. Becerra (Chicago: C o m m e r c e Clearing House, 1964), p. 135. 67. Z o n i n g Regulations (Reglamento de las Fracciones I, V, y VII, del Artículo 3 de la Ley de Planificación y Zonificación del Distrito Federal), Arts. 6, 7, 16, D . O . , Feb. 4, 1941.

FINANCING

URBAN

DEVELOPMENT

largely on "administrative discretion." 68 The DDF's planning authority, discussed in Chapter Five, infra, might provide the basis for an argument that the Public Works Office may control land uses without reference to the zoning plan adopted by the Planning Commission. Whether Piano Regulador operates under the nuisance test of the regulations or asserts an independent zoning authority, the exercise of administrative discretion on such an ad hoc basis would appear vulnerable to amparo review as a violation of Articles 14 and 16 of the Constitution. Article 103 of the Mexican Constitution and Article 1 of the Amparo Law provide that amparo protects only those "individual guarantees" specifically enumerated in the first twenty-nine articles of the Constitution. The effort to broaden the amparo into a general writ for controlling nearly all governmental abuses of power has focused primarily on Articles 14 and 16 of the Constitution. Article 14 provides, in part: "No law shall be given retroactive effect to the prejudice of any person. No one shall be deprived of life, liberty, property, possessions or rights, except by a trial held before previously established courts, in conformance with laws issued prior to the fact, and in compliance with the essential requisites of procedure. . . . In trials of a civil nature, the final judgment shall be in conformance with the letter, or the judicial interpretation, of the law, and in the absence of the latter, it shall be based on general principles of the law." Article 16 provides, in part: "No one shall be molested in his person, family, home, papers, or possessions except on written order of the competent authority establishing the legal cause of the proceeding." Article 14, paragraph 4, permits review of civil, mercantile, and administrative decisions which allegedly conflict with relevant statutes. 69 The constitutionality of such statutes, regardless of their reference to any particular individual guarantee, has also been thought subject to attack on the basis of Article 14, paragraph 2. Article 16 has been seen as providing even broader protection of constitutional limitations without reference to particular individual guarantees. The phrase "competent authority" opens the way for judicial review, on the basis of the entire constitution, of an official's power to undertake a given action. Moreover, it has been argued that Article 16's reference to the "legal cause" of an official proceeding justifies judicial scrutiny of both the statutory authorization for an action and applicability of the statute or 68. Interviews with Piano Regulador officials, Feb. 1965. 69. See Burgoa, EI Juicio de Amparo, pp. 226-34.

MEXICO'S

FEDERAL

DISTRICT

regulation to the case at hand. Thus an agency must state both its standard and its reason for applying that standard to the complainant's case.70 The Supreme Court has reportedly overturned Piano Regulador's refusals to approve proposed uses for reasons other than the probability of nuisance. However, zoning officials insist that they do not consider the possibility of judicial review in reaching zoning decisions, for they assert that such decisions are rarely challenged in court. 71 Because amparo suits have not always assured fair and consistent administrative practices, several commentators have proposed the creation of a general administrative tribunal in Mexico.72 Until recently, the movement toward such an institution took the form of proposals to broaden the Fiscal Court's jurisdiction. It appears that recent amendments (Decree of Dec. 29, 1965) which grant the Fiscal Court jurisdiction over federal and DDF tax controversies and over fines arising out of violation of any federal or DDF law, not merely federal tax laws, should serve to overcome many of the difficulties encountered in the past with amparo suits. One aspect of the proposed reform requiring attention is the effect of an expanded jurisdiction on the Fiscal Court's operating procedures. Should the entire Court, or merely one or two specialized panels, be charged with reviewing, for example, the DDF's zoning or subdivision determinations? This and other questions must be decided in the near future.

70. Burgoa, Las Garantías Individuales, 3rd ed. (México, D.F.: Editorial Porrúa, 1961), pp. 441-42. 71. Interviews with Plano Regulador officials, Feb. 1965. 72. See, e.g., Alfonso Nava Negrete, Derecho Procesal Administrativo (México, D.F.: Universidad Nacional Autónoma de México, 1958), pp. 302-03; Dolores Heduán Virués, Tribunal Fiscal, pp. 317-19; Serra Rojas, Derecho Administrativo, p. 1116.

CHAPTER T W O THE

REAL

PROPERTY

TAX

FINANCING

URBAN

DEVELOPMENT

The urban property tax is the major purely local tax of the Federal District, as it is of most local governments in the United States, the United Kingdom, and a few other countries. The problems and practices of property tax administration in the Federal District are not unlike those of foreign jurisdictions. This chapter describes and analyzes the District's property tax, applying tools of analysis, such as assessment/sales ratios, which have been effectively employed elsewhere. It considers the desirability of various changes and suggests some reforms. In general, however, the District's property tax is an effective tax instrument which has helped provide revenues to finance local governmental expenditures which have grown with extreme rapidity. The practice and experience of the Federal District can provide lessons to officials in other Latin American cities in the use of the property tax.

THE

I

REAL

PROPERTY

TAX

DESCRIPTION

The Finance Law of the Federal District of Mexico provides for the taxation of real property. This chapter briefly describes the relevant portions of the law and then analyzes the operation and impact of the property tax (impuesto predial) in the Federal District. 1

A. TAXABLE PROPERTY The real property tax is an annual tax on the value of real property located in the Federal District. All property, unless specifically exempted, is taxed. Exemptions may be partial or total and temporary or permanent. The tax base includes all privately owned property located in the Federal District, except the following exempted by Article 42 (I): 1. property used exclusively to provide free, government approved public welfare or educational services; 2. ejidos, when used exclusively for agriculture, though they are subject to Federal Government taxes not examined in this book; 3. cemetery land actually in use as burial plots. Also excluded from the property tax base are: 1. properties owned by the government of the Federal District or the national government (Art. 31); 2. properties belonging to the National Autonomous University of Mexico, or to private or public welfare agencies which render services to the general public, but properties of Spanish and French welfare agencies and of other agencies which limit their services to a particular national group are taxable (Art. 42 (I)); 3. properties owned by a foreign government and used exclusively for its diplomatic representatives in Mexico, provided reciprocity is extended (Art. 42 (I)). Total temporary exemptions are authorized in the following cases where construction was commenced or completed after May 14, 1954: 1. 15 years, for homes, dwellings, or apartment buildings com1. Relevant portions of the Finance Law of the D D F (Ley de Hacienda del Departamento del Distrito Federal), D.O., Dec. 31, 1941, appear translated in the Appendix. All references to Articles in the text and footnotes of this chapter are to this law unless otherwise specified.

FINANCING

URBAN

DEVELOPMENT

pleted before December 31, 1961, which rent for M$350 or less per dwelling unit, or which have a similar estimated rental value if occupied by the owner or gratuitously;2 2. 15 years, for homes completed before December 31, 1961, which have a total value of M$80,000 or less, provided such homes were constructed and sold by a credit institution, or were constructed with a loan not exceeding M$60,000 obtained from such an institution;3 3. 15 years, for condominiums completed before December 31, 1961, provided each unit sells for M$60,000 or less, or is rented for M$350 or less a month; 4 4. 20 years, for multifamily dwellings completed before December 31,1966, which contain four or more dwelling units, provided each unit rents for M$350 or less a month; 5 5. 30 years, for homes or dwellings completed before December 31, 1966, which are built for and, without charge, are exclusively inhabited by workers of a given commercial enterprise. 6 Partial, temporary exemptions are authorized in the following cases: 1. government employees, who borrow from ISSSTE in order to purchase or build houses, receive an exemption equal to twice the value of the loan, or M$200,000, whichever is less. The exemption terminates when the loan is entirely repaid, when the building is sold or transferred, or if the building is used for unauthorized purposes (Art. 42 (II) ); 2. purchasers of houses built by the DDF receive a 50 per cent exemption until all payments are made, typically for 10 to 20 years (Art. 31, and see discussion in Part II-A, infra); 3. properties in regions designated as "worker communities" (colonias proletarias) are exempted from half of the property tax for 10 years (Art. 42 (IV)). Article 42 (III) grants partial permanent exemptions of 50 per cent or 20 per cent to properties officially designated as monuments, by virtue of their location or history or of their architectural or artistic 2. Tax Exemption Law for Popular Housing in the Federal District and Territories, (Ley de Exención de Impuestos para Habitaciones Populares en el Distrito y Territorios Federales), Art. 1, D.O., Dec. 31, 1954. 3. Ibid., Art. 5. See ibid., Art. 6, for reduction of exemption depending on loan funds as a percentage of the investment or, in the case of sale, the ratio of the unpaid balance of the loan to the sale price. 4. Ibid., Art. 10. 5. Ibid., Art. 4. 6. Ibid., Art. 8.

THE

REAL

PROPERTY

TAX

merit, and to certain sports facilities. An improved real property officially listed as historically significant pays 50 per cent of the tax assessed. A property officially listed as a monument for its architectural or artistic value pays 80 per cent of the tax. (In exchange for tax relief, however, the rights of the owner are limited. For example, one official stated that the federal government has the right, seldom exercised, of first refusal when such property is offered for sale.) Properties used for playing fields or swimming pools, even if connected businesses are located on the premises, pay 50 per cent of the tax assessed. Added in 1959, this provision is intended to encourage sports; it is broad enough to exempt country clubs.

B. TAX BASE AND TAX RATES The property tax is levied on the basis of rents or appraised capital values, depending upon location, use, and whether or not owner occupied. At present about half the properties in the District are taxed on the rental basis and half on the appraisal basis, according to the impressions of officials. The appraisal basis is supposed to approximate market values. It applies to all property in the rural parts of the District, to all unimproved property in the District, to all property which is not rented or held for rent, and all property used for certain specified purposes, whether or not rented, such as factories and hotels (Arts. 36, 37, and 46 (IX)). Appraisals are made by the government (Art. 67, but compare Art. 61). The rental basis uses rents actually paid or, in certain cases, estimated rents. The rates of tax are 12.6 per cent of gross rents or 1.09 per cent of appraised value,7 but rural property, that is, property in the District not supplied with such urban services as water and sewage, is taxed under Article 41 at about half the 1.09 per cent appraisal basis rate applicable to urban properties. The tax rates have not been altered since 1941, although in 1949 the 15 per cent additional tax became a Federal District levy rather than a federal levy. Before 1941 property owners paid separately for garbage removal and some other urban services. The present odd rates seem to 7. Art. 41. These awkward rates result from history and multistep computations. The statutory rate on rental property is 12.6% of 87% of gross rents, while the rate on appraised properties is 1.26% of 75% of appraised value; but the resulting tax is increased by 15% in each case, Art. 931. See the description of the 15% additional tax in Chapter One, Part II, supra.

FINANCING

URBAN

DEVELOPMENT

have been obtained by consolidating these charges. The sevenfold increase in the yield of the real property tax in the last fifteen years, then, has been entirely a result of changes in the tax base—a reflection of both the great increase in property prices over this period and the improved efficiency of administration. The rates on rentals and appraised properties are equivalent if rents are capitalized at approximately 11.5 per cent per year. The property owner is generally responsible for paying the tax, but the possessor is liable when the owner cannot be found or when security title is held by another (Art. 30 (III)). Liability of the owner or possessor is personal (Art. 32). Derivative liability, and joint and several liabilities, exist in certain cases (Arts. 32-35).

C. ASSESSMENT: RENTAL BASIS Since 1941, the property tax has been levied on both rental and appraised value bases; previously only the latter was used. The property tax is computed on the rental basis when the property is wholly or partly held for rent, except for rural or unimproved urban properties and property such as: factories or warehouses, public entertainment or sports areas, hotels or guest houses, gas stations, sanatoriums, schools, and laboratories. The rental basis applies primarily to residential and commercial (office and selling space) properties, including those held in condominium form. 8 Taxpayers must report within 30 days any leases entered into or altered. They must also report any changes in the numbering or designation of premises or apartments previously reported, and any partitioning or combining of units (Arts. 47 and 48). Any change in the rent, even if specified in the contract, must be reported within 30 days after the change becomes effective.9 When the rent is a function of the lessee's income, the taxpayer must report in each January the rent received during each month of the previous year. The average of these rents is the tax base. On new properties, where the rent is on a percentage base, the provisional tax 8. The rental basis also applies in certain other instances, Arts. 38, 39, 50 and 52. See Art. 37 for a list of property subject to appraisal basis. 9. Art. 47. This system has produced a flood of rent declarations. In 1963 the Property Tax Office received more of these reports than all the other reports called for in the law together. See Tesorería del Distrito Federal, Informe General de Labores Por el Ejercicio de 1963 (México, D.F., 1964), p. 29. [Hereinafter cited as Tesorería, Informe, with fiscal year(s) indicated.]

THE

REAL

PROPERTY

TAX

base is the first monthly rent received by the lessor. It must be reported to the Treasury within 30 days. Any necessary adjustments are made in January when the annual report is submitted (Art. 47). In all other cases, tax on the rental basis is effective from the beginning of the twomonth billing period following the month in which the lease was entered into or modified (Art. 53). Condominiums, both residential and commercial, are also taxed on the rental basis even when not rented. Each owner of a unit in the condominium is billed and listed separately on the tax register. The tax takes effect with the first bimonthly tax payment after the provisional notarization of the deed forming the condominium. If the condominium is formed before completion or occupancy of the building, the tax is levied on the land only. The tax is due from the beginning of the bimonthly billing period which begins after each of the apartments, offices, or commercial premises is completed, or after each is occupied if occupied before completion (Art. 39). Originally, the law did not provide for situations where occupancy preceded completion. As a result, many large buildings were left unfinished for long periods of time, although almost fully occupied, so that the tax was due on the bare land only. If the Treasury doubts the veracity of a rent declaration, it may investigate. If investigation reveals an invalid lease which purports to cover the whole property, i.e., that the property is not legally subject to a lease, then the property is appraised, and the appraised value is taken as the tax base. If the lease is valid, but covers only part of the property, the Treasury may estimate rents for the parts not covered and add them to the reported rent. Finally, if the lease is valid and covers the entire property, but the rents reported and contracted for are not those actually paid, the rental for the entire property is estimated (Art. 50). The Treasury ignores faked leases as evidence. In such cases it may refer the case to the Public Ministry (Ministerio Público) for the application of criminal sanctions (Art. 51). The criminal penalties in fraud cases range from 3 days to 2 years in jail when the amount involved is less than M$50,000, and from 2 to 9 years in jail for greater amounts (Art. 983). Since no one has been sent to jail for some years under these provisions, it seems likely that these sanctions deter only the uninformed. If the owner occupies part of the premises, or if others use the premises gratuitously with the permission of the owner, the Treasury uses the rent formerly paid as the estimated rent for that part of the property (Art. 55).

FINANCING

URBAN

DEVELOPMENT

Recently adopted rental estimation rules specify the following procedures: First, the value of the property is appraised by ordinary methods, as described in Parts I-D and I-J, infra. Then, as shown in Table 17, the "gross rent" is computed by multiplying the value by a percentage rate which varies for different kinds of property; finally, the "gross rent" is reduced by a certain factor, which also varies for different kinds of property, to get the tax base.10 These rules supplement Articles 36, 41, and 46 (X), which authorize computation of the tax on the basis of rents which the property is able to produce. The Supreme Court declared these articles unconstitutional as a violation of the "equitable and proportionate taxation" clause insofar as they allow the tax authorities uncontrolled discretion. 11 Although such decisions do not compel the Treasury to modify its procedure (see Chapter One, Part IV, supra), officials saw some merit in the Supreme Court's contention that existing standards for estimating rents were inadequate. The result, albeit with considerable delay, was the adoption of the rules described above as part of the Appraisal Manual (Instructivo para la Valuación de Predios). Articles 62, 63, 75, and 76 require property owners or occupants to permit appraisers and estimators free access to properties, but sanctions are seldom employed to enforce these provisions.

TABLE 17. RENT ESTIMATION, CAPITALIZATION RATES AND DEDUCTIONS.

. j .. Land Use

Commercial Apartments Most Houses Luxury Houses

Gross Rents % of Appraisal

Tax Base % of Gross Rent

9.5-10.0 8.5-9.0 8.0 6.5-7.5

62-70 70-75 75-80 75-80

Source: Calculated from Appraisal Manual, Instructivo para la Valuación de Predios en el Distrito Federal, Arts. 82, 59, D.O., Nov. 27, 1964.

10. Instructivo para la Valuación de Predios en el Distrito Federal, Arts. 82, 59, D.O., November 27, 1964. [Hereinafter cited as Appraisal Manual.] 11. Amparo en Revisión 2156/1956, Gregorio Contreras, Decided Oct. 17, 1956, [Nov., 1958] BIJ 719.

THE

REAL

PROPERTY

TAX

D. ASSESSMENT: APPRAISAL BASIS The property tax is levied on the appraisal value of rural property (property wherever located which is not provided with such urban services as sewage disposal or water) whether or not rented, urban property which is not rented, and urban property which lacks permanent improvements or is devoted to specified uses. Article 37 (II) specifies "uses" including entertainment, public sports, hotels, factories, gas stations, and schools. Five years after a property has been appraised, the Treasury may reappraise it, but is not required to do so. The Treasury may reappraise sooner if improvements are added or modified or if the property is sold at least one year after the previous appraisal, but, here again, reappraisal is not compulsory in either case. Pre-1959 law contained no provision for periodic reappraisal. Reappraisals cover both land and improvements (Art. 68). The value of improvements and the value of land are estimated separately by different techniques and by different branches of the Property Tax Office. Article 67 leaves it to the Treasury to determine the methods and standards of valuation. This task has been delegated to the Property Tax Office and, in turn, to the Technical Branch. Article 66 requires that the valuation encompass the entire property and that separate values be given for land and improvements. The on-site appraisal is conducted by the Valuation Branch of the Property Tax Office. The Technical Branch estimates land value per square meter for each block of each street in those parts of the city which have been cadastered (Appraisal Manual, Art. 8). In the uncadastered regions, appraisers of the Valuation Branch estimate land values largely on the basis of the availability of urban services, location, and size (Appraisal Manual, Art. 9). In the cadastered regions, the Technical Branch also considers information on sales prices (routinely supplied to the Property Tax Office under the real property transfer tax), bank appraisals, newspaper advertisements, and important new public works in assigning the land values per square meter for a particular block. These values guide the appraisers, who may adjust for special factors set out in the Appraisal Manual, completely revised in 1964. It is divided into two parts. One deals with land, the other with improvements. The land part shows in detail how the land values determined by the Technical Branch are to be used in valuing each lot. The section dealing with improvements contains detailed descriptions of various kinds of im-

F I N A N C I N G

URBAN

D E V E L O P M E N T

provements and the way in which they are to be valued in estimating the overall replacement cost of improvements. Appraisers have greater discretion in setting land value in uncadastered regions, although even there the Treasury has issued value guidelines for areas larger than one block. The Technical Branch defines a typical lot (predio tipo or lote tipo) for each of the 63 regions into which the Federal District is divided for property tax purposes. This lot is used as the standard against which other lots of odd sizes or shapes or lots with special attributes are valued. Improvements are valued on the basis of replacement cost less depreciation for property tax purposes. 12 The Appraisal Manual sets out ranges of estimated construction costs per square meter for nine types of buildings.13 These estimates have been amended twice since 1954, most recently in 1962. Various decreases (e.g., for disrepair, poor materials) in the estimated costs of construction may be made. In all, there are more than 200 factors mentioned in the Manual which the appraiser may have to consider on different properties. Valuation procedure is discussed in greater detail in Part I-J of this chapter.

E. A S S E S S M E N T : S P E C I A L

SITUATIONS

1. CHANGES OF BASIS

If property taxed on the rental basis comes to be occupied wholly by its owner or to be let gratuitously to third parties, the tax basis is changed to appraisal value. Conversely, if an improved property previously taxed on the appraisal basis is wholly or partly rented, the tax basis is changed to rental. In either case, Articles 47 and 54 require that the change in occupancy be reported promptly and that the new basis be applied with the next bimonthly bill. Such changes of basis occur frequently.

12. Those portions of the Appraisal Manual which deal with improvements resemble appraisal manuals used in property tax jurisdictions in the United States. See, for example, State of New York, State Board of Equalization and Assessment, Assessors Manual, Vols. I, II (Albany: 1957). 13. Appraisal Manual, Art. 67. For accompanying cost tables see Adjustment and Improvement Unit Value Tables (Tablas de Castigo y Cuadros de Tipos de Edificación y sus Valores Unitarios), D.O., Feb. 13, 1965. See also Part I-J., infra.

THE

REAL

PROPERTY

TAX

2 . DIVIDING AND JOINING OF P R O P E R T I E S

When properties are divided or combined, buyers and sometimes sellers must report the change to the Treasury within 15 days. If the basis of taxation changes, the new basis is effective with the first bimonthly bill. Divided properties are taxed as separate properties (Arts. 56, 57, 58, 70, 71, 106). 3 . SUBDIVISION OF U N I M P R O V E D L A N D

When unimproved land is subdivided, the developer, after securing approval of the Department of Public Works, must submit plans to the Treasury and ask for cadastral boundaries. He must also dedicate a portion of the land to the Federal District for streets, parks, and schools. He must notify the Treasury of any subsequent changes in plans and inform the Treasury when installation of public works (urbanización) is complete. The Treasury must assign each lot a property tax number within 15 days after it receives plans. When public works are installed, the Treasury registers values and indicates the tax due on each property. The subdivider is required to pay property tax on each lot until it is sold. The Treasury may collect back taxes on unreported subdivisions, quite apart from other penalties that may be imposed (Arts. 79-87). Despite legal provisions authorizing subdivisions, administrative decrees or practices have made it almost impossible for any subdivisions to be made within the Federal District in recent years. This statement, substantiated by numerous Mexicans, reflects policies intended to slow the rapid growth of population in the Federal District, policies reflecting concern over water supply, especially from wells which may cause further sinking of the city's ground level. The Property Tax Office reports that it issued new cadastral numbers to lots in subdivisions (fraccionamientos) as follows: 27,339 in 1960; 5,274 in 1961; 14,473 in 1962; and none in 1963.14 These statistics are consistent with the interpretation that authorizations of new subdivisions stopped sometime during 1962 (or 1961 if there were delays in issuing new numbers).

14. See Tesorería, Informe (1960), (1961), (1962), (1963).

F I N A N C I N G

URBAN

D E V E L O P M E N T

F. TAX PAYMENT Two offices handle property tax collections. The Collection Office (Dirección General de Recaudación y Pagos) receives payments. The Enforcement Office (Dirección General de Rezagos y Ejecución) handles delinquent accounts. Both offices deal with other taxes as well. Although the property tax is assessed annually, payment is usually made in six bimonthly installments, beginning in January. The 12 peso minimum tax required under Article 41 must be paid in January. On written request, taxpayers may pay the sum due for the whole year before the end of February. Early payment does not bar collection of additional amounts which may become due later in the year as a result, for example, of a new base or appraisal, per Articles 96 and 16. Formerly, the Treasury allowed discounts of 5 per cent or 10 per cent to those who prepaid, but it dropped them in 1954. Prepayment lets the taxpayer stand in line once instead of six times, but brings no other apparent advantage. Taxpayers, as a matter of course, do not use the mails for prepayment or any other payments. Discounts are still given for prepayment of cooperation fees (Art. 425) and the planning tax (Art. 400). Upon the taxpayer's request, the head of the Enforcement Office can authorize any tax payment to be further spread over three monthly installments, the first at the time of the request, the second after one month, and the third after two months. The Subtreasurer may authorize further spreading over 12 monthly installment payments in special cases (Art. 18). When collection action is necessary, additional fees are charged, a 2 per cent per month surcharge which can accumulate up to 48 per cent of the unpaid obligation, plus expenses of any attachment proceeding (Arts. 22 and 768). Fiscal attachment, imposed to obtain payment of an already determined amount of property tax, affects the property itself, irrespective of who the owner or possessor may be (Art. 98). However, a personal liability for the tax exists as well (Arts. 32, 34, 35), and action may be taken against the personal or other real property of the taxpayer (Arts. 762, 763, 772). The Treasury initiates enforcement proceedings after taxpayers are three or more payments behind, that is, six months or more in arrears. A fiscal marshal (actuario fiscal) visits the property to demand payment from the delinquent owner, if he can be found, or from other suitable persons (Arts. 761 and 764). In 1963, the 160

THE

REAL

PROPERTY

TAX

fiscal marshals paid over 36,000 visits in connection with the property tax alone. 15 If the delinquent pays, the proceeding is concluded (Art. 765). If he does not pay in full, the fiscal marshal serves him or another suitable person with a summons informing him that within 5 business days he can pay or oppose the proceeding. The taxpayer may oppose the proceeding under Articles 757 or 766 because he has already paid, because the Treasury has mistakenly set up two accounts for the same property, because the statement presented is incorrect, or because the statute of limitations bars collection of this debt. Furthermore, under Art. 766, if the taxpayer neither opposes nor pays, he must appear personally or be represented at the attachment hearing held at the Treasury; if he does not appear, the proceeding goes on and has full legal effect. When property is attached, all accessories and appurtenances are included. The Treasury may (under Art. 767) name a trustee (depositario) to administer the property and supervise any rentals, arrange leases (though not at rents less than those formerly paid, unless specially permitted), collect rents, and make ordinary expenditures for the maintenance and operation of the property. The property will be attached and operated in this way for a period sufficient to pay off the back taxes, those due for the next year, and any expenses of enforcement (Art. 768). Articles 783 through 801 set out procedures for foreclosure and sale to satisfy unpaid taxes. However, officials in the Treasury report that they have seldom used these procedures in property tax cases. At one time it was thought that publicity resulting from foreclosures would undermine taxpayer relations. More recently, partly because of one or more instances of ineptness in following prescribed procedures, the Treasury has been reluctant to use foreclosures; an erroneous step or a defective notice could expose the Treasury to large liabilities in the future. No amount of supervision can preclude error; but the enactment of a very short statute of limitation (say, six months) for challenging foreclosure could prevent large liabilities from accruing. Article 99 forbids notarization of any document involving properties located in the Federal District unless all taxes and fines have been paid. If nonpayment occurs because the property is not registered on the tax roll as a result of an error by the Treasury without any fault by the taxpayer, Article 99 allows the Treasury to authorize notaries to act. If the property is unregistered for reasons attributable to the 15. Tesoreria, Informe (1963), p. 80.

FINANCING

URBAN

DEVELOPMENT

taxpayer, Article 100 empowers the Treasury to collect five years' back taxes, unless the taxpayer can show that improvements are less than five years old, in which case improvements are taxed only for the period since their completion. Lastly, private agreements which shift liability for the property tax are without any legal effect for tax purposes (Article 102). For example, if it is agreed that the lessee should pay the tax and he does not do so, the lessor is liable as far as the Treasury is concerned. Of course, he may sue the lessee for breach of contract.

G. APPEALS Taxpayers may desire a review of or an appeal from a property tax determination for several reasons. There may have been error of calculation, identification, or location; there may be disagreement over valuation or over exemptions; there may be a question of interpretation; or the Treasury may have illegally raised the amount of tax due. In cases of clear error the administration can, under Article 25, change a determination that it has already made. But private taxpayers rarely make such a claim. Most property tax disagreements between taxpayers and the Treasury concern valuations, exemptions, and reported rents, and a few cases raise questions of interpretation. These disagreements and questions are handled by the courts. The taxpayer may contest an adverse administrative decision of the Treasury by an appeal to the Fiscal Court (Tribunal Fiscal de la Federación). 16 The amparo procedure can be used to move the case from the Fiscal Court to the District Court and from there, in certain cases, to the Supreme Court of Mexico. (Amparo is discussed in Chapter I, Part IV, supra.) Decisions of the Fiscal Court affect only the case in question. Reports of decisions are not written to serve as precedents for decisions in other cases, and in fact relatively few are published. They do, however, guide lawyers, and the Treasury takes account of such decisions and reviews their implications carefully, especially if adverse. 16. The procedure is laid down by the Federal Fiscal Code (Código Fiscal de la Federación), Arts. 168-204, D.O., Dec. 31, 1938. See also Art. 160. Until 1946, a special board of appeals handled such cases for the Federal District, but it was found that the Federal Fiscal Code gave authority to the Fiscal Court, which has since handled them. The Fiscal Court is discussed in Chapter One, Part IV, supra.

THE

REAL

PROPERTY

TAX

The taxpayer must guarantee the amount of tax before he can go to court (Art. 24). He may pay under protest, post bond or a mortgage, or deposit money in the Nacional Financiera.17 By paying under protest, the taxpayer escapes all surcharges if he loses the case. The surcharge is ordinarily 2 per cent per month for not more than 24 months. However, by paying, the taxpayer loses the use of his money for the period it takes to litigate the lawsuit. Because of the high rates of interest and the moderate inflation in Mexico, most taxpayers prefer to pay only when the decision goes against them. The Fiscal Court hears between 200 and 300 cases per year on property tax matters, which is somewhat less than 10 per cent of its total case load. 18 Taxpayers initiate all suits, frequently to press complaints about newly increased assessments. Somewhat less than half of all cases involve properties assessed on the estimated rental basis. In these cases the Treasury argues that it can use this basis because rental contracts have not been submitted on time, or declared rents are impossibly low. Taxpayers allege that rents estimated by the Treasury are higher than actual rents. The Fiscal Court has a long-standing rule that the Treasury bears the burden of proving that declared leases are fraudulent. The Court also holds that owners have a right to rent properties for any amount, however low. The Court dismisses some cases on technical grounds; some procedural requirement may not have been followed, or the action may have been brought to court too soon or too late. Pretrial settlements occur in many other cases. The taxpayers win about 80 per cent of litigated cases involving properties assessed on the rental basis. The Fiscal Attorney handles all litigation on behalf of the Treasury (Chapter One, Part III-B, supra). In each case pending before the Fiscal Court, he sends one of the five technical experts (engineers or architects) on his staff to appraise the litigant's property. If the expert 17. Nacional Financiera is the dominant government owned financing corporation. See Calvin P. Blair, "Nacional Financiera—Entrepreneurship in a Mixed Economy," in Raymond L. Vernon, ed., Public Policy and Private Enterprise in Mexico (Cambridge, Mass.: Harvard University Press, 1964). Also, see Robert T. Aubey, Nacional Financiera and Mexican Industry (Los Angeles: Latin American Center, University of California, 1966). 18. The data in this paragraph is based on an enumeration of the case load of two of the Fiscal Court judges for two years. During this time the two judges heard 670 cases. Of these, 48 dealt with property tax matters, 15 of which involved properties assessed under the rental basis. Taxpayers won 12 of these cases; the Treasury won 3. This information was supplied by the President of the Fiscal Court, Lie. Carlos del Río Rodriguez.

F I N A N C I N G

URBAN

D E V E L O P M E N T

agrees with the taxpayer, then the Fiscal Attorney may request the Property Tax Office to change its valuation. If the expert submits a value between the estimate of the taxpayer and that of the Property Tax Office, the Fiscal Attorney attempts to reconcile the parties around the estimate of his expert. If a question of valuation reaches trial, the Fiscal Court under Article 112 appoints an independent appraiser, usually one employed by some mortgage bank in the District, to act as a referee. (See Part I-J, infra.)

H. PENALTIES Fines (Article 113), together with the infractions to which they apply, are as follows: I. For late filing of any required report, from M$10 for being 30 days late to M$300 for being six months to one year late. 2. M$301 to M$5,000: if no reports are filed at all; if the rents reported are less than the actual rents, even if those reported are specified in the lease; if contracts for rental or transfer of property are falsified in any way affecting the property tax; if the Treasury is obstructed in or prevented from carrying out appraisals or estimates of rents; if any cadastral work is obstructed; if notaries affix their seals to documents when they are prohibited from so doing by the Finance Law; if judicial or administrative authorities do not inform the Treasury when they receive unstamped leases. 3. M$5,000 to M$ 10,000, if subdividers carry out any dealings in lots without the authorization of the Public Works Office. The taxing office concerned administers fines. If those fined do not pay, the matter goes to the Enforcement Office (Dirección General de Rezagos y Ejecución). If the fine is protested, it is reviewed by the Fines Revision Branch (Departamento de Revisión de Multas Fiscales) of the Fiscal Attorney's Office. The fines mentioned above are added to any taxes and other charges due. When there is a range of possible fines, the fining body determines the exact amount. If any infraction is committed three times or more by the same person with respect to the same property within one year, Article 116 doubles the previous fine. Infractions other than those specifically mentioned above are covered in Articles 118 and 715 through 741. Finally, if the infractions are fiscal crimes (delitos fiscales) the Treasury will use Articles 115 and 969 to lay a charge to this effect with the Public Ministry for prosecution. (Article 964 makes

THE

REAL

PROPERTY

TAX

intent an essential element of a fiscal crime.) Although the Finance Law authorizes the Treasury to maintain a body of Tax Police (Policia Fiscal) in order to obtain evidence in such cases, there have been no such agents for several years, and the regular staff of the Treasury now carries out any necessary investigations. 19

I. T H E P R O P E R T Y T A X O F F I C E : O R G A N I Z A T I O N A N D FUNCTIONS 2 0 1. PERSONNEL

The Property Tax Office employed about 1,600 persons in 1965, about one-fourth of whom were on "piece rate."

TABLE 18. PERSONNEL OF THE PROPERTY TAX OFFICE, 1 9 6 5 .

Branch

Full Time Employees Salary

Property Tax Office and Suboffice Valuation Topography Tax Roll Assessment Technical Records Coordination, Inspection, and Statistics Total

Part Time Employeesa

Hourly Rate

Salary

Piece Rate

Total

Hourly Rate

11

2

10

2

0

25

38

26

29

15

66

174

100

48

35

21

227

431

96

70

90

49

0

305

99

42

166

30

116

453

21

6

10

4

14

55

23

54

44

52

0

173

2

3

2

3

0

10

390

251

386

176

423

1626

Source: Correspondence with Lie. Octavio Calvo, Treasurer of the Federal District, N o v e m b e r 25, 1965. "Includes some full time employees w h o work overtime.

19. Art. 969. See also T a x Police Regulation ( R e g l a m e n t o de la Policía Fiscal del D.F.), D.O., July 18, 1951. 20. T h e organization is set forth more fully in Departamento del Distrito Federal, Gráficas Departamentales y Funcionales de la Tesorería del Distrito Federal (México, D . F . , 1960).

FINANCING

URBAN

DEVELOPMENT

Salaries for employees of the Property Tax Office itself averaged U.S. $90 per month per full time equivalent worker. Average salaries ranged from U.S.$161 per month per full time equivalent worker in the Technical Branch to U.S.$68 in the Tax Roll Branch. 2. VALUATION BRANCH (Departamento de Avalúos y Estimaciones de Rentas) Approximately 174 employees including appraisers, both regular and part time, and other personnel staffed the Valuation Branch in 1965. By comparison, the City of New York employed about 300 assessors and assistant assessors in 1952 to cover a city with about twice the population of the Federal District. 21 An appraiser employed by the Property Tax Office must be either an engineer or an architect. He may be licensed or he may be a pasante (one who has finished course work but is not yet licensed) in his field. Surveyors must have completed the first two years of courses in civil engineering or be pasantes in engineering or architecture. In addition, the Office provides some on-the-job training, although there are no formal courses. Low salary scales for regular employees (about U.S.$120 per month) are circumvented by hiring part time employees on a piece rate basis. By working full time, these part time employees can complete 6 or 7 appraisals daily at U.S. $2 each. Paradoxically, salaried full time employees are driven by the low pay scales to find outside work and, as a result, really work part time. They average only two appraisals daily. 3. TOPOGRAPHY BRANCH (Departamento de Topografía) This branch carries out the surveying, calculating, and drafting work necessary for cadastral purposes. Surveyors sketch, describe, measure, and align all properties. The calculating section determines the area and location of every lot in the region being surveyed. Then the map section produces scaled drawings of each region and detailed maps of each block and lot. According to Articles 92 through 95, property owners must facilitate the work of Treasury personnel conducting survey work. Copies of 21. Robert M. Haig and Carl S. Shoup, The Financial Problem of the City of New York (New York: Finance Project of the Mayor's Committee on Management Survey, 1952), p. 143.

THE

REAL

PROPERTY

TAX

surveys are supplied to the owners concerned, or to possessors when appropriate. Copies may also be given to administrative and judicial authorities and to notaries. Property Tax survey records are not acceptable as evidence in establishing title. In addition, the Topography Branch is charged with verifying the boundaries of the Federal District and with establishing property lines in large public housing developments. 4.

T A X R O L L BRANCH

(Departamento de Padrones)

This branch assigns new account numbers and maintains the cadastral records. In accordance with Article 88, four tax lists are maintained, as follows: Numerical: account number of the property, taxpayer's name, location of the property, whether rental or appraisal basis, amount of base (valuation), amount of tax. (The account number system is such that the region and block in which the property is located are identified.) Alphabetical: taxpayer's name, nationality, and tax mail address; account number of property. Graphical: general and detailed cadastral maps of the District, showing each separate parcel. Exempt Properties: account number, taxpayer's name, location of the property, legal basis for the exemption, dates at which exemption begins and ends, as appropriate. (Properties on this list are also on the other three lists.) The Tax Roll Branch also deals with notaries, supplying them with copies of plans on request and receiving notices they are required by law to submit. Notaries in Mexico are restricted in number. Admission is a slow process. The 170 authorized notaries in the Federal District earn a high and virtually certain income, since most contracts, for example transfers of real property, require the notary's seal. Before he can authorize a contract of sale for real property, the notary must send copies of a property transfer declaration to the Treasury of the Federal District for the Collection Office, the Tax Roll Branch, and the general records. This declaration shows the name, nationality, and residence of the seller and buyer, the sale price, the location, area, and borders of the property sold, the tax account number, and the water account number if it is different. If a portion of a property is to change hands, more details must be supplied, including a sketch showing the exact

FINANCING

URBAN

DEVELOPMENT

nature of the division. A similar report for the real property transfer tax must include both banking and tax values; another declaration must be filed for the federal stamp tax, and still another for the Federal District Water Department. 5.

ASSESSMENT BRANCH

(Departamento de Liquidación y Giro)

This branch makes up tax bills and handles other charges connected with property taxes. All changes in the tax registers and in valuation eventually come to this branch, where adjustments in taxes are made and bills are prepared. The tax bill is dispatched and collected, however, by the Collection Office of the Treasury. Although the Collection Office has by far the largest staff in the Treasury, it nevertheless constitutes a serious bottleneck for property tax administration. (See Part II-E, infra, for further discussion of these problems and possible remedies.) 6.

TECHNICAL BRANCH

(Departamento Técnico)

This branch periodically revises estimates of land and improvement values. It also fixes the size and shape of the typical or standard lot (predio tipo or lote tipo) for each region. The Appraisal Manual is prepared here. This small branch, like the Valuation Branch, depends to a large extent on part time professional employees. J. NOTE ON APPRAISAL PROCEDURE The appraisal procedures of the Property Tax Office are described here, and then those of the banks. 22 Appraisal procedures and forms are designed and standard or unit values are established in the Technical Branch of the Property Tax Office. Appraisals or valuations of particular properties are made by the Valuation Branch. Although land and improvements may be appraised by one person, the procedures applied to each are entirely different. Within each cadastral region of the Federal District a typical lot (predio tipo or lote tipo) is chosen as a hypothetical standard size from 22. The material in this Note is based on the Appraisal Manual and its accompanying Adjustment and Improvement Unit Value Tables, as well as on the authors' personal observations and interviews in Mexico City.

THE

REAL

PROPERTY

TAX

which the value of any parcel of land can be determined. The typical lot is determined through a general study of prevailing frontage and depth measurements of properties in the region. Each block of each street in the region is then assigned a unit value, which is the value per square meter for land in a typical lot which fronts on that block. When this process is completed, the region is cadastered. The appraised value of land in the region is, with certain exceptions noted below, based on its dimensions, as compared with those of the typical lot, and on the unit value for the block on which it fronts. A typical industrial lot is used for all industrial properties and for all properties in certain specified industrial zones. In uncadastered regions, each property is appraised on the basis of its location, dimensions, proportions, and the availability of urban services. In rural zones used for agriculture and lacking urban services, no typical lot is employed, and properties are appraised on the basis of area and use. The provisions of the Appraisal Manual relating to the typical lot are detailed and logical. Generally, lots are classified according to their dimensions and shape. If the frontage of a lot is equal to or greater than the frontage of the typical lot and the depth is no greater than the depth of the typical lot, the appraised value is obtained by multiplying the actual area of the lot by the unit value for the block on which it fronts. If the frontage is less or the depth greater, or if both conditions exist, adjustment tables for depth and for frontage are used to reduce the unit value applied. This procedure relates a property's value to street frontage and thus roughly to urban services. Irregularly shaped properties are divided into as many regularly shaped properties as possible. Then an adjustment coefficient for irregularity, reducing the unit value, is applied to the remaining area. The same procedure is used for regular and irregular properties fronting on two or more streets. Additional provisions cover special cases. For example, the valuation of a corner property is increased by 15 per cent if the land use is residential and 25 per cent if it is commercial. Properties without frontage on a street are treated as though they were irregular portions of the nearest or servient frontal property. Private ways are accorded their own unit values. Special adjustments are accorded land in a state of excavation and land with a slope of 10 degrees or more. The methods of appraising improvements bear some resemblance to those in appraisal manuals used in United States taxing jurisdictions which use replacement cost less depreciation as a method of

F I N A N C I N G

URBAN

D E V E L O P M E N T

valuation. 23 Improvements or buildings are either classified or unclassified. Classified improvements, by definition, are predominantly residential and are divided into nine types depending on the age, usefulness and nature of the structure. (See Table 19.) Each type is described in great detail as to its structural characteristics, materials, and fixtures. Accompanying improvement unit value tables, which list all general characteristics, specify the minimum and maximum appraised value per square meter for each type. The absence or presence and relative importance of each characteristic helps the appraiser fix the value of improvements per square meter. Incomplete classifications are permitted for unfinished structures, as are dual classifications. Thus an "older, quality" building with modern fixtures could be valued at a higher rate than the maximum for type older, quality. Also, the areas are noted where each type is most likely to be found. The Appraisal Manual's unit values for improvements raise certain questions. They are presumably derived from a cost analysis of the various types of classified buildings, and are supposed to be revised periodically to approximate the "real cost" of construction, i.e., replacement cost. Tables of values were examined for 1954, 1958, and 1962. The values in the categories for older structures were the same for all three tables; it is doubtful that these values express replacement costs. All other values in the tables have been revised upwards. Table 19 shows the unit values by category for the three years. Although some alterations have been made in the list of more than 200 classifying characteristics, the reason for the variations, ranging from no increase for older buildings to about 70 per cent for residential buildings and 95 per cent for mixed use buildings, is not clear. Available statistics show that the cost of construction materials in Mexico City rose about 35 per cent from 1954 to 1960 and that the wages of construction workers in the Federal District rose by 33 per cent from 1955 to 1959. 24 These data show that the increases in unit values for modern structures have been greater than the increases in building costs. This change probably reflects a narrowing of the gap between unit values and actual construction costs, but may reflect a general upgrading of the quality of new construction. A limited comparison of unit values with actual construc23. See, for example, Vols. I and II of State of New York, Assessors Manual. Also, see John H. Keith, Property Tax Assessment Practices (Monterey Park, Calif., Highland Publishing Co., 1966) pp. 470-506. 24. Calculated from Secretaría de Industria y Comercio, Dirección General de Estadística, Compendio Estadístico: 1960 (México, D.F.: 1962) pp. 70, 126.

THE

REAL

PROPERTY

TAX

tion costs can be made. The average value per square meter of floor space for all buildings constructed in the Federal District during 1961 was M $ 4 2 9 . 2 5 The figure is subject to some downward bias because of undervaluations in declarations and to some upward bias because of the likely exclusion of some poorer quality dwellings from the basic returns. Unfortunately no breakdown by type of structure was available, but the figure approximates the range of values in Table 19.

TABLE 1 9 . APPRAISED VALUES PER SQUARE METER OF STRUCTURES (PESOS).

Type

Older: A. Ordinary B. Medium C. Quality Modern: D. Ordinary E. Medium F. Quality G. Luxury H. Mixed (residential-commercial, 1-5 stories)0 I. Mixed (6-10 stories)4

1962«

1962 increase over 1954 (per cent)*

1954

1958

30-80 100-150 160-250

30-80 100-150 160-250

30-80 100-150 160-250

0 0 0

100-150 200-250 300-350 400-600 300-400

125-200 225-300 350-450 500-700 400-600

170-270 320-430 450-650 700-950 600-750

76 67 69 65 93

500-600

600-800

800-1350

95

Source: Appraisal Manual, Instructivo para la Valuación de Predios en el Distrito Federal, D.O., Nov. 27, 1964; and prior versions issued by the Treasury of the D.F. on Jan. 15, 1958 and July 1, 1962. "Changed in 1962, these unit values became official in Feb. 1965, with the publication of the Adjustment and Improvement Unit Value Tables, as an Appendix to the current Appraisal Manual. b From midpoint to midpoint. c Until 1962, up to 6 stories. d In the intermediate year, a third class (J) of mixed buildings over ten stories was provided, with a range of 800-1,000 pesos per square meter.

25. Calculated from Comercio Exterior, Eng. ed., Sept., 1962 (Monthly publication of the Banco Nacional de Comercio Exterior, S.A.), p. 24.

F I N A N C I N G

URBAN

D E V E L O P M E N T

Unclassified improvements or buildings are mostly nonresidential and are either special or temporary. The latter includes structures which are manifestly unproductive in relation to land value (Article 46 (VI)). In addition to residential slum shacks, temporary improvements include the garages and repair shops consisting of a galvanized iron roof on a timber framework which are located throughout the District. Special improvements include buildings over 10 stories high, and museums, hospitals, warehouses, factories, markets, schools, hotels, etc. The characteristics of each structure which are comparable to those of classified structures help determine a general range for value per square meter, but the appraisal is derived from original construction costs for which the appraiser may request documentary substantiation. Special rules are included for the valuation of condominiums. For both classified and unclassified structures, all characteristics not included in the unit value tables are appraised separately. These include such installations as air conditioning and escalators and such external elements as walks, terraces, pools, and landscaped gardens. Also, all structures are entitled to a depreciation deduction of up to 30 per cent depending on their age and state of preservation. Typical appraisal practice is as follows. The appraiser first examines the cadastral file of the property to be appraised. If the property is in a cadastered region, he is given a copy of the cadastral plan and data on the area along with the work order. On visiting the property, he notes the area by floors as well as any modifications from the plan. If important modifications have been made, he requests the Topography Branch to alter the cadastral plan accordingly. If the building is classified or classifiable, he determines the appropriate unit value within the specified range. The type of construction and materials employed are most determinative, but particular attention is paid to the quality of fixtures and whether or not they were imported. In uncadastered regions, the appraiser sketches existing structures, noting relevant characteristics so as to relate them to the unit value tables. The official appraisal forms are multipurpose and appear to be adequate. However, at least one appraiser uses a form of his own design in which he need merely put a check mark in the appropriate space. A carefully designed official form of this nature could prove useful for relatively inexperienced appraisers. In one case, a liquor distillery appraisal, the appraiser first assured himself that he had an accurate plan of the site. For another, a small private house, a rough sketch showing the dimensions of the lot and

THE

REAL

PROPERTY

TAX

house sufficed. Each building of the distillery was described in detail on a separate form. On the form were recorded the materials, the quality and finish of construction, and the installed fixtures and equipment. Also recorded were general observations as to parking space, area devoted to office use, and any measurements taken to assist in making a cost analysis. In the cost analysis particular attention was paid to the size and quality of the structural steel beams. The appraiser was well acquainted with construction materials of all sorts and had little difficulty in appraising their quality and probable cost. The values assigned to the several buildings and to such outside improvements as fencing and paving were summarized on a final form which showed the total value of improvements. The value of the land was added to this total to obtain the total valuation estimate. The appraisal process took between three and four hours. For the private house, the appraiser spent only about ten or fifteen minutes. He made some rough measurements and took some careful notes. Of special interest was his reduction of unit value by a factor of 10 per cent to take into account the extent to which the building, a relatively new one, had deteriorated. Similar small allowances had been made for one or two of the distillery buildings. On the whole, judged by any practical standard, the procedure followed and the care taken to record details seem sound. The house and its land were valued at M$65,000 (U.S.$5,200), the factory and its land at 1.5 million pesos (U.S.$ 120,000). At present tax rates in the urban zone the tax due would be about U.S.$57 per year on the house and U.S.$1,244 on the distillery. The modesty of these amounts is due to low rates rather than to extreme undervaluation. The tax on older properties of similar value is no doubt still lower, because their appraisals tend to be more out of date. The Appraisal Manual, official forms, and cadastral information on file provide the principal basis for making new appraisals. While these materials provide a basis for adequate appraisals, the Property Tax Office recognizes that it should pay more attention to such outside sources of information as studies and surveys by real estate and management firms and by commercial banks. Banks also make many appraisals. These are made for mortgage loans and for other purposes. For example, BNH makes inheritance and gift tax appraisals for the Fiscal Court. Other institutions need periodic valuations of their investment property, and sellers of real property require valuations for stamp tax and transfer tax purposes. BNH charges M$1.25 per thousand plus M$60 for each valuation. The same

F I N A N C I N G

URBAN

D E V E L O P M E N T

fee is charged to public and private clients. A portion of this fee is paid to the appraiser according to a schedule of fees which is considered quite attractive. Thus, banks find that they can call on the more expert appraisers. There is some overlap of staff between BNH and the Treasury; three of the fourteen appraisers in BNH's valuation branch also worked for the Property Tax Office in 1962. Each BNH appraisal is examined by the Bank's valuation staff to discover errors and to check for consistency with other appraisals and is then endorsed by an officer of the Bank. The Bank also provides the basic valuation form. Until about four years ago, BNH made more appraisals than perhaps all other banks in the Federal District combined. Recently, other banks have become prominent mortgage lenders and make many appraisals for their own purposes and upon request of others. Appraisal practice at BNH, according to its staff, provides some contrast with that of the Property Tax Office. The objective of each valuation is to determine commercial or market value, or capital value. BNH does not usually use the valuations of the Property Tax Office because they are not often current. The appraiser must examine newspapers and other sources and make inquiries to determine the commercial values of land comparable to or near the property being appraised. A BNH appraisal takes into account current market prices for similar property and current replacement costs for construction. Actual or estimated rent is also employed in a capitalization of income approach, which is used primarily to check the results produced by the market value and replacement cost figures. All figures are worked out in great detail on the Bank's form. In estimating net rents, overall allowances are made to cover such expenses as collection, vacancy, water, maintenance, and repairs. For one-family houses the allowance is 25 per cent; for apartment houses and office buildings, 30 per cent. Other percentages apply to industrial and special-purpose buildings such as hotels and gas stations. In addition, a depreciation allowance is accorded, not for physical wear and tear, but for such detractions from commercial value as rent control or proximity to a low-grade hotel or bar or property emitting noxious fumes. Net annual rental income is most often capitalized at 8 per cent, the rate an individual can obtain by buying Nacional Financiera securities or by making other safe investments. This percentage is raised or lowered, respectively, in cases where rents are much higher than the market value of the building might justify, or where, for example, a

THE

REAL

PROPERTY

TAX

luxurious house yields a low rent in relation to the market value of the property. The tendency in these cases is to use a capitalization figure which results in a capitalized value approximating replacement cost. For a property subject to rent control, a valuation based on capitalization of income can easily be less than the value of the raw land. In such a case BNH often accepts as the property's commercial value a figure as low as 75 per cent of the land value, inasmuch as the buildings are usually old and poorly constructed and maintained. Also, the tenants usually cannot be ejected without being paid a handsome premium. (See Chapter III, Part III, infra.) BNH's valuations of older structures are generally based solely on capitalization of rents. If rented, the actual rent is capitalized; if vacant, the rent is estimated and then capitalized. The appraiser uses his general knowledge in estimating rent, taking into account the limitations on use and remodeling. The capitalization figure is usually 8 per cent.

l l

ANALYSIS

An appraisal of the Federal District real property tax begins by noting that the tax has been a great financial success. Revenues from the property tax increased 3.5 times in real terms during the decade before 1963, making it the second most important source of revenue for the Federal District (nearly as much provided by the D F s share of the federal commercial receipts tax). The property tax was the bulwark of a highly income-elastic tax system which generated substantial budget surpluses in the early 1960's despite government expenditures which had expanded at the rate of 13 per cent compounded annually since 1953. In general the administration of the tax is comparable to that of many jurisdictions in the United States and is superior to the administration of other major property tax jurisdictions in Latin America, those in Caracas, Venezuela and Montevideo, Uruguay. 26 Where appropriate 26. For a discussion of the real property tax in Caracas, see Carl S. Shoup et al., The Fiscal System of Venezuela: A Report (Baltimore, Md.: Johns Hopkins Press, 1959) pp. 332-41, and, in more detail, Carl S. Shoup, C. Lowell Harriss and William S. Vickrey, The Fiscal System of the Federal District of Venezuela: A Report (New York: by the authors 1960) ch. iv "Real Estate Taxation," pp. 2775.

F I N A N C I N G

URBAN

D E V E L O P M E N T

in the remainder of this chapter comparisons will be made among practices in Mexico City, Caracas, and Montevideo. A. TAXABLE PROPERTY AND EXEMPTIONS The definition of tax base is inclusive, encompassing all properties not specifically exempted. Treasury officials have compiled very little information on the extent of exemptions in the Federal District. In 1964, out of a total of about 600,000 properties, 11,633 were exempted completely and without time limit. Since these properties have not been appraised, it is impossible to know what percentage of the value of taxable property is included in this figure. According to some Treasury officials the total revenue loss from permanent total exemptions is about 1 per cent of total tax due. Although this estimate excludes partial or temporary exemptions it still seems unduly low, since the properties enjoying total permanent exemptions are quite large, on the average. A considerably larger number of properties possess temporary or partial exemptions. However, no calculations of the number of properties enjoying such exemptions or of their value have been made. One official at the Property Tax Office suggested that roughly 75,000 properties are partially exempt. In order to evaluate the cost of exemptions to the Federal District, the exact number and value of properties presently exempted from payment of property taxes should be computed. Whether exemptions should be ended or reduced is a separate question. But intelligent appraisal of exemptions can only be made with full knowledge of their cost. The method of computing partial exemptions should also be reconsidered. At present, when an exemption is awarded, the property is appraised and the percentage of estimated value which is taxable is converted into an absolute sum, entered in the property tax books as the taxable value for the life of the exemption. Even if property values rise, this entry is not changed until the exemption expires, at which time the authorities, using the appropriate valuation method, compute a new taxable value which is entered on the books. Thus a 50 per cent exemption can easily become an 80 or 90 per cent exemption in the face of booming property values. Of course, the reverse is also true to the extent that physical depreciation and obsolescence are not recognized by the present method of computation. It is not clear why partially exempted properties should not be periodically reappraised as

THE

REAL

PROPERTY

TAX

are other properties. If all exempted properties were appraised periodically, the cost of exemptions would be known and this use of public revenues could be weighed against other "expenditure" programs. Other questions arise concerning the appropriateness of certain kinds of exemptions. Why, for example, should purchasers of housing constructed by the Federal District be exempted from the property tax until all payments have been made? A legal explanation is that title does not pass to the purchaser in Mexico until he has made all payments and that all properties belonging to the Federal District are exempt. But as a matter of policy it is not equitable for the tax system to treat occupants differently merely because of the status of the titleholder. A similar objection may be raised against exemptions awarded to borrowers from ISSSTE. Exemption of home owners living in colonias proletarias and of ISSSTE borrowers is presumably motivated by a desire to lighten the tax burden on the poor. But why should a homeowner be exempted from tax because of the location of his house, or because he has borrowed from a particular source, rather than on the basis of the value of the house or the level of his income? Construction subsidies through low interest loans, subsidized land, or other techniques may well be better instruments for attacking the housing problem than the reduction of current costs through partial exemption from property taxes. Also, subsidies do not distort the tax base. If it were public policy to provide special advantages for poor home owners who borrowed from particular sources, but for neither equally poor homeowners who borrowed from other sources nor for equally poor tenants, then property tax exemptions would be superior to direct housing subsidies. But the basis for such a policy would be hard to discern. If subsidies are not feasible, the tax exemptions may be desirable, but the possibility of obtaining more equitable results than under the present tax exemptions should be explored. The greater than 50 per cent reduction in the tax rate applicable to rural areas also seems questionable. (See Articles 37, 41, 46 (IV) and (V).) If such properties have low values because they are poorly located or lack services, they pay less tax because the tax base is small. Conversely, much of the value of rural property in the D.F. probably derives from the government of the D.F. and the economic and social services it provides; that value plus value due to location within the D.F. surely constitute a proper base for the tax at the regular rate rather than at less than one-half that rate or any other lower rate. By comparison with Caracas, Mexico City's property tax law

F I N A N C I N G

URBAN

D E V E L O P M E N T

explicitly exempts relatively few properties. The major differences are (1) the decision in Caracas not to tax any property lacking urban services, a practice which the Shoup mission sharply criticized;27 (2) the practice in Mexico of allowing exemptions in a number of special situations described above which have no counterpart in Caracas. Casual observation suggests that the effect of the former exemptions in Caracas is greater than the effect of the latter in Mexico. By contrast, property exemptions in Montevideo are granted to a wide variety of properties, not only to those owned by the government or used for specified charitable purposes, but also to properties employed in profit making activities—including even such activities as preparing dried meat, any mining or associated construction, and private schools, as long as at least one-tenth of the students attend on scholarships.28 Properties with low market value are also exempt. While the inferior performance of the property tax in both Caracas and Montevideo has many causes, erosion of the tax base through exemptions is one of the more important. One of the largest potential sources of exemptions in any urban property tax is limited geographical jurisdiction. Location outside the boundaries of the jurisdiction constitutes permanent total exemption. Until recently this problem was trivial for the Federal District, because Mexico City, the dominant urban complex, lay wholly within the District. However, the spectacular growth of the capital city has recently been spilling over into the neighboring State of Mexico, partly as a result of the growing scarcity of unused land in the Federal District and partly because of explicit local and national policies to discourage further growth in the Federal District. The result has been the creation 27. Shoup, Harriss and Vickrey, Fiscal System Federal District Venezuela, p. 66. 28. Real Property Tax Law of Uruguay (Contribución Inmobiliaria), Law No. 9189 of January 4, 1934. For a compiled text of this law corrected to 1947, see Joaquín E. Brites, Recopilación de Leyes Vigentes Del Uruguay, Años 1931-1947, Vol. I (Montevideo: Milton Reyes y Cía, 1948), pp. 386-97. For related legislation, see ibid., pp. 397-413. For all modifications to date and related national and state (departmental) legislation see, under heading "Contribución Inmobiliaria," Registro Nacional de Leyes de la República Oriental del Uruguay, published annually under direction of "Diario Oficial" (Montevideo: Curbelo y Cía). For jurisprudence and annotated case reports see, under heading "Contribución Inmobiliaria," Eduardo Albanell MacCall and Oscar Arias Barbe, eds., Revista Jurídica, La Justicia Uruguaya (Montevideo: 1940 to date, one or more volumes each year). For analysis of Real Property Surtax (of 1 to 4% on properties exceeding 100,000 pesos in taxable value), see Enrique E. Elizalde, Sobretasa Inmobiliaria, 3rd ed. (Uruguay: by the author, 1962).

THE

REAL

PROPERTY

TAX

of an inequity in tax treatment of growing importance. 29 The solution lies in the coordination of tax policies for the greater urban area. Such coordination may require action at the level of the federal government, which in Mexico has the necessary authority. (An attempted study of the impact of property tax differentials on industrial location is described in Chapter Five, infra.) B. TAX BASE AND RATES Three characteristics of the Mexican property tax deserve comment under this heading: the rate level, proportionality, and inclusion of both land and improvements in the base. 1. T H E TAX R A T E

The effective rate of the Mexican property tax on urban property is approximately one-half of 1 per cent of true or fair market value compared with the nominal rate of 1.09 per cent of appraised value and 12.6 per cent of rents. The expression "effective rate," so widely used in the United States, often required explanation when it was used in Mexico in discussions held for the present study. The expression presumes that market value is an appropriate measuring stick for describing and comparing rates, a presumption that the Mexican statute recognizes in Article 46 (IX), but which many Mexicans do not. The stated effective rate presumes a ratio of appraised values to market values of about one-half. (See Part II-C, infra.) This effective tax rate is higher than that which appeared to prevail in Caracas or in Montevideo. The nominal tax rate in Caracas is 6 per cent of potential rents; 30 in Montevideo it is .65 per cent of appraised value (excluding Surtax).31 29. A similar problem has been reported in Lagos, Nigeria: see John F. Due, Taxation and Economic Development in Tropical Africa (Cambridge, Mass.: M.I.T. Press, 1963), p. 108. [Hereinafter cited as Due, Taxation Tropical Africa.] It is seen in numerous cities in the United States; see, for example, Seymour Sacks and William F. Hellmuth, Jr., Financing Government in a Metropolitan Area: The Cleveland Experience (Glencoe, 111.: G l e n c o e Free Press, 1961), esp. chap. IV, "Revenues," and Robert C. Wood, 1400 Governments (Cambridge, Mass.: Harvard University Press, 1961). 30. For a description of the Caracas Real Property Tax (Ordenanza sobre Impuesto de Casas, Otros Edificios y Terrenos sin Construir, Oct. 3, 1950), see Shoup, Harriss and Vickrey, Fiscal System Federal District Venezuela, pp. 27-31. 31. For Montevideo, see Real Property T a x Law of Uruguay, Art. 1. For Uruguayan surtax see Elizalde, Sobretasa Inmobiliaria. A l s o see n. 28.

FINANCING

URBAN

DEVELOPMENT

But in both cities the delays in valuation were so long, evasion so extensive, and administration so deficient, that effective rates must have been only a small fraction of nominal rates. The heavier effective rate in Mexico results mostly from better administration rather than higher nominal rates. Revenue from the property tax is approximately 1 per cent of national income originating in the Federal District, about twice the share found in Caracas, but less than half the share found in American cities with populations of one million or more. 32 Although nominal Mexican property tax rates are higher than those in Caracas or Montevideo, they are modest by comparison with rates in most American cities, and, in fact, with prevailing rates in many jurisdictions, where the level of economic development is no higher than in the Federal District of Mexico. 33 The levels of rates outside Mexico suggest that further increases in tax rates, should they become desirable in the future, would not render the Federal District rates unusually severe. Finally, one small technical change in the property tax rates seems desirable. The separate computation of the 15 per cent additional tax is an unnecessary administrative nuisance. It can and should be abolished with no revenue loss by increasing the basic property tax rate by 15 per cent. 2 . PROPORTIONALITY

Except for certain exemptions which favor the poor, the Mexicans have eschewed any effort to incorporate progressivity in the property tax. Their practice seems wise; probably any movement to introduce pro32. U.S. Department of Commerce, Bureau of the Census, Compendium of City Government Finances in 1962, City Finances: 1962 (G-CF62-No. 2) (Washington, D.C., 1963). 33. Due, Taxation Tropical Africa, pp. 106-15, reports the rates for selected jurisdictions in sub-Saharan Africa. In Nigeria, where the rental basis is used, the rates vary from 10% to 50%, with Lagos using a rate of almost 47%. In Kampala, Uganda, the rate is 1V2 % of the capital or appraisal value of the land, plus lA % of the value of improvements. In Nairobi, Kenya, the rate is 2% of the value of the land only. Due does not estimate effective tax rates, but his general evaluation suggests that administration in these jurisdictions is good. By comparison, tax rates in Brazilian cities are lower, ranging from 6% to 10% (8% in Sao Paulo) of rental value on improved property; see Harvard Law School International Tax Program, World Tax Series: Taxation in Brazil, prepared by H. J. Gumpel and Ruben Gomes de Sousa (Boston, Mass.: Little, Brown, 1957), p. 69. In India, municipalities' property tax rates range from 10% to 30% of rental value; see Harvard Law School International Tax Program, World Tax Series: Taxation in India, prepared by Walter W. Brudno, Charles K. Cobb, Jr. and Nani A. Palkhivala (Boston, Mass.: Little, Brown, 1960), p. 94.

THE

REAL

PROPERTY

TAX

gressive rates would be ill-considered. This ground has been covered many times in the past. 34 Accord is here noted with certain criticisms of a progressive property tax rate schedule. First, the objectives of such a schedule are often confused. Is the progressivity intended as an abilityto-pay levy on property owners? Is it intended to spread the benefits of local government expenditures more equitably? Is it intended to break up properties of either large size or high value? Is it intended to prevent or discourage certain land uses? Or is it some combination of these all at once? Second, there is no reasonable assurance in logic or experience that these objectives would be achieved by employing progressive rates on urban property. Thus, rich owners may hold only a small proportion of their total wealth in real property, while middle class owners may have most of their wealth in the form of their own homes. Furthermore, owners may shift all or part of the tax to tenants and consumers. Third, administrative difficulties arising from owner attempts to split ownership may turn out to be insuperable in the face of the complex legal forms and devices available for the holding of property. Finally, it is the progressivity of the tax system as a whole that matters, not the progressivity or regressivity of parts. Within an otherwise progressive system, particular regressive or proportional levies may play a role. Overall progressivity is best promoted by expanding the scope of taxes which lend themselves to progressive rate structure, specifically the personal income tax. 35 3 . SITE VALUATION

The base of the Mexican property tax includes the value of both site and improvements. Certain jurisdictions in developed and underdeveloped countries tax improvements at lower rates than land (e.g., Pittsburgh in the U.S. for several decades and Jamaica in recent years) or exclude improvements altogether from the tax base (e.g., Nairobi). 36 Discussion of the desirability of taxing improvements less heavily than 34. See, for example, Ursula K. Hicks, Development Finance, Planning and Control ( N e w York: Oxford University Press, 1965), p. 81. 35. For views contrary to those expressed in this paragraph see Joint Tax Program, Fiscal Survey of Colombia (Baltimore, Md.: Johns Hopkins Press, 1965), pp. 134-47. 36. David Harrison, "Housing Rehabilitation and the Pittsburgh Graded Property Tax," Duquesne Law Review, 2:213 (1964); J. R. and U. K. Hicks ' T h e Taxation of the Unimproved Value of Land," Report on Finance and Taxation in Jamaica (Kingston: Government Printer, 1955), pp. 133-43, reprinted in R. Bird and O. Oldman, Readings on Taxation in Developing Countries (Baltimore, Md.: Johns Hopkins Press, 1964); Due, Taxation Tropical Africa, pp. 110-13.

FINANCING

URBAN

DEVELOPMENT

land has been extensive. Once again, we endorse the Mexican practice. Separate treatment of improvements and land is not only undesirable but also, to a large extent, impracticable and therefore illusory in cities. First, the separation of site value from value due to improvements becomes increasingly difficult and artificial as urban development proceeds. Second, the objective of site valuation is, in large measure, to promote improvements by not taxing them. It is not clear why this objective should be favored against other economic activity, especially in developing countries. Moreover, strong theoretical arguments have been advanced against the likelihood that site valuation will achieve the objective.37 No empirical evidence has been produced to substantiate the widespread occurrence of such effects. 38

C. VALUATION: RENTAL AND APPRAISAL 1. G E N E R A L C O M M E N T S

Mexican officials report that as recently as 1960 nearly one-third of all properties in the Federal District had never been appraised for property tax purposes. However, by 1965, they say, this proportion had been reduced to 5 to 10 per cent. The proportion of properties escaping property tax altogether seems to have been no higher in Caracas where self-reporting is used. Apparently, owners there found it strategically wise to report their properties but to understate external indications of value. In Montevideo there are no statistics on coverage of the property tax, but casual observation suggests that the administration ignores large numbers of structures. The problem of creating an inventory of and establishing at least some value for all property in the Federal District is, as the 1965 proportion indicates, therefore nearing solution. Brief attention is paid to this problem under the discussion of the appraisal basis below. Most of the discussion in this section contrasts the appraisal and rental bases of valuation and analyzes the methods of valuation used under each. 37. See, for example, Arthur P. Becker, ed., Land-Value Taxation and Contemporary Economic Thought, Vol. I, No. 1 (Milwaukee, Wis.: Boulder Conference Committee, 1964); see also "Report of Claremont Round Table Conference," Nation's Cities, March, 1965, pp. 23-26. 38. Donald G. Hagman, "Open Space Planning and Property Taxation—Some Suggestions," 1964 Wisconsin Law Review, p. 628; and "The Single Tax and Land Use Planning: Henry George Updated," U.C.L.A. Law Review, 12:762 (1965).

THE

REAL

PROPERTY

TAX

In most countries the valuation basis in use requires the examination of rents and also the appraisal of at least some properties. Where the rental basis is used, appraisals are used for verification or estimation; where the appraisal basis is used, rentals are used as one method of computing appraisal values. The Mexican property tax is unusual in explicitly creating a dual rate structure and valuation scheme, that is, in using the rental basis for some property and the appraisal basis for other property, with a distinct statutory rate for each basis. Property tax officials estimate that about half of all properties are taxed under each basis. Thus in Mexico City no clear administrative argument based on predominance in the number of one or the other can be used to justify exclusive use of either the rental or appraisal basis of taxation. An instance in which the administrative argument favors use of the rental basis is given for Lagos, Nigeria, by Due.39 In principle, the property tax levied on a particular property should be the same whatever the basis used. Thus in the Federal District Finance Law, Article 46 (IX), the object in all cases to which the appraisal basis applies is to tax "fair market value." However, the law states no such clear object with respect to property taxed on the rental basis. In practice, the tax on a particular property differs when computed under the rental and appraisal bases. Furthermore, when the appraisal basis is used, there exist different valuation methods, each of which may produce a different appraisal, a matter discussed below in the analysis of the replacement cost method under the appraisal basis. To the perennial dispute over which property tax basis is best, there is no clear-cut, universal answer.40 Instead an attempt is here made to compare the actual operation of the two bases, appraisal and rental, which the Federal District employs. As earlier noted, the rental basis uses actual or estimated gross rents in accordance with Articles 50 and 52, while the appraisal basis most often employs the replacement cost method. Unless the present value of rents, capitalized at 11.5 per cent, just equals the estimate of replacement cost, the two valuation bases produce different tax liabilities for the same property. This statement is not an attempt to show which basis more closely approximates market values. The implicit rate at which the market discounts rents, as 39. D u e , Taxation Tropical Africa, p. 107. 40. F o r a general discussion of rental versus capital value bases of property taxation, see Haskell P. Wald, Taxation of Agricultural Land in Underdeveloped Countries, Chap. 1. (Cambridge, Mass.: Harvard University Press for the Harvard Law School International T a x Program, 1959).

FINANCING

URBAN

DEVELOPMENT

shown by sales price, varies widely from property to property. Likewise the correlation between replacement cost and market price is far from perfect. However, these facts do not logically preclude the possibility that the rental and replacement cost bases affect each property in about the same way. When are the tax liabilities for the same property likely to be different under the two bases? The rental basis will yield a lower tax than the appraisal basis for property which, in relation to its optimum economic use, is used less intensively than are properties on the average. The Federal District has avoided the most extreme form of this problem by valuing vacant land on the appraisal basis. However, practical problems have led to exceptions; for example, parking lots, whose rates are controlled by the Federal District, are not taxed on the appraisal basis, and with good reason, since many are located on select sites where full appraisal might significantly reduce parking lot profits. Vacant land taxed on the appraisal basis and well located generally bears a heavier burden than it would if it were taxed on the basis of current rents. However, where an improvement, permanent within the meaning of Articles 37 (II) and 46 (VII) but nevertheless dilapidated, exists and is rented, the rental basis is used for the entire property and may well yield a tax much below one based on the capital value of the land alone. Finally, the appraisal basis also can include such values as those embodied in extra land or spacious gardens, values which may escape taxation under the rental basis. A related problem arises when real property values are rapidly rising. Capital value is based upon both current and anticipated future services which the property will provide. When real property values are increasing sharply in anticipation of future services and income from property, the current capital value of both land and improvements goes up quite apart from any rises in present income. Neither the rental basis nor the replacement cost method of determining the appraisal basis will ordinarily reach such speculative values. However, land appraisals, which are based on selling prices, do reach these values. Therefore, rents in the more rapidly growing parts of the city will be lower, relative to capital values, than in the less rapidly growing parts of the city. To state the conclusion differently, the rental basis probably results in lower taxes for rented than for appraised properties in the most rapidly growing parts of the city; and the rental basis probably results in heavier taxes for rented than for appraised properties in parts of the city growing least rapidly. Where long term leases are in force, the

THE

REAL

PROPERTY

TAX

conclusions stated must be qualified. Future increases in short term market rents may or may not be accurately anticipated, and different methods may be used for spreading the anticipated increases over the term of the lease. Further qualifications are needed if revaluation of properties taxed under the appraisal basis is done less often in rapidly growing than in slowly growing parts of the city. 2. RENTAL BASIS

Several Mexicans outside the Treasury suggested that more opportunities for evasion exist under the rental basis of property taxation than under the appraisal basis. Bribery (mordida) can, in principle, occur regardless of the taxing method. However, the rental basis opens opportunities for unilateral evasion by the taxpayer. He may submit a false lease, understating the true rent. For apartment buildings, submitted leases may refer to unfurnished apartments while the owner requires each tenant to sign a furniture lease which is then not submitted. (It is not clear that furniture rental should be taxed under a real property tax. As a practical matter, furniture rental is probably taxed in order to prevent people from dividing rental income between furniture and real property as an evasion device. However, since the Federal District does tax it, an easy path to evasion creates the likelihood of inequitable treatment (see Art. 30).) The owner may require tenants to give I.O.U.'s for the difference between actual rents and rents stated in leases. These I.O.U.'s, or personal notes, are enforceable in the courts. Alternatively, the owner may require tenants to sign a new, undated contract or an agreement to vacate, also not dated. If the tenant fails to pay the agreed rental, the owner may fill in the date and enforce the contract. The variety of evasion techniques and the inherent difficulty of proving evasion in court reduce the need for mordida in dealings with tax officials. Each of these practices is illegal, but, reportedly, widespread. Much property tax litigation is initiated by taxpayers whose leases have been rejected by the Treasury as understatements of actual rentals received by the taxpayer. As noted earlier in this chapter, the Treasury rarely wins. The relative frequency of such cases, as compared to other cases, together with their predictable end suggests a serious problem of evasion with which the Treasury is nearly powerless to deal. However, no data is available on the percentage of leases rejected by the Treasury which are brought to the Fiscal Court. With small amounts of tax often involved, plus taxpayer lethargy, it may be that

86

F I N A N C I N G

URBAN

D E V E L O P M E N T

the Treasury's policy is reasonably effective. Even if the actual rent is so low that the owner is, in effect, making a gift of the use of the property to the tenant, the Fiscal Court will uphold the lease unless the Treasury can prove it fraudulent. If the rental basis is retained, a proposal under active consideration in mid1965 should be adopted. Under this proposal the Fiscal Court would be empowered to accept the Treasury's estimated fair market rental for a property if the actual rents fall below that estimate by some specified amount, say 20 per cent. If the scope for using estimated rents were widened in this way, all rented properties should be appraised in order that the resulting appraisals might be used in estimating rents. The administrative burden seems lighter under the rental basis than under the appraisal basis. Although contracts must now be checked, suspiciously low rents must be investigated, and certain rents must be estimated, not all properties need be visited. This judgment would be reversed if the use of estimated rentals were extended in accord with the proposal just mentioned. The smaller importance of field work under the rental basis at present is largely due to the limited scope for estimation procedures and is reflected in the qualifications of rental estimators. Appraisers, as noted above, must be architects or engineers. Rental estimators need have no special qualifications and, in fact, need not necessarily be government officers (Arts. 61 and 67). The rental basis includes gross rents. In other words, owners may not subtract depreciation on normal maintenance in reaching taxable rents. Taxation of gross rents permits owners to avoid taxes by charging lower rents in exchange for the assumption by the tenant of certain expenses, such as gardening, utilities, and watchmen. On the other hand, the gross rental basis includes in the tax base income from leased assets other than real property, such as furniture, as discussed earlier. Consistent taxation on the basis of net rents would require allowances for depreciation and maintenance as well as the exclusion of payments for the use of assets other than real property. There seems little doubt that taxation of net, rather than gross, rents would aggravate administrative problems which are already quite serious.41 To summarize, it is suggested that the rental basis for property taxation be gradually eliminated in the Federal District. First, the rental basis results in differential and haphazard tax treatment of property owners, principally by failing to tax speculative values which are 41. Cf. Shoup, Harriss and Vickrey, Fiscal System Federal District Venezuela, pp. 59-61, where the same conclusion is reached regarding property taxation in Caracas.

THE

REAL

PROPERTY

TAX

reached by the appraisal basis. This consideration is especially important in a rapidly developing urban area, and in developing countries in general.42 Second, the avenues to evasion under the rental basis are extensive and the prospects for substantially more effective administration are poor. While the efficiency of administration under the appraisal basis may not be better at present than under the rental basis, the appraisal method seems more susceptible to improvement. Possible improvements in appraisal are discussed in the following section. Many experienced persons in Mexico share the belief that the rental basis should be eliminated. However, ending the rental basis should not, in our view, excuse owners from the requirement that leases be submitted to the Property Tax Office, although much of the processing could be eliminated. The leases would remain in the individual property files as an aid to applying the capitalization of income approach, which could serve to corroborate appraisals based on market data and replacement costs. Tabulated data available from leases might prove useful to economists, forecasters, planners, developers, and banks. Thus, before the flow of information on leases is cut, when and if use of the rental basis ceases, attention ought to be given to streamlining the processing of leases and to ways of using information in them. 3 . APPRAISAL BASIS

This section comments on a number of aspects of the appraisal basis as it is and might be used in the Federal District. a. Cadaster Equitable valuations or revaluations on the appraisal basis are possible only if there is an adequate inventory of real property. This inventory, or cadaster, consists of the individual property files, which contain detailed physical descriptions and surveys, and maps which cover both large and small areas of the Federal District (Art. 88). The inventory remains useful only if new information is continually channeled into each property file. At present, this information seems relatively up-todate in the Federal District, but the burden of keeping it current is increasing. One serious gap in the inventory is the complete lack of data on government-owned properties and on ejido land. Individual property photographs and an expanded use of aerial photography would help in keeping information up-to-date and should be used. 42. D u e , Taxation

Tropical

Africa,

p. 117.

F I N A N C I N G

URBAN

D E V E L O P M E N T

Study of foreign cadastral techniques, including both inventory and valuation aspects, would speed modernization of property tax procedures in the Federal District. Study of foreign techniques should be pursued in part by observation of a few property tax offices in the United States and Canada and, perhaps, a few in Europe, and in part by continuing participation in the International Association of Assessing Officers. This organization, based in Chicago, consists mainly of American and Canadian property tax officials. Although language may create some difficulties, an increasing number of Mexican property tax officials speak English, and a very few of them already belong to IAAO. Foreign observation is by no means without precedent in the Federal District property tax. The reforms completed in 1949 under the direction of Lie. Sealtiel Alatriste, Jr., were at least in part due to study of United States property tax offices.43 b. Separate Valuation of Land Because of the problems discussed in connection with site valuation, it is suggested that more and more properties, starting at the center of the city, be appraised as an entire unit of land and improvements. Separate data on land valuation, to the extent available, would then be used for whatever help it might be in making appraisals of individual properties as an entire unit. Furthermore, separate appraisal of land and improvements obstructs the use of data on actual sales in making appraisals, since sales data is for the entire price of improved properties. c. Replacement Cost and Other Valuation Methods Just as separate valuation of land becomes artificial when sales of vacant land become rare, so also the replacement cost method of appraising improvements becomes artificial as buildings age. Construction methods and styles change, and buildings depreciate. By correctly allowing for obsolescence and wear, the appraiser is, in effect, approximating the "fair market value" of the building. Unfortunately, "fair market value" can rarely be determined with exactitude no matter what valuation method is used. Sales prices used in the market data method are often out-of-date and are so influenced by special factors that to use them alone for tax purposes is undesirable. Economists may feel that these slurs on actual market prices hark 43. Sealtiel Alastriste, Jr., Informe Sobre la Reorganización de la Tesorería del Distrito Federal (México, D.F., 1949). Lic. Alatriste was Treasurer of the Federal District in 1949. In 1965 he was the head of IMSS.

THE

REAL

PROPERTY

TAX

back to the medieval concept of the "fair price." If "fair market prices" are not the prices actually agreed upon in the market, what are they? The fact is that, for property tax purposes, the blind use of actual market prices is undesirable for the following reasons. Buyers and sellers place different subjective valuations on different properties that may be almost indistinguishable. These subjective valuations change over time; in general, they cannot be estimated or even perceived except at time of transfer. But most properties do not change hands each year. Also, market prices change over time. Consequently, judicial insistence on the validity of market prices or casual use of market prices by tax officials would constitute imperfect and sporadic attempts to reach one part of the economic value of property. The result would be to create inequalities probably as great as those that result when market values are entirely disregarded. Consider properties A and B identical in external appearance. A was sold last year and B this year at a different price. The difference in price might arise because (1) of general price changes, (2) of changes in general real estate prices only, (3) of changes in neighborhood real estate prices, (4) buyer of A or of B was more anxious to buy or less informed, or (5) seller of A or of B was more anxious to sell or less informed. Should properties A and B be valued for property tax purposes at their respective actual selling prices, at the price of A , at the price of B, or at some other price? The answer is that "it all depends." The capitalization of income method yields good results only if the correct capitalization rate is used. Thus the determination of the allowance for obsolescence under the replacement cost method, of the rate of capitalization under the capitalization of income method, and of the adjustment for special factors under the market data method are all techniques for making observed data conform to the nebulous concept of fair market value. Because of the difficulties that plague any attempt to estimate "fair market value," the replacement cost approach cannot be dismissed. Nevertheless, there are a number of ways in which its application in the Federal District can be improved and supplemented by alternative estimation techniques. When current actual data on rents, market prices, and replacement costs are used together, the maximum opportunity is provided for the exercise of intelligent judgment in deciding upon an appropriate rate for depreciation including obsolescence, upon a capitalization rate for income, or upon adjustments for special market factors. The main point in valuation is to make effective use of all

FINANCING

URBAN

DEVELOPMENT

available sources of information and not to be bound to any one particular method. d. Assessment-Sales Ratio Information Although market prices cannot infallibly guide the taxing authorities to correct individual assessments or appraisals, they are useful in evaluating assessment patterns. Are properties in certain regions, in certain price classes, or in certain uses subject to particularly high or low rates of taxation? Officials in the Property Tax Office and private citizens in Mexico did not seem concerned with these possibilities. No evidence was found of any attempt to study the relation between appraised or assessed values and sales prices, to compute the resultant assessment-sales ratios, or to relate these ratios to other variables associated with properties in the Federal District, such as location, use, and price class, or to variables associated with characteristics of the owners or occupiers, such as race, religion, income, or politics. Such studies have proven most helpful elsewhere. 44 In order to evaluate property taxation in Mexico City we undertook a small pilot study there. The study demonstrates clearly the existence of highly unequal appraisals and suggests the possibility of further fruitful research. Data. Any property tax appraisal study involves the comparison of valuations made by the property tax administration with "objective" values supplied from the outside. The usual "objective" data are market prices. We did not use data on market prices, although such data are collected as a matter of course by the Real Property Transfer Tax Branch (Departamento del Impuesto Sobre Traslación de Dominio de Bienes Inmuebles). First, it is generally believed that sales prices, at least until recently, were understated by large, but uncertain, amounts because of the joint interest of buyers and sellers in avoiding the transfer tax. Also, we were informed that the files at the Transfer Tax Branch are inconveniently arranged. Second, we were given access to a large body of independent data on land valuations made by mortgage banks from 1939 to 1958, data which have been collected by the National Housing Institute (INV). We randomly selected 20 per cent of the valuations made during the years 1957 and 1958 and submitted 44. See, for example, Oliver Oldman and Henry Aaron, "Assessment-Sales Ratios under the Boston Property Tax," National Tax Journal, 18:36-49 (1965), and references included in that article.

THE

REAL

PROPERTY

TAX

addresses of those properties to the Property Tax Office. Both INV and the Property Tax Office supplied information on the exact size of the properties, thereby permitting checks that the same property was being described by both sources. In all, addresses of 274 properties were submitted. We asked the Property Tax Office for the following information on all 274 properties. 1. Land use: single family house, apartment, commercial, or vacant land. 2. Basis for property taxation: rental or appraisal. 3. Year in which the appraisal in effect in 1957 (or 1958, where applicable) had been made. 4. Appraised value of land and of improvements. The Property Tax Office returned some information on 233 properties. Of this number, information on 53 was defective. Either the area differed radically from that indicated by INV, or the year in which the property tax appraisal was made was not mentioned, or no separate appraisal for land was given. Of the 180 properties on which data were complete, 6 were exempt from property taxation. Of the remaining 174 properties, 79 were taxed on the appraisal basis and 95 on the rental basis. There are thus 79 usable observations. Land use was inadequately specified for these 79 properties, and all plans to correlate assessment-sales ratios with land use had to be dropped. Nearly all properties were listed as single or multifamily residences. Although some of the addresses were in strictly commercial sections, no commercial properties were reported. Properties which appeared to be vacant land, because the valuation of land was the same as that for the entire property, were reported as single family. Also, the appraisal information which was provided was apparently the valuation in effect in 1964, the time the information was obtained, not the valuation in effect in 1958, as requested. As a result, however, the data even more powerfully established a picture of highly unequal appraisals. (Data limitations discussed in this paragraph overshadow conceptual difficulties of using mortgage data.) Results. The ratios of assessments or appraisals made by the Property Tax Office to those made by mortgage banks were distributed as follows. The wide divergence of the ratios is striking. Many of the high ratios may be due to the fact that the property tax appraisal was made as much as five years after the bank appraisal. Also, bank appraisal

FINANCING

URBAN

DEVELOPMENT

TABLE 2 0 . FREQUENCY DISTRIBUTION OF OBSERVED ASSESSMENT / SALES RATIOS.

Assessment

Ratios

Frequency

Greater than 2.0 1.2 to 2.0 0.8 to 1.2 0.6 to 0.8 0.4 to 0.6 0.25 to 0.4 0.0 to 0.25

4 11 19 11 6 5 23

may be especially conservative. The number of properties with very low property tax values, below 25 per cent of bank appraised value, is particularly high. Table 21 casts further light on these results.

TABLE 2 1 . ASSESSMENT / SALES RATIOS BY DATE OF APPRAISAL.

Property Tax Appraisal

Date

1945 or before 1 9 4 6 - 1950 1951 - 1955 1956 1957 1958 1959 or later

Frequency

10 16 6 3 4 17 23

Average Assessment Ratio°

.148 .166 .388 .629 .414 1.138 1.188

Range

. 0 2 4 - .621 .038 - .404 . 0 7 7 - .600 . 2 6 7 - 1.282 . 1 0 6 - .625 .347 - 3.670 .795 - 3.344

"Average of all 79 ratios is .694.

Age explains almost all of the egregious underassessments for property tax purposes. Land values rose sharply during the 1940's and 1950's. The values of some properties increased especially rapidly. To observe that in some cases the oldest property tax valuations are only 3 or 4 per cent of recent bank appraisals is, therefore, not surprising.

THE

REAL

PROPERTY

TAX

T A B L E 2 2 . A S S E S S M E N T / SALES RATIOS BY VALUE OF PROPERTY.

Bank Appraisal (pesos) 12.5 pesos — I dollar

Assessment Ratiosa Year of Appraisal for Property Tax 1955 or before 1956 or after

(0)

0 - 10,000

10,001 - 25,000 25,001 - 50,000 50,001 - 75,000 75,001 - 100,000 100,001 - 200,000 200,001 - 500,000 500,001 and above

0.549 0.184 0.199 0.168 0.193 0.075 0.073

(7) (4) (5) (1) (8) (2) (5)

0.848 1.576 1.402 0.969 1.103 0.766 0.787 0.404

(1) (5) (10) (8) (7) (10) (5) (1)

'Number in parentheses indicates frequency.

At first glance, from Table 22, the data appear to permit some tests of the correlation between assessment ratios and "true value" indicated by bank appraisals, according to different price classes of land. It appears that more expensive properties are underassessed in Mexico, as they are in many jurisdictions in the United States. Such an inference is not justified, since it is equally plausible that banks appraise less expensive properties more conservatively as a safeguard against meeting possible foreclosure costs which, with attendant delays, might constitute a high proportion of a loan. This issue can be settled only by examination of actual sales prices. The bank appraisal data refer only to land. As a result it has been impossible to deal with rented properties or improvements on the land. Conclusions. The results are quite limited. We see that assessments or appraisals are highly unequal, but little more. Further analysis depends on the use of transfer tax and other sales information. As mentioned earlier, the accuracy of such information has been open to considerable doubt. Since the introduction of the capital gains tax, however, the joint interest of buyer and seller in understating the selling price has been broken. For this reason, a number of Mexicans suggested that it would now be appropriate to rely on the sales prices reported under the

FINANCING

URBAN

DEVELOPMENT

Transfer Tax. The real danger is consistent underreporting. Occasional cases of underreporting would be revealed as deviant cases when ratios were computed and could be discarded. It would not be difficult for the Treasury to carry out a large scale assessment-sales ratio study. The small amount of data presented in this section is sufficient to suggest that some rather striking relations would be revealed. e. Reappraisal The above data suggest that current Treasury appraisals agree fairly closely with those made by the several mortgage banks. Although this pattern may only indicate similar mistakes by independent organizations, this does not appear to be the case, since there is little overlap of personnel and somewhat different appraisal techniques are used. Only three of fourteen appraisers in the valuation department of the National Mortgage Bank (BNH) in 1963 also worked for the Treasury. Also, the banks do not use land values established by the Property Tax Office. Besides estimating replacement costs, they consider current market prices of properties similar to the one being appraised, and use information on actual rents in order to apply the capitalization of income method. (See Part I-J, supra.) The chief problem is not that property tax appraisals are inaccurate, but that there are too few of them. In making appraisals the Valuation Branch applies current estimated land values and construction costs. These estimates are revised every three to five years. Between 1954 and 1962 the construction cost guidelines were increased by 65 to 95 per cent, depending on type of construction, while the price index of construction material in the Federal District rose 63.4 per cent. Actually the guidelines are not exact figures, but ranges of prices within which the applicable construction cost is determined on the basis of special factors. The guidelines for "colonial" structures (tipo antiguo) were not raised at all; this seems illconsidered, given the use of replacement cost and the existence of inflation.45 At the same time estimates of land values were periodically revised. However, these revised estimates of land values and construction costs are used only for appraisals made after the revision. Old appraisals are not adjusted in the light of the new information. Although the Property Tax Office is empowered by Article 66 to revalue properties every five years, it does not at present do so and 45. For current guidelines see Adjustment and Improvement Unit Value Tables; see also Part I-J, supra; for price index of construction materials see Banco de Mexico, S.A., Informe Anual: 1962 (Mexico, D.F., 1963), p. 77.

THE

REAL

PROPERTY

TAX

cannot with present resources. As a rule, revaluations are made only when properties change hands or when major improvements are made. On occasion, an entire block or group of blocks is revalued. For example, when a zone has recently been renewed through a major Federal District project or has been benefited by an important municipal work, such as a new park or highway, the Property Tax Office attempts to revalue all affected properties. Similarly, zones whose rapid decay is clearly observable are apparently occasionally revalued. When an entire area is revalued, no announcement is made for fear of general public resistance. Such fears may help explain the Treasury's preference for revaluations precipitated by sale, death, or new improvements. In one other circumstance properties are reappraised. Owners occasionally request revaluation by the Property Tax Office. Queries regarding possible condemnation in the neighborhood frequently accompany such requests. Recognizing that property tax land appraisals may determine compensation for condemned land, owners apparently try to guard against possible loss. As a result of these practices, some properties, perhaps as many as 45 per cent, may escape reappraisal for a decade or more. In the face of rapidly rising real property values, such lags guarantee highly inequitable appraisals. There are two methods which can sharply reduce such inequities and consequent revenue loss. First, there appears to be no reason why old appraisals should not be adjusted whenever new guidelines for land values and construction costs are adopted, especially since the Property Tax Office file on each property contains the necessary information to which the new values and costs could be applied. Any changes in these guidelines would only reflect long term trends in prices and would help maintain the real value of property taxes during inflation. If modern automatic data processing techniques were used, the administrative cost of making such adjustments would be trivial. In order to reduce the shock of the first increases, which are likely to embody much "catching up," the adjustments might be spread over two or three years. In fact, by accustoming taxpayers to frequent changes in property tax liability, the political obstacles to more frequent genuine appraisals might crumble. These adjustments merely prevent price changes from eroding the tax base. They are no substitutes for genuine reappraisals, which would, for example, reconsider for each property the obsolescence allowance appropriate for it in applying replacement cost methods. In Montevideo, however, formula adjustments to existing valuations are the only form of

FINANCING

URBAN

DEVELOPMENT

reappraisal used over long periods, in some cases thirty or forty years. The hopeless inadequacy of such an approach and the bizarre relations between appraised and market values are obvious. Second, reappraisal should not await sale, death, or new construction. The resulting lags are so great that excessive inequity results. For example, two identical structures, both built in, say, 1950, might still have been assessed in 1960 at their original 1950 level despite a doubling of construction costs and land prices during the ten years and despite two increases during the ten years in the "block prices" and construction cost guidelines used by the Property Tax Office. If one of the structures had been sold in 1961, it would almost certainly have been revalued using the "block value" and construction cost guidelines then in effect, while the taxable value of the other property would have remained unchanged. Even when many such transfers have occurred in a given region and the number of resulting inequities is large, there is no procedure by which the entire region is automatically revalued. If the value of real property changes rapidly, then the threat of revaluation when the property is transferred or improved can constitute a serious barrier to an otherwise normal sale or improvement. In general, reappraisal in the Federal District should take place more often than every five years, the minimum period which must now elapse before reappraisal is normally permitted. A five year cycle is acceptable when property values are not changing or when the value of all properties change by similar amounts. In an environment of rapid and uneven growth, such as that prevailing in Mexico City, the inequities of taxation that can arise in a period as short as five years suggest the desirability of a shorter cycle, perhaps three years. Reappraisal of transferred properties somewhat more frequently than properties in general is perhaps justified, however, since transfer may indicate new land uses or new market judgments about the value of the property. From the political standpoint it seems plausible that taxpayer resistance is at a minimum following transfer. Also valuation made immediately after sales may be more accurate because of the availability of the current and actual sales price and, frequently, a newly made bank appraisal for mortgage purposes. The preceding discussion suggests that the current system of selecting properties for appraisal is unsatisfactory. Consistent revaluation of properties whose appraisals are oldest would no doubt be an improvement. However, an optimal reappraisal system would most frequently appraise properties in regions where changes in real property values

THE

REAL

PROPERTY

TAX

diverge most sharply from the average change in real property values. Such deviant regions could be indicated by a continuing general study of sales prices. The ultimate allocation of appraisal efforts will, of course, depend as much upon political feasibility as on economic equity. In any event, the inequities apparently generated by current appraisal practices deserve serious scrutiny.

D. APPEALS A N D EQUALIZATION Neither government officials nor private lawyers in Mexico regard as serious the problem of unequal valuation of similar properties. The Mexican Constitution requires equitable and proportionate taxation. Art. 31 (IV) of the Mexican Constitution provides: "Mexicans are obligated to . . . contribute for the public expenses, both of the Federal Government and of the State and Municipality in which they reside, in a proportionate and equitable manner as provided by law." This provision is very similar to those in many state constitutions in the United States, which have been interpreted to require uniform and equal valuations of similar properties. This principle was invoked by the Mexican Supreme Court, in the case discussed in Part I-C, supra, to hold taxation on the basis of optimum rental value unconstitutional. Despite this constitutional provision, and despite a statute, Article 46 (IX), and regulation (Appraisal Manual) which lay out uniform appraisal procedures, no one seemed concerned about the principle of equality in practice. The lack of concern is surprising. In the United States this problem, often referred to as one of equalization within a given property tax jurisdiction, has long plagued administrators and taxpayers. 46 In Mexico, at least some people knew from personal observation that there were properties with virtually the same market values but considerably different property tax valuations. Their examples are corroborated by the information on ratios of tax values to market values reported earlier in this chapter. There have apparently been no court cases in which a taxpayer sought a reduced tax valuation for his property by offering to prove that 46. See, for example, Advisory C o m m i s s i o n o n Intergovernmental Relations, The Role of the States in Strengthening the Property Tax, Vols. I, II (Washington, D.C.: U.S. G o v e r n m e n t Printing Office, 1963), and N o t e , "Inequality in Property Tax Assessments: N e w Cures for an Old 111," Harvard Law Review, 75:1374 (1962).

FINANCING

URBAN

DEVELOPMENT

one or more other properties of the same market value had a lower property tax value than his. It seemed to be assumed by several persons with whom the point was discussed that the solution to problems of equalization was for the Treasury to raise those valuations which were too low, rather than for the courts to lower those which were too high. While state courts in the United States used to agree with that solution,47 the United States Supreme Court in 1923 ruled that that solution deprived the taxpayer of his constitutional rights to equal protection of the laws because there was no practicable means for the taxpayer to obtain an increased valuation of all undervalued property in the municipality.48 Now state courts in the United States regularly order reduced valuations for taxpayers who prove that their property is assessed closer to the statutory standard, usually fair market value, than are other properties on the average.49 While there is some legal precedent for similar relief in Mexico,50 Mexican lawyers may hesitate to base a property tax reduction law suit upon claimed unequal valuations because of the extreme difficulty in obtaining sufficient comparative valuation data to support the claim. Also, the cost of obtaining such data is high in relation to the potential tax saving at current low tax rates. Making such data readily available would presumably create more interest in such suits, as would any substantial increase in tax rates. Through appeals based on overvaluation or unequal valuation the taxpayer can do much to assure equitable and effective property tax administration. However, he can do this only if he or his representative has access both to full information on the valuation of any property including his own and to a forum in which he may obtain professional review. The information exists within the Property Tax Office. It should be and, with modern document copying devices, can be made available to the taxpayer on request, promptly, and at low cost, without giving taxpayers direct access to property files. Also, information on ratios of property tax values to market values should be publicized when pro47. For example, Royal Mfg. Co. v. Board of Equalization, 78 N.J.L. 337, 74 Atl. 525 (New Jersey Court of Errors and Appeals, 1909). 48. Sioux City Bridge Co. v. Dakota County, 260 U.S. 441 (1923). 49. For example, In the Matter of Kents, 34 N.J. 21, 116 Atl. 2nd 763 (New Jersey, 1961); State ex rel. Park Inv't Co. v. Board of Tax Appeals, 175 O.S. 410, 195 N.E 2nd 908 (Ohio, 1964). 50. In an apparently unreported lawsuit about twenty years ago, one cantina owner succeeded in having his monthly flat rate of alcohol tax reduced from about M$500 to M$300 by introducing evidence into court comparing the characteristics of his cantina with another which paid only M$300.

THE

REAL

PROPERTY

TAX

duced. An appeals forum, the present Fiscal Court, now exists, but changes in it are needed before it can handle the expanded review tasks suggested here. Additional judges or permanent referees under the existing judges, assisted by a small professional staff, could deal effectively with appeals based on overvaluation or inequality. Once taxpayers begin to perceive the possibility of relief from unequal application of the property tax, many appeals might well follow—a salutary development, since fair valuation is a difficult business, well worthy of the exercise of judicial talents.

E. PROPERTY TAX OFFICE Much of the work in any property tax office consists of routine operations repeated in hundreds or thousands of cases. One example of such routine procedure is the printing, addressing, and posting of tax bills. This step in property taxation in the Federal District is handled outside the Property Tax Office and is done largely with automatic data processing (ADP) equipment. It seems clear that ADP equipment can be used to great advantage in the Property Tax Office itself, especially in the Assessment Branch (described in Part I-I, supra), where backlogs in filing and updating accounts are so serious that there reportedly have been recent cutbacks in the number of appraisals being made. Vast numbers of files are piled two and three feet deep on many large tables located throughout the branch. It is clear that much of the work of this branch could be performed more efficiently and, very likely, more cheaply with ADP equipment. While employment in the Assessment Branch may decline, the number of appraisers in the Valuation Branch should certainly be increased. If the rental basis of property taxation is eliminated over the years, as urged above, the number of appraisers must rise sharply. Even if the rental basis is maintained, sufficiently frequent reappraisals under the appraisal basis will require a larger staff, as will improved operation of the rental basis itself. The anomalous situation in which part time appraisers working on piece rate earn more and do more than salaried full time employees is obviously unsatisfactory. Adequate payment for appraisers is essential, both to attract able men and to reduce temptations to accept bribes. This can be accomplished by judicious use of the piece rate basis as a supplement to salaries of regular employees, pending development of

100

FINANCING

URBAN

DEVELOPMENT

status through professionalization and generally increased salary scales for appraisers. In 1964 the staff had the capacity to make approximately 50,000 appraisals per year. There were 30 salaried and 35 piece rate appraisers in the Valuation Branch in that year. If the 30 salaried (or regular) employees each averaged 2 appraisals per day, and the 35 piece rate appraisers averaged 5, as was reported, they could have made 235 appraisals per working day. If the working year consists on the average of 220 working days, they could have made 51,700 appraisals. N o comparison between salaried and piece rate appraisers was available for the end of 1965. (See Table 18.) However, during 1965 appraisal capacity was substantially increased by hiring more piece rate appraisers. T o appraise once every five years the approximately 300,000 properties taxed on the appraisal basis, as well as to appraise all transferred properties and new construction, was obviously impossible. An increase in appraisal staff of 30 to 50 per cent was needed if current legal standards were to be met. For reasons stated above, we feel that movement toward even more frequent appraisals is desirable. Clearly, still further expansion of the appraisal staff would be necessary if this suggestion is adopted. If properties are appraised every three years, 100,000 reappraisals would be required each year plus those needed for certain transfers and properties with new construction (say, 40,000). T o make 140,000 appraisals in 220 working days, about 130 appraisers making 5 appraisals per day are necessary. Over 300 full time appraisers making 2 appraisals a day would be necessary. In addition, the staff would have to be at least doubled over these levels if the rental basis is to be gradually eliminated. The cost of hiring sufficient appraisers to make possible a three year valuation period for properties at present on the appraisal basis would be between M$2 million and M$3 million per year at 1965 salaries. Full time appraisers received from M$l,110 to M$ 1,320 per month in 1965. Part time appraisers receive from M$20 to M$80 per property depending on its value, whether or not it is improved and whether or not it is located in a cadastered region. If the assessmentsales ratios as a result were raised by as much as 5 per cent, for example, from .50 to .55, the Federal District would have received approximately MS11.25 million in additional revenue in 1963. This estimate presumes that about half of the M$450 million in property tax revenues was collected under the appraisal basis. T o hire enough appraisers to provide for elimination of the rental basis as well as to

THE

REAL

PROPERTY

TAX

reappraise every property every three years would require additional outlays for appraisers' salaries of between M$5.5 million and M$8 million. Some of these costs would be offset in savings generated by ending the rental basis, so that the net cost would be less.

F. N O T E O N M U N I C I P A L I N V E S T M E N T AND PROPERTY VALUES Values of land located in different parts of a city rise at different rates as old neighborhoods decay and new neighborhoods develop. Although all property values rise during rapid inflation, some do so more rapidly than others. Many factors influence property values, such as proximity to roads, to parks, or to large populations, and the conditions of neighboring properties. Public policies also appear to affect property values in a number of ways—through urban improvements such as roads, lighting, and sewage disposal, and through management of open space, zoning regulations, and rates of property taxation. In order to reveal how various improvements affect property values, a study was begun at the National Housing Institute ( I N V ) on the rate at which land values had increased in Mexico City in the two decades spanning 1939 and 1958. The I N V data, along with background information on their proposed use, were made available for use in the present study. The figures cited here are derived from the I N V study. Land values are prices per square meter indicated by bank appraisals. Bank appraisals are made whenever bank loans are requested or property is sold, and in some cases to set values for expropriations and for death taxes. These appraisals are generally considered to have been somewhat more reliable than the market prices which are reported for purposes of the real property transfer tax and which are believed to be seriously understated. In the twenty years covered by the study, approximately 35,000 appraisals were made by the three banks from which data were collected. Next, the city was divided into more than 700 districts, each designed to be as homogeneous as possible with respect to types of property. Regions in which land values had risen particularly slowly or rapidly were to be examined more closely in order to determine the extent to which especially high or low outlays on urban services could explain these deviations. It is unfortunate that the study was suspended at I N V in 1958.

101

102

F I N A N C I N G

URBAN

D E V E L O P M E N T

Preliminary computations based on the INV data were done at Harvard in 1964 and reveal the expected deviations in the rates at which land values have increased in different regions. Over the period, land prices rose in every region. In some regions land prices increased approximately 300 per cent, much less than the 500 per cent rise in the major price indices reported in Table 24 in connection with our study of rent control. In some others land prices rose 100 times. In most regions land prices between 1939 and 1958 increased 10 to 20 times. Data broken down by region, either for urban expenditures or for property taxes, was not available for correlation with the data on land values. Therefore, reluctantly, this line of inquiry was abandoned. Further study of the impact of urban improvements and property taxation on land values is warranted. A study of the determinants of property values requires an accurate series of data on expenditures for urban improvements, broken down by region and extending over a decade or more. By relating the timing of improvements to changes in property values, it might be possible to establish a cause and effect relationship (which might run either way). Data from a detailed assessment-sales ratio study (of the kind outlined earlier in this chapter) could be used in a similar manner to determine the relationship, if any, between overappraisal or underappraisal and property values. In either case, the study would require considerable financial resources and skilled personnel. Although the many factors influencing property values might prevent unambiguous findings, the study should yield useful insights.

H i

N O T E ON P R O P E R T Y IN CUERNAVACA

TAX

REFORM

The property tax is more highly developed in the Federal District than in any other city or town in Mexico. In recent years, a number of other city or state governments in Mexico have inquired about or attempted a reform of property tax administration to increase its yield and fairness. Such a reform has been carried through in one city, Cuernavaca, the

THE

REAL

PROPERTY

TAX

capital of the State of Morelos. This section describes briefly the history and results of that reform. 51 The government of Morelos contracted with the National Mortgage Bank (BNH) to reappraise 13 of the 19 regions of Cuernavaca. Work began in 1960 and was completed at the end of 1962. The revaluation cost about M$4.2 million. In 1964 property tax collections in the affected regions were M$4.0 million, or more than six times higher than they were before revaluation. The work was carried out under the joint direction of the government of Morelos and of BNH. The valuation was not done by the Morelos Property Tax Office (Dirección General de Catastro) itself, but by a largely independent ad hoc agency, the Technical Valuation Branch (Departamento de Catastro Técnico). The staff of this branch included permanent employees and others hired under contract. It was housed in offices apart from the Property Tax Office. The revaluation consisted of the following basic steps. The first was to map the previously delineated urban zone and to list all blocks, properties, and owners in it. All data on physical characteristics of individual properties were then updated. The second step was to determine the "typical lots" for different kinds of land uses and for different regions. Third, taxable land values per square meter (unit values) were assigned in each region. All available information from other sources, such as realtors, notaries, mortgage banks, and data on public improvements were used. After executive approval they were published in the Official Gazette (Periódico Oficial). The fourth step was the development of taxable values for improvements. The fifth step was the actual appraisal of individual properties on the basis of the typical lot, unit values, improvement classification tables, and adjustment tables. The appraisal was conducted in accordance with a newly formulated Appraisal Manual modeled generally on the Appraisal Manual of the Federal District. Finally, proper notice to the owner was given, recording was accomplished, disputes were settled, and the results were published. Classifications for improvements were utilized which had been developed previously by the Property Tax Office. For example, im51. The material here is based on the following information available in 1964: BNH, La Catastración en Cuernavaca: Sus Aspectos Técnicos, Administrativos y Financieros (México, D.F., n.d.); Lic. Luis Humberto Rojo, "La Catastración en Cuernavaca" (unpub. MS: 1964, translation on file at Harvard Law School Library); and on the authors' personal observations and conversations in Cuernavaca and Mexico City.

103

104

FINANCING

URBAN

DEVELOPMENT

provements were classified according to whether they were "old," "modern," or "other," whether they were "adequate," "average," "quality," or "luxurious," or whether they were "provisional." The types of material used in each part of the improvement, such as stone, wood, or metal, were also listed. The appraisers were, in fact, applying valuation techniques which had been developed by the regular Property Tax Office, but which had fallen into disuse. Although the technical and administrative problems are always difficult, the political problems of revaluation were crucial in Cuernavaca, especially since the resulting increase in tax collections was substantial. In Cuernavaca the following steps were taken. First, regional councils (juntas) assisted in determining the typical lots and the unit land values. On these councils sat one representative of the property owners' association of the region to be revalued. These regional councils forwarded their opinion of the typical lots and unit land values to a central council in which another representative of the property owners' association sat. Although the property owners' association had minority status, the views of their members were aired before councils whose approval was necessary before the typical lot specifications and unit land values could be applied. Reportedly these councils initially created some difficulties for administrators, but have developed into an effective instrument for assuring the public that land values are fairly and honestly determined. Before 1946, similar councils existed in the Federal District where, according to reports, they consisted of valuation experts who did little more than dispute officially proposed unit land values. The councils were abolished during World War II and were never restored. The Property Tax Office of the Federal District does not miss them, claiming that its own Technical Branch can do anything the councils might do. Nevertheless, the success of the councils in Cuernavaca in quieting resistance to increases in property taxes suggests that they might assist rather than hinder property tax administration in the Federal District as well, especially if an increase in tax rates should be considered. Political resistance in Cuernavaca was also forestalled by the willingness of the Technical Valuation Branch not to press all its legal rights. Entitled by law to inspect each property internally, to fine uncooperative owners or tenants, and to summon the police to enforce admittance, the Branch resorted to the simpler expedient of grossly overvaluing properties. Outraged owners then admitted appraisers and were rewarded for their cooperation with a "lower" valuation instead of

THE

REAL

PROPERTY

TAX

being punished for their earlier resistance with a fine. Also, the Executive regularly granted reductions of up to 25 per cent in appraised values of land, not of improvements, which convinced taxpayers that they were being granted favored treatment. In addition, great care was taken to assure that simple arithmetic and measurement errors did not occur, thus avoiding complaints about these matters. The experience of Cuernavaca indicates that, with careful technical work and political discretion, a determined Mexican state (or local) government can reform property tax administration and increase revenues. In Cuernavaca the cost of the revaluation was almost covered by the increase in revenues collected in one year. Whether the effects of the reform are permanent or temporary will depend on the ability of administrators both to resist pressures for reduction of individual valuations and to carry out valuation every five years as specified by law.

105

CHAPTER THREE

OTHER

TAXES

AND

URBAN

CHARGES

LAND

ON

108

FINANCING

URBAN

DEVELOPMENT

In addition to the property

tax, real property

is typically

subject

to a number of other charges. This chapter examines three sets of such charges. First, special assessments are analyzed. a far less important

Although

source of revenue than the property

they are distributed

tax,

unevenly among real properties and may be

quite large for some. It is therefore

important

that the

method

of assessment be fair and that there exist effective appeal mechanisms. Both of these conditions

seem to be absent in the Federal

District. Another a collection

important

set of charges levied on real property

of transfer taxes and fees. Except

are imposed

to defray costs of services provided

seller, they obstruct of improved

is

when such charges to a buyer or

the transfer of property and the

development

patterns of land use. In the Federal District,

the

yield of transfer charges is only a small fraction of total revenues. Nevertheless,

they may constitute

a heavy burden on sales, es-

pecially of inexpensive properties. It is therefore urged that most transfer taxes be abolished or reduced sharply. A final

real property

rent control,

"charge"

examined

in this chapter is

which may be regarded as a tax on landowners and

a subsidy to tenants. The size of the tax and subsidy equals, as a first approximation, potential

the difference

free market rents. Rent control

eral District

for

twenty-five years. About

live in rent controlled

responsibility

and landlords

may be enforced

for

1.0 million people

rent control, only

third part of this chapter attempts and proposes a program

achieved.

has existed in the Fedstill

housing. Because no executive agency has

a maintenance

control

between actual rents and

through

rights of tenants the courts.

The

to assess the effects of rent by which decontrol

might be

OTHER

i

SPECIAL

TAXES

AND

CHARGES

ON

URBAN

LAND

ASSESSMENTS

A. INTRODUCTION Special assessments are charges imposed on properties benefited by municipal improvements; the charges offset all or part of the cost of the improvements. For example, where the opening of a neighborhood street is beneficial primarily to nearby property owners, it is often thought fairer that these property owners, rather than all the taxpayers of the city, pay for the improvement. Special assessments, like user charges, are based on the benefit principle of taxation. But in the case of improvements like a new street, user charges are impractical because they would be inconvenient and prohibitively expensive to collect. Also, property owners may benefit from increased property values, even if they or their tenants make no direct use of the street. Within the Federal District, there are two types of special assessments, the planning tax (Impuesto de Planificación) and cooperation fees (Derechos de Cooperación), each of which has a separate statutory basis. In 1963, special assessments yielded almost M$43 million, approximately 2.3 per cent of the DDF's total revenues. This Part surveys the planning tax and cooperation fees and suggests areas where reform of the District's special assessment system appears appropriate. If the Federal District were creating a new tax system, the desirability of using special assessments would have to be scrutinized carefully. The principal argument for special assessments is that they are a good form of taxation according to the benefit principle. The benefits of some improvements accrue to the entire community; other improvements benefit particular regions, perhaps in a complex pattern; still other improvements benefit easily identifiable groups. In general, beneficiaries of relatively small improvements are clearly identifiable, as in the case of sewage lines to particular houses, sidewalks, or street lights. However, even improvements which appear to benefit particular households or neighborhoods may well bring important benefits to the entire community. It is also true that these small improvements are the kind that most modern cities try to make available to all citizens because such improvements are regarded as necessities rather than amenities. The larger improvements, such as parks or highways, may be used by all, but not every household is supplied one of its own. Thus, in general, projects whose beneficiaries are readily identifiable tend to be made

109

110

FINANCING

URBAN

DEVELOPMENT

available to all members of the urban community; other projects produce benefits in undeterminable ways. In the case of the former, benefit taxation can be used, but, as the discussion below indicates, it is extraordinarily complex and, at least in part, arbitrary. Since everyone benefits, general revenues can be used instead, thereby eliminating the need to collect special charges from each beneficiary. In the case of the latter, special assessments cannot be relied upon to distribute burdens in accord with benefits. To the extent that urban improvements, wherever located and of whatever kind, increase some property values, such increments would be reached by a property tax based on up-to-date valuations. Another argument made for special assessments is that they protect existing parts of the city from being unduly burdened by the rapid growth of outlying sectors. There are several replies to this contention. First, property tax collections in outlying areas will rise as a result of improvements, thus offsetting at least part of their cost. In any event, costs imposed by newly developing areas may be recovered through other techniques. In the case of the Federal District, for example, subdivision requirements (discussed in Chapter V) adequately protect older areas against these costs. Finally, the possibility that the older city has benefited from the District's growth cannot be entirely dismissed. A third argument justifies special assessments on the assumption that, within limits, more public services are better than less and suggests that special assessment financing encourages city administrators to provide more of these services. Even if additional public works are considered desirable, it is equally possible that general revenue financing will lead to a greater flow of public services; for if each neighborhood knows that it pays only a small increase in taxes for improvements located within it, then presumably it will lobby more vigorously for improvements. If general revenue financing of public improvements raises the demand for them, special assessment financing may raise the supply of funds to finance these improvements. Whether or not special assessment financing will increase the quantity of public improvements in a given city may well turn on both the effectiveness with which citizens influence planning decisions and the planners' ability to draw on alternative sources of financing.1 1. See "Report of Claremont Round Table Conference," Nation's Cities, March, 1965, pp. 17, 29, for a summary of Minneapolis' experience with special assessment financing as a stimulus for planners to program parks and playgrounds but not street improvements.

OTHER

TAXES

AND

CHARGES

ON

URBAN

LAND

It has been impossible to determine in the time available for this study whether any of the above conditions justifying special assessments is satisfied in Mexico City. Accordingly, the following discussion deals with the reform, rather than the repeal, of special assessments in the Federal District.

B. PLANNING TAX 1. HISTORY

Before 1950, the DDF levied an incremental value tax (Impuesto de Plusvalía). The purpose of this charge was to tax increased property values arising from such public works as streets, parks, gardens, and plazas. The plusvalía tax generated resentment because taxes on incremental values are often subjective, because subsequent property taxation reached these same values, and because the DDF frequently invested, in other regions of the city, the surpluses which the tax yielded over improvement costs. In 1950, the planning tax was introduced as Title Nine of the District's Finance Law. The basic innovation of this new statute was its limitation of special assessments to the recovery of project costs. However, if the planning tax generates surpluses, they may still be used anywhere in the District for similar types of projects.2 The present statute makes no effort to counter the other objections raised against the plusvalía tax. 2 . S C O P E OF THE P L A N N I N G T A X

The DDF, according to Articles 374 and 379 (VI), (VIII), may levy the planning tax to recover certain of the costs of opening, adjusting, or enlarging public ways, parks, gardens, and plazas. Apparently, the Jefe of the Department may suspend all or part of the tax associated with projects that he believes benefit the community in general and should be financed through general tax receipts. This authorization does not appear in the statute, but Mixed Planning Commission technicians indicated in interviews in August, 1964, that the Jefe asserts and occasionally invokes this power. 2. Finance Law of the D D F (Ley Federal), Arts. 375, 403, D.O., Dec. and footnotes of this chapter are translations of relevant portions, see

de Hacienda del Departamento del Distrito 31, 1941. All references to Articles in the text to this law unless otherwise specified. For Appendix.

111

112

F I N A N C I N G

URBAN

D E V E L O P M E N T

It is not clear that the planning tax in practice distributes the DDF's urbanization costs equitably. "Public ways" encompass a variety of neighborhood streets, commercial avenues, limited access highways, underpasses, and rotaries. Expansion of such routes may not only benefit adjoining properties, but also facilitate transportation throughout the city. In particular, underpasses, rotaries, and highways, which may inconvenience nearby properties, benefit commuters passing from outlying residential areas to central business regions. Extension of major avenues like Insurgentes, Revolución, or Paseo de la Reforma also serves the entire community even while increasing nearby property values. Neighborhood streets, on the other hand, benefit surrounding properties more than they do non-adjoining parcels or the community at large. Similarly, parks, gardens, and plazas may serve and benefit either the entire community or a particular neighborhood or both. Certainly the Chapultepec and Alameda parks are properly financed through general tax receipts. Each forms an important part of Mexico City's public life, and it would be difficult, if not impossible, to identify benefits to particular pieces of property. Even smaller parks and gardens may attract visitors from all parts of the city. It therefore seems appropriate to finance at least a portion of these park costs out of general tax receipts. Special assessments seem fairest when parks are intended as recreational areas for particular neighborhoods. However, provision of neighborhood parks and plazas may be regarded as a general governmental obligation. Each neighborhood might expect to receive such benefits over a period of years. Furthermore, neighborhood parks may benefit the whole community; for example, parks located in slums may discourage children from roaming the streets and adopting socially disruptive habits. The planning tax would function more equitably in terms of allocating the burden of new projects if workable standards could be established to distinguish neighborhood benefits from community benefits in order to determine what portion of project costs should be borne out of special assessments and what portion out of general revenues. It seems visionary to expect precise standards. However, if the Jefe promulgated regulations specifying when project costs should be met in part out of general revenues, the more serious grievances of particular neighborhoods would be relieved. In the past, the Jefe has not often exercised this power. One of the few recent instances in which special assessments reportedly were suspended was in connection with the

OTHER

TAXES

AND

CHARGES

ON

URBAN

LAND

District's peripheral, limited access highway, since it was thought that adjoining property values might decline because of the improvement. When neighboring property values actually increased as sections of the highway were opened, several members of the Mixed Planning Commission favored use of special assessments, despite the project's obvious service to all Mexico City residents.3 Whether or not, and to what extent, property owners whose property values increase should pay a part of the cost of the improvement causing the increase, when many others also benefit from the improvement, is a difficult question to answer both in general and in each specific case. 3. ASSESSMENT ZONE

Once a city decides to levy special assessments for a given project, it must define which properties benefit from the improvement and should be taxed. The District's technique for defining this area, while somewhat arbitrary, resembles those employed in many cities in the United States.4 For public ways, the assessment zone includes all property not further from the improvement than twelve times the average of street widths in the project (Art. 393 (I)). For parks, gardens, and plazas, the zone includes all properties within 144 meters (Art. 393 (II)). Inside this zone non-frontal properties are assigned an "influence index" which, allegedly, measures the relative benefits they receive from the improvement. This index varies with a parcel's distance from the property fronting on the improvement. It ranges from 60 per cent to 5 per cent of the "planning index" of this frontal property (Art. 393 (III)). Although the statute commendably attempts to differentiate benefits within the assessment zone according to a parcel's relative proximity to an improvement, it is not clear that parks, plazas, and streets distribute their benefits identically. The formula for defining the assessment zone itself is open to even greater question. The crucial multiple "twelve" is unrelated to any objective estimate of increased property values. Even if benefits of a new street are proportional to mean street width, the fixed zone for all parks, gardens and plazas fails to reflect more relevant considerations, such as size, which may spread benefits either more or less than 144 meters.

3. Interview with Mixed Planning C o m m i s s i o n technicians, August, 1964. 4. See Harold M. Groves, Financing Government, 6th ed. ( N e w York, Holt, Rinehart and Winston, 1964), pp. 411-14.

N.Y.:

113

114

FINANCING

URBAN

DEVELOPMENT

4 . ASSESSING INDIVIDUAL P R O P E R T I E S

Within the assessment zone, each property is liable for a portion of the improvement's "net cost." Articles 381 through 387 set out detailed rules for determining this figure. In general, "net cost" includes professional fees, overhead expenses of the Executive Committee executing the project, and the cost of acquiring land for the project less the market value of surplus public land resulting from the project's completion. In a succession of astoundingly complex articles, the statute develops several indices for allocating this cost. In the relatively straightforward case of the opening of a single street of uniform width, the street's width, in meters, is taken as its "width index," as specified in Article 391. The average cost per meter of street length of condemning the street (excluding compensation for parks, squares or gardens) then is divided by the highest per square meter cost of condemning the street to form the "cost index" specified in Article 390. The cost index is added to the street's average width index to form the "index of land facing the improvement" of Article 389. This index becomes the "planning index" of Article 388 (I) for each parcel fronting on the improvement. For parcels within the assessment zone which do not front on the improvement, the planning index is equal to the influence index discussed above (Art. 388 (III)). Thus derived, the planning index for each property is multiplied by its "homogeneous area" (physical area adjusted for purposes of cadastral valuation) (Arts. 379 (IV) and 380). In theory, this product represents the property's benefit from the project, for the planning index serves as an estimate of each property's per meter benefit. To determine the relative benefit each parcel receives from the improvement, the above product is divided by the sum of all such products within the assessment zone, which is intended to represent the total benefit produced by the improvement. The fraction so obtained, deemed to equal each property's share of the total benefit, is multiplied by the improvement's liquid cost to yield the proportionate share of the work allocated to each property. This figure is the tax due under Article 380. This formula is needlessly complex. First, the planning index, which seems to be crucial, actually cancels out in the final computation of the planning tax, since in the uniform project described above, the planning index is in effect the same for each property. In the end, the tax levied on each property depends only on its size and its distance from the improvement as expressed in the influence index. If the street

OTHER

TAXES

AND

CHARGES

ON

URBAN

LAND

to be improved varies in width by more than 51 per cent along the length of the improvement, Article 379 (II) dictates that the project be broken down into sections. The planning index for each project section will differ in accordance with the mean width of the street in the section and with the average cost of condemnation per meter of street length in the section, but the planning index is, in effect, the same for all properties within a given project section. The maze of formulas serves only to create drafting difficulties and to obscure the factors which actually determine the allocation of the planning tax. Although the size of a property and its distance from an improvement are relevant factors in calculating special assessments, it is still questionable whether those factors distribute the planning tax equitably. The planning index itself is the peculiar result of the addition of indices of width and cost. The size of a property does not indicate whether it is vacant or improved. Similarly situated lots of the same surface areas pay identical planning taxes even if one is vacant and the other supports a skyscraper. While the owner of the vacant lot might utilize improvements as effectively as his neighbor by erecting another skyscraper or selling to one who intends to so improve the property, in practice the owner or the tenants of the improved lot are likely to utilize the improvement more intensively. If it is increased market value of the vacant lot which justifies a heavy planning tax, it would be appropriate to consider the land's cadastral value as well as its area. The distance-area approach also ignores the use made of assessed property. Whether a property is used for residential or commercial purposes is no less relevant than whether or not it is improved in ascertaining its share of benefits from a broadened avenue or neighborhood park. If potential rather than present use is the basis for the tax, then a property's cadastral value seems more relevant than its relative size. An assessment formula based in part on reliable cadastral values would indicate potential use more reliably and precisely than does the present formula, which presumes that similarly sized parcels exploit municipal improvements equally. It should be noted that the planning tax is concerned with "homogeneous area", which includes adjustments for corner lots, uneven terrain, irregular boundaries, and other peculiarities considered in the Appraisal Manual (see Chapter Two, Parts ID and I-J, supra). Since these and similar features of each lot are important guides to its commercial value, it may be argued that "area" does provide a reliable shorthand guide to cadastral values. On the other hand, it is no more difficult to use cadastral values themselves in

115

116

FINANCING

URBAN

DEVELOPMENT

the assessment formula. In fact, there are probably some cases where unit values differ substantially within a given assessment zone, so that even "homogeneous area" is a bad indicator of relative values. Either estimated land values or cadastral values (land plus improvements) may be used to allocate project costs to properties. If it is assumed that no improvements will be made on a given piece of vacant land, then cadastral values should be used, because improved properties presumably benefit from and use a project more intensively than do vacant properties. If vacant land is soon to be improved, then the use of cadastral values accords such land a windfall gain, since the property will soon use the project as intensively as currently improved properties. In such cases, the use of land values for allocating project costs seems preferable. Since, for practical reasons, the distribution of special assessments cannot await future developments, a choice must be made between cadastral and land values. Cadastral values are readily available and estimates of land values are in large measure arbitrary. (See Chapter Two.) For these reasons it is preferable that up-to-date cadastral values be used. As improvements are added, cadastral values should in some measure reflect the additions to property values which public works bring about. 5. P A Y M E N T

Owners of assessed property are liable for the planning tax, even where ownership of improvements rests in others. Where ownership cannot be ascertained, or the owner is required by contract to transfer title to a possessor, the possessor is liable for the tax. Under recently added provisions, persons living in condominiums are liable for planning taxes assessed against any part of the property in proportion to their share of the property's total area. Trustee institutions are liable for planning taxes assessed against trust properties (Art. 376). The planning tax is paid in bimonthly installments over a period not to exceed ten years, as established by the Mixed Planning Commission (Art. 399). Where full payment is made in advance of the date for the first installment, property owners are entitled to 10 per cent discounts (Art. 400). Normally, payments are made to the Treasury, which may proceed in summary fashion against any persons liable for the tax (Art. 401). When the D D F has financed an improvement through bank loans, tax payments are pledged and paid to a fiduciary credit institution which holds the proceeds in trust as security for the

OTHER

TAXES

AND

CHARGES

ON

URBAN

LAND

lender's claims (Arts. 405 and 407). Where taxes collected by the DDF exceed an improvement's cost, the excess must be held for other DDF projects, as determined by the Mixed Planning Commission (Art. 403). 6. EXEMPTIONS

Only two classes of property are specifically exempted from the planning tax. Diplomatic missions are exempt, provided reciprocity is extended Mexican missions (Art. 377). In addition, properties catalogued as monuments enjoy either 10 or 50 per cent exemptions, depending on the nature of the property's special features (Art. 378). Curiously, government property is not exempted under the statute, though in practice the planning tax apparently is not levied on such land. Some Mexican observers have criticized the planning tax for an alleged tendency to drive low income families to the District's undeveloped urban fringe. Whether as owners or tenants in regions benefited by DDF projects, these groups cannot afford to pay higher taxes (or rents reflecting such taxes) and therefore abandon their neighborhoods to higher income families.5 If this criticism has any validity, it might provide the basis for a special exemption for residences occupied by low income families. To the extent that migration has occurred, however, the problem lies less in special assessments than in the nature of municipal improvements, the DDF's pattern of land use controls, and the District's severe housing shortage. If the planning tax were not levied on low cost residential properties within a given zone, property values would still increase in accordance with benefits received from municipal improvements. If property owners sought to maximize profits, they would reallocate their land to more profitable uses, and rental charges within the zone would rise correspondingly. Since the quantity of housing remains constant, and improvements contribute to increased demand, elimination of special assessments cannot be expected to preserve benefited property for low income users. If elimination of special assessments is unlikely to preserve low cost residential uses, it might be possible to achieve this end by exempting residences from the planning tax only so long as they met a statutory definition of low cost housing. However, most low income 5. See José A. Tenreiro Rivero, Derechos de Cooperación en la Ley de Hacienda del Distrito Federal (hereinafter referred to as Tenreiro Rivero, Derechos de Cooperación), (diss. Facultad de Derecho, Universidad Nacional Autónoma de México, 1959), p. 25. Several D D F officials interviewed in August, 1964, made the same observation.

117

118

FINANCING

URBAN

DEVELOPMENT

families are tenants who would benefit from this conditional exemption only if their landlords found it less profitable to raise rents above the specified ceiling than to avoid the planning tax. Where the capitalized value of the increase in market rentals exceeds the planning tax, landlords will not be deterred from new land uses by the proposed exemption. Limited information precludes any estimate of how frequently such a tax incentive would be effective in the District. In any case, enforcement of the proposed scheme would be extremely difficult. The definition of low cost housing would require periodic adjustment due to inflation. Some improvements should be permitted, with corresponding rental increases, even for exempted residences. Furthermore, the complexity of policing rentals for exempted properties would require considerable administrative machinery, something the Department has been unwilling to create to enforce rent control decrees (see Part III, infra). In short, manipulation of special assessments for the purpose of providing housing for low income families is not recommended as an efficient means toward the objective. 7 . REVIEW PROCEDURES

Property owners within an assessment zone have no opportunity to express their views formally on the desirability of the improvement (See Art. 398). This is so despite a Supreme Court holding, in a case dealing with cooperation fees, that prior administrative hearings are required by Article 14 of the Constitution where the amount of special assessments depends on the Department's cost in installing urban services.6 This case seems to apply to the planning tax as much as to the cooperation fees statute (since amended) which was held unconstitutional in that case. However, in a recently appealed decision of the Mixed Planning Commission, the Fiscal Court held that the Mixed Planning Commission is not required to permit taxpayers to contest municipal projects prior to their execution.7 In this study, no further cases were discovered specifically dealing with the planning tax; this remains an important subject for further research. In any event, owners receive no official notice of an improvement until the project has been approved and the cost study completed. At this point, in accordance with Article 397, the Mixed Planning Com6. Amparo en revisión 3058/52, Aguila Real, Decided June 17, 1958, (Sept., 1958) BIJ 513. 7. Tribunal Fiscal de la Federación, Juicio No. 2 2 2 3 / 6 2 (3* Sala), Decided March 16, 1964.

OTHER

TAXES

AND

CHARGES

ON

URBAN

LAND

mission issues a notice to each owner or possessor specifying the nature of the improvement, the cost of the work, the location of the taxpayer's property, the tax assessed, the number of bimonthly payments to be made, and the amount of each payment. Interested persons desiring to contest the Commission's notice of assessment have fifteen days to protest. Article 398 instructs the Commission to render its decision without procedural formalities and on the basis of the evidence introduced. It is not clear from these provisions precisely what the taxpayer may contest. Presumably, it is too late to protest against the project itself. His only standing, then, is to challenge his particular assessment. Whether this challenge is limited to the mathematics of the assessment and to the taxpayer's claim to exemptions, or whether it may go further and question the project's alleged cost, the relation of the assessment to those of similarly situated properties, or the entire statutory scheme itself, remains in doubt from the statute's language. Further study of the Commission's hearing practice would be most useful in evaluating this form of administrative review within the Department. One critic has arguéd that the planning tax, in conjunction with cooperation fees and other property taxes, constitutes an excessively burdensome tax in violation of Article 31 (IV) of the Constitution, requiring an "equitable" allocation of taxes. 8 The Supreme Court has rejected an analogous argument, involving the old plusvalía tax, in holding that cooperation fees merely reimburse the Department for its services in installing improvements while the incremental value tax reached plusvalía created by the improvement. 9 Whatever the merits of this analysis, it would not seem to apply to the planning tax, which relates to the cost of installing improvements rather than the recapture of plusvalía. However, as indicated below, cooperation fees and the planning tax impose assessments for different types of improvements which, if complementary, are not identical.

C. COOPERATION FEES 1. HISTORY

As early as 1897, the Department levied a special tax on pavements and drains according to front footage of benefited properties. More 8. Tenreiro Rivero, Derechos de Cooperación, pp. 19-25. 9. Revisión Fiscal 80/52, Esther Pérez de Zavala, Decided March 24, 1955, 1955 ISCJN (S. Aux.) 67.

119

120

FINANCING

URBAN

DEVELOPMENT

recent regulations, issued in 1931, required property owners to contribute either money, land, or labor to certain municipal improvements. Under these regulations, taxpayers were permitted to inspect relevant Department accounts, since property owners' approval was necessary for a project's execution. In 1933, when the levy became compulsory, public participation was eliminated. The cooperation fees became Title Ten of the Finance Law of 1941. The actual rates have been amended in 1945, 1953, 1955 and 1959.10 2.

SCOPE OF COOPERATION F E E S

Cooperation fees are levied on properties benefited by water mains, sanitary sewers, storm sewers, pipelines connecting subdivisions to these central facilities, sidewalks, street pavements, and public lighting (Art. 417). Cooperation fees also are collected, under Article 427, when the Department installs or repairs private plumbing connections, cleans septic tanks, and drains cellars flooded from causes other than inadequate public services. None of these services qualifies as an improvement under the planning tax, except for street pavements and (possibly) sidewalks. However, neither pavement nor sidewalk expenses form part of a project's "net cost" under the planning tax (see Art. 381). Thus in practice no duplicative assessments can be expected. This casts doubt on the principal complaint critics have had with cooperation fees—the apparent unfairness of levying two special assessments, as well as increased property taxes, against properties benefited by a single Department project. The statute is precise in identifying the services financed through special assessments, especially in comparison with the planning tax provisions of Title Nine. Thus cooperation fees are not charged, according to Article 428 (I), for street paving connected with the removal or reduction of street dividers, the raising of trolley tracks in previously paved streets, the paving of central portions of main avenues, or any paving of less than five centimeters thickness. In each of these cases, the legislature apparently concluded that nearby property owners are either inconvenienced or not benefited by improvements serving a large number of city residents. For similar reasons, the only fees levied when improvements involve streets or highways outside of the District's internal transportation system are those in Article 428 (II) for the connection of subdivisions to municipal sewer and water systems. 10. This summary is taken from Tenreiro Rivero, Derechos de Cooperación, 81.

pp. 53-

OTHER

TAXES

AND

CHARGES

ON

URBAN

LAND

Despite the statute's attempt to define the circumstances in which municipal services benefit nearby properties instead of the general community, it has been contended that neither sanitary nor storm sewers are properly financed through special assessments. According to one analyst,11 these services are such basic governmental responsibilities that their installation throughout the District's urban area ought to be standard. Since all neighborhoods may expect to enjoy these facilities, property owners adjoining a new storm sewer benefit only by having the service before other residents. An equally important consideration is that both storm and sanitary sewers operate for the benefit of the entire urban community in preventing floods and disease. These considerations are particularly pertinent to Mexico City, where flash floods affect many parts of the city and health standards in several unserviced regions are extremely low. When the network of storm and sanitary sewers in the Federal District includes most of the urban area, it will be appropriate to consider imposing cooperation fees only for connections. 3. ASSESSMENT ZONE

Unlike the planning tax, cooperation fees are levied only against properties fronting on improvements or having access to them through easements or servitudes (Art. 418). This approach seems reasonable since properties not bordering on most improvements other than storm and sanitary sewers do not benefit significantly. Certainly this assessment zone makes more sense than the 144 meters always used for parks, gardens, and plazas under the planning tax. 4 . PROPERTIES A S S E S S E D

Cooperation fees are levied against each parcel in the assessment zone at rates which vary according to the type of improvement installed and the quality of materials used. For example, public lighting costs M$85 per front meter of property for incandescent bulbs and M$100 per front meter for mercury vapor fixtures. Similarly, fees for asphalt sidewalks are M$10 per square meter of sidewalk fronting on a parcel and M$15 per square meter for concrete sidewalk (Art. 420). For individual Department services, such as cleaning septic tanks or pumping cellars, beneficiaries are charged a fee based on the Department's estimated cost in providing the service (Art. 427). 11. Ibid., pp. 23-24.

121

122

FINANCING

URBAN

DEVELOPMENT

In certain circumstances cooperation fees are apportioned among several property owners. Where water or sewer pipelines are installed in the center of a street, or where pipelines on one side of a street serve properties on the other side, properties on each side of the street pay half the specified rate (Art. 423 (I)). Similarly, where street lights are installed only in the center of a street, properties on each side split the charges (Art. 423 (II)). For street pavements, the appropriate rate is multiplied by the area of pavement, measured to the center of the street, in front of each property in order to determine the property's cooperation fee (Art. 423 (III)). Each unit of a condominium is assessed, under Article 424, in proportion to its area within the condominium. These techniques are relatively straightforward in comparison with assessment techniques under the planning tax, because it is easier to identify the properties benefited by improvements financed by cooperation fees than to identify those benefited by improvements financed by the planning tax. 5 . PAYMENT

Cooperation fees are payable in bimonthly installments over a period of two years commencing on the date the improvement is put into service. The period may be extended to four years upon proof of inability to meet the two year requirement. Nevertheless, fees charged for connecting subdivisions to water or sewer systems are payable in full, under Article 425, at the time connection is requested. Fees for installing or repairing private plumbing connections, cleaning septic tanks, and draining cellars are payable in advance of the service (Art. 427). Fees payable in installments also may be paid in full at the time of the first payment, in which case a 5 per cent discount on the total fee is granted by Article 425, which also states that property owners may offer contributions in excess of cooperation fees to the Department, presumably to encourage the provision of services to their neighborhood. 6 . EXEMPTIONS

The only properties exempted from cooperation fees are diplomatic missions, provided reciprocity is extended, and properties which belong to the federal government, territories, states, municipalities, or the Department (Art. 422). The government ownership exemption does not

OTHER

TAXES

AND

CHARGES

ON

URBAN

LAND

appear in Title Nine, which again suggests that Title Ten is the product of more careful drafting. The discussion of exemptions for low cost residences under the planning tax is relevant here as well. 7 . REVIEW PROCEDURES

The major shortcoming of Title Ten is its failure to provide any procedure for administrative review of special assessments. There is no provision authorizing taxpayers to challenge either proposed improvements or assessed charges before the administrative body imposing cooperation fees. Indeed, the absence of such a provision is emphasized by the failure of the statute to identify the administrative agency charged with supervising cooperation fees, though doubtless the Mixed Planning Commission assumes this job in practice. Taxpayers may, however, appeal assessments directly to the Fiscal Court (Art. 432). If an error of no more than M$5 is involved, because of inaccurate property measurements, the fees assessed are deemed correct (Art. 429). Considerable litigation has centered on Title Ten's review procedures. Several interesting cases reflect the gradual elimination of taxpayers' rights to administrative hearings in this area. Until January 1, 1949, taxpayers could petition the Department, before its approval of an improvement, about the desirability and cost of the proposed project. Statutory changes, effective January 1, 1949, eliminated this right. In 1958, however, the Supreme Court held this change unconstitutional because it violated Article 14 of the Constitution. 12 Since the fee assessed against each property turned (at that time) on the improvement's total cost, the revised procedure denied taxpayers their right to a prior hearing to protest official action affecting their property rights. The effect of this holding, however, was mitigated by further statutory changes already in effect at the time of the decision. Effective January 1, 1950, cooperation fees were set at fixed rates regardless of an improvement's cost. Taxpayer hearings were stipulated but only after cooperation fees had been assessed, and the purpose of these hearings was limited to reviewing the assessments' accuracy. Appeals to the Fiscal Court were permitted as well. These amendments permitted the Supreme Court to uphold the 12. Amparo en revisión 3058/1952, Aguila Real, Decided June 17, 1958, (Sept., 1958) BIJ 513.

123

124

FINANCING

URBAN

DEVELOPMENT

statute's review procedure. 13 While citing the provisions for subsequent administrative and judicial review, the court stressed that project cost no longer determined cooperation fees. The administrative decision to proceed with a project was held not to influence property rights, since taxpayers already knew the rate at which cooperation fees would be levied. This rationale is questionable. The decision, for example, to approve, enlarge, or postpone a new sewer line does affect the property of persons who will be liable for cooperation fees. Furthermore, some cooperation fees, such as those assessed for cleaning septic tanks, do depend on the Department's cost in providing the service rather than on a pre-determined rate schedule. On the other hand, the legislature appears to have been sufficiently convinced by the court's reasoning to discard all administrative review procedures when it amended the statute in 1959. Although no further cases have been discovered on this issue, it will be interesting to observe whether the Supreme Court will rely on its prior reasoning in the absence of any form of administrative review. If the Fiscal Court had the power to modify the fees, the Supreme Court might well find that property owners' rights were sufficiently protected as long as they have the right to challenge cooperation fees before the Fiscal Court. Since, as indicated in Chapter One, Part IV, the Fiscal Court appears to lack this power to modify administrative determinations, the problem of administrative hearings on cooperation fees remains a complex one.

D. PROPOSALS FOR REFORM The Department has used special assessment more than many municipal governments in Latin America. In Caracas, for example, the statutory authorization for recapture of municipally created plusvalía is rarely invoked, perhaps because the city requires subdivision developers to finance most urban services in new areas. 14 In general, special assessments are a recommended source of revenue for urban governments only where political and policy considerations make increased property tax revenues a less desirable alternative. Study of the District's 13. Amparos en revisión 6251/1951, 3382/1955, 5890/1955, 4910/1955, Decided Feb. 18, 1959, and 6048/1957, Decided Mar. 3, 1959, (March, 1959) BIJ 133 (Single opinion). This appears to be an application of the five case rule for establishing jurisprudence, as described in Chapter One, Part IV, supra. 14. Carl S. Shoup, et al., The Fiscal System of Venezuela; A Report (Baltimore, Md.: Johns Hopkins Press, 1959), pp. 337-38.

OTHER

TAXES

AND

C H A R G E S

ON

URBAN

LAND

planning tax shows that taxpayer resentment may undermine otherwise desirable revenue measures. The legislative reforms of 1931 and 1950 limiting the planning tax and cooperation fees to recovery of improvement costs are steps in the right direction. If an element of arbitrariness is present in all special assessment systems, reducing the tax to project cost at least sets an outside limit on the effects of arbitrary factors. To identify affected properties and to estimate plusvalía accurately impose staggering administrative burdens. In any case, plusvalía is reached by the regular property tax when the increased value in the property is reflected in cadastral value. The cadastral value then generates additional property tax revenue each year. In the United States, this additional revenue is regarded as a sufficient tax on windfalls.15 Capital gains taxes cannot ordinarily be used for this purpose because capital gains taxes are levied only when the gain is realized, that is, when the property is sold. Thus the tax may be deferred indefinitely, in many cases allowing the windfall to disappear over time or be counterbalanced by the value reducing factors. Another difficulty is that capital gains taxes are usually part of a country's national rather than local tax structure. This fact, true in both Mexico and the United States, raises problems of overlapping jurisdiction and local administration which may be unsolvable. In defining the scope of special assessments, the Department and other local governments should examine which kinds of urban services benefit particular local properties. The District's planning tax fails to do this with sufficient precision and imposes special assessments even for major arteries and recreation areas that serve the general urban community. Cooperation fees, on the other hand, are levied for services which for the most part benefit local regions, though even here, storm and sanitary sewers, especially trunk lines, may benefit the general community. In deciding how to finance a given improvement, the Department should consider not only its benefits to a particular region and particular properties, but also the benefits to the city as a whole. The District has utilized two quite different methods for denoting the zone of specially assessed properties. In general, the difficulties associated with the assessment zone used for the planning tax derive from the kinds of 15. See Lyle C. Fitch, "Concepts and Administration of Taxes on Property," in Joint Tax Program, Problems of Tax Administration in Latin America (Baltimore, Md.: Johns Hopkins Press, 1965), p. 465; translated and reprinted as "Impuestos Sobre Los Bienes Raíces-Conceptos y Administración," in Joint Tax Program, Reforma Tributaria para América Latina, Vol. I: Problemas de Administración de Impuestos (Washington, D.C.: Pan American Union, 1963), p. 450.

125

126

F I N A N C I N G

URBAN

D E V E L O P M E N T

improvements financed through that tax. Alternatively, cooperation fees rely on a more easily determinable and justifiable assessment zone by reaching only properties fronting on, or with access to, the improvement. The planning tax and cooperation fees also apportion costs to individual properties differently. The extraordinarily complex formulas which determine planning taxes incorporate land area and distance from improvements in an index of benefit. Current cadastral values, including both land and improvements, should also be considered in these formulas. While the cooperation fees' fixed rates have the virtue of simplicity and predictability, project costs differ from each other and from these fees. Although the need to amend these rates every few years imposes only a minor administrative burden, any unusual delay in amending them causes some properties to be assessed fees which are closer to an improvement's actual cost than others. While legislative reactions to Supreme Court decisions suggest that the purpose behind fixed cooperation fees is a desire to avoid administrative hearings prior to a project's approval, perhaps direct allocation of project cost among benefited properties can be established sometime in the future when the legal situation with respect to review is clarified further.

H

THE T R A N S F E R OF R E A L PROPERTY IN T H E F E D E R A L DISTRICT: TAXES, CHARGES, AND PROCEDURES

Briefly, the costs of transferring real property in the Federal District include professional fees, user charges for municipal services, taxes on the transfer process itself, and elements of the federal income tax. Among these charges, only the transfer tax is a significant revenue source for the DDF; it produced over M$25 million, or roughly 1.4 per cent of the DDF's revenues in 1963.16 Nevertheless, transfer costs have a direct effect on the use and development of Mexico City's urban land. To some degree the functions of these charges overlap or, at times, conflict. 16. Tesoreria del Distrito Federal, Informe de 1963 (México, D.F., 1964).

General de Labores por el

Ejercicio

OTHER

TAXES

AND

CHARGES

ON

URBAN

LAND

A. REAL PROPERTY TRANSFER TAX Title Eleven of the District's Finance Law establishes a real property transfer tax (Impuesto sobre Traslación de Dominio de Bienes Inmuebles). The tax is imposed on transfers of title to or of co-ownership interests in realty situated in the Federal District. Six basic classes of transfers are taxable: sales; corporate organizations, mergers, liquidations, dissolutions or increases in capital; acquisitions of land by adverse possession; foreclosure sales; voluntary recisions of contracts; and acquisitions by inheritance, legacy, or gift (Art. 444). Normally, the transferor is liable for the tax, although the transferee is secondarily liable if the tax remains unpaid. When two parties exchange land, each is taxed with respect to his transferred parcel. Trust grantors are liable when, pursuant to the terms of the trust, property is transferred to beneficiaries or third parties. Tranferees are primarily liable for the tax only when property is sold through foreclosure sale or acquired through inheritance, gift, or adverse possession (Art. 445). In most of these cases it makes little difference which party is liable for the transfer tax since the sales price will distribute this added cost in accordance with the parties' bargaining power. The transfer tax is assessed at 1.5 per cent of the property's tax base, which since 1960 has been the higher of the declared selling price and an official bank appraisal (Arts. 446 and 447). Before 1960, the tax base varied according to the type of transfer involved (sale, exchange, foreclosure, corporate merger, etc.) and the property's cadastral value. 17 Article 447 provides that appraisals must be made no more than six months before transfer regardless of the kind of transaction involved. It also provides that, when title is transferred without the present right to the property's income, 75 per cent of the bank's appraisal serves as the tax base; the remaining 25 per cent is taxed when the right to current income is conveyed to the transferee. Many transfers are not subject to the tax. Transfers which take place in the formation of partnerships and in the establishment or dissolution of community property arrangements between spouses are nontaxable, as are transfers taking place in the dissolution of joint ownership arrangements where each party receives only his share of the property. Similarly, neither judicial recision of sales contracts nor condemnation proceedings are taxable. Transfers to or from the federal 17. See Arts. 447-48 prior to 1959 amendments published in D.O., Dec. 31, 1959.

127

128

F I N A N C I N G

URBAN

D E V E L O P M E N T

government, states, territories, DDF, various decentralized agencies, and private charities are nontaxable, as are transfers to government employees when the purchase is at least 50 per cent financed by ISSSTE (Art. 456). Federal legislation exempts transfers involving insurance companies. 18 The exemption of houses financed at least 50 per cent by ISSSTE is the principal attempt made by the DDF to reduce transfer costs for low cost housing. An increasing number of Mexican states authorize transfer tax exemptions for low cost developments in an effort to implement the recent FOVI program and to attract housing investors to urban areas. By September, 1964, the states of Michoacán, Nuevo León, Chihuahua, San Luis Potosí, and México had enacted measures to eliminate, reduce, or suspend transfer taxes for low and middle income projects.19 Mortgage bankers emphasize the importance of these inducements in their investment decisions, and District banks actively lobby for such exemptions. Within the District, of course, an exemption to attract low cost developers is beside the point so long as the DDF's subdivision ban remains in effect. So long as this ban is enforced against ISSSTE financed housing as well as against other private subdivisions, the exemption in favor of ISSSTE borrowers has little effect. If, however, ISSSTE financing were to constitute sufficient grounds for an exception to the DDF's subdivision policy, the advisability of the transfer tax exemption should be reconsidered. Since ISSSTE members already enjoy substantial advantages in home financing, it may be argued that District residents should not subsidize these members further through transfer tax exemptions. In addition, pressure appears to be mounting for similar exemptions in favor of IMSS members.20 While such exemptions benefit some District residents, they tend to delay broader reforms directed at the tax itself. The transfer tax is administered by a separate office within the Treasury. It handles about 20,000 transactions annually, of which roughly 20 per cent are nontaxable. Taxpayers must file transfer tax returns within thirty business days from the time of transfer, time of transfer being defined by Article 451 according to the type of transac18. Insurance Companies Law (Ley General de Instituciones de Seguros), Arts. 132, 134, D.O., Aug. 31, 1935. 19. See Ley de Hacienda (Michoacán), Art. 30; Ley de Fomento a la Construcción de Viviendas Populares (Chihuahua), Art. 6; Código Fiscal (San Luis Potosí), Art. 23; Ley de Protección y Fomento a la Urbanización y Construcción de la Vivienda Popular (Nuevo León), Art. 3 (c); Ley General De Hacienda (México), Arts. 12 (VIII), 48 (IV). 20. Interview with Lic. Sealtiel Alatriste, Jr., Director of IMSS, July, 1965.

OTHER

TAXES

AND

CHARGES

ON

URBAN

LAND

tion involved. Returns indicate: 1) the names and residences of the parties to the transaction, 2) dates of the acts giving rise to tax liability, 3) the nature of the transfer, 4) description of the property and its taxable value, 5) date of bank appraisal and by whom made, 6) chain of title which appears in the Property Registry, 7) the parcel's property tax account number, and 8) computation of the tax due. The return must be accompanied by a copy of the instrument of transfer or by notarial verification of statements taken from it, as well as by a voucher from the Enforcement Branch indicating that no liabilities are outstanding on the property for property taxes, special assessments, or other charges levied by the DDF (Art. 450). Once received, transfer tax returns are examined by both the Transfer Tax Branch and the Property Tax Office (Art. 452). The former examines the return's accuracy; the latter uses transfer tax appraisals in determining street unit values for cadastral purposes (see Chapter Two, Part I-D, supra). A variety of sanctions are available to enforce transfer tax requirements. The Treasury may impose fines ranging from M$10 to M$ 1,000 for failure to provide required data and in amounts equal to three times the tax avoided for intentional errors designed to evade the tax (Art. 460). In addition, notaries cannot approve transfers if tax liabilities are outstanding with respect to the property unless the transferee agrees to accept such liabilities. Thus, a special transfer tax receipt or certificate that no tax liability is outstanding is specified by Article 450 as a prerequisite for notaries to approve or the Registry to record a transfer. Article 451 stipulates that, if the transfer tax remains unpaid at the end of the thirty day payment period, notaries should record this fact and mark the transfer documents with "not executed." Notaries are subject, under Article 460, to fines up to M$ 1,000 for errors in transfer tax returns, up to M$5,000 for knowingly submitting false information, and up to three times the tax avoided for authenticating deeds without tax receipts. Article 460 also states that notaries who act with intent to evade the tax may lose their licenses, though the D D F has not found it necessary to impose this penalty in recent years. Notaries are also secondarily liable, under Article 461, for fines not paid by parties to the transaction.

B. NOTARIAL AND RECORDING FEES Upon transfer, Federal District land is subject to various recording and notarial fees. Most of these are flat charges amounting to MS 193.20

129

130

FINANCING

URBAN

DEVELOPMENT

regardless of the property's value. This figure covers stamps for certain types of documents, a "certificate of contribution" (presumably to show that no tax liabilities are outstanding against the property), and miscellaneous services performed by the notary. 21 In addition to these fixed fees, transferred property is subject to a special recording fee, which varies according to the property's appraised value. It appears that recording fees fall most heavily on low value properties, amounting to over 1 per cent for a M$ 1,000 lot, .5 per cent for a M$5,000 lot, and less than .2 per cent for properties exceeding M$200,000. A further charge, also varying with property values, is assessed for official authorization of the transfer documents. This fee amounts to 1.5 per cent for properties worth M$ 1,000, .4 per cent for properties worth M$50,000, .3 per cent for properties worth M$200,000, and less than .2 per cent for properties worth M$ 1,000,000. These several charges and fees impose transfer costs of approximately 25 per cent of the value of properties worth M$ 1,000, 6 per cent of properties worth M$5,000, 1 per cent of properties worth M$50,000 to M$ 100,000, and .5 per cent of properties from M$200,000 to M$ 1,000,000 in value.22

C. NOTE ON THE FEDERAL DISTRICT'S PROPERTY REGISTRY This note on the Public Registry of Property for the Federal District describes land transfer procedures in Mexico City. The Registry, under the supervision of the Dirección General de Servicios Legales, has been criticized by those Mexican notaries who believe the present recording system to be obsolete. For example, recorded documents are copied by hand or typewriter into large volumes which are subject to considerable wear and tear. When a registered tract is transferred or mortgaged, the registrar makes a marginal note (referring title searchers to the subsequent transaction) alongside the document by which the transferor (or mortgagor) acquired title. A tract index and a vendee index are used at the Registry. A tract 21. The figures in this Part are from sample cost sheets for land transfers in the Federal District provided by a licensed notary, Lie. Francisco Vázquez Pérez, July, 1965. 22. Ibid. The real property transfer tax, the stamp tax, and the 15% additional tax could add from 4 to 7 percentage points to those stated in the text.

OTHER

TAXES

AND

CHARGES

ON

URBAN

LAND

index lists all properties in the jurisdiction according to their location and refers title searchers to the documents by which a given parcel was transferred to its present owner. A vendee index lists alphabetically all transferees of property within the jurisdiction and refers title searchers to the document by which a given person acquired his property. In the United States, a vendee index usually is supplemented by a vendor index, which allows title searchers to determine whether a transferee has subsequently retransferred a given parcel. 23 Since only a tract index and a vendee index are used at the Registry, it is impossible to check a vendee's subsequent resale of his property except through such marginal notes as the registrar has made. Furthermore, cursory examination of these indices suggests that, while the vendee index is reasonably accurate, the tract index is not always current on street changes or property divisions. Notaries also object to the large surpluses accrued by the Registry. According to one estimate, the Registry collects nearly M$ 1,000,000 monthly, as against roughly M$80,000 in expenses. 24 In an effort to spur recording reforms, a committee of notaries proposed new legislation in the early 1950's. On July 1, 1952, the President promulgated regulations 25 establishing an entirely new recording system, to become effective July 1, 1953. However, on June 3, 1953, this effective date was postponed until further notice. 26 Although there is little likelihood that the suspended regulations will be implemented in the near future, the main features of the new system deserve mention. The regulations provide for a separate folder (cuadernillo) for each recorded property. This folder contains four sections: the first describes the property and includes its cadastral plan; the second enumerates the chain of title associated with the property; the third lists mortgages, leases, subleases, certain types of trusts, and other security interests associated with the property; the final section is reserved for those "provisional annotations" required by Article 3043 of the Civil

23. See, generally, A. James Casner and W. Barton Leach, Cases and Text on Property, 1st std. ed. of 1950 with 1959 Supp. and 1964 Tax News Release (Boston, Mass.: Little Brown & Co.); see pp. 761-984 for a discussion of U.S. recording practice. 24. Memorandum of Lie. Francisco Vázquez Pérez to the authors, July, 1965. 25. Federal District Public Registry of Property Regulations (Reglamento del Registro Publico de la Propiedad para el Distrito Federal), D.O., Dec. 15, 1952. 26. D.O., June 20, 1953.

132

FINANCING

URBAN

DEVELOPMENT

Code. 27 Three types of indices are provided for in the new scheme: a tract index, a "personal" index listing owners (presumably vendees) and creditors, and a cadastral number index, which serves to equate cadastral and recording numbers for each property. 28 It is not clear why this admittedly desirable reform of the recording system has been suspended for so many years. Though implementation costs have been estimated at M$2,000,000, the notaries who proposed the scheme maintain that current recording charges could recapture this sum within one year. 29 It may be that the new system's attempt to link cadastral information with conventional transfer data is objectionable to the Treasury. It would seem, though, that the suspended regulations provide an excellent opportunity to implement the proposal advanced in Chapter Two that all property tax appraisal values be made available to the public. The new recording system does not specifically include appraised values as an item of required data for each property, but this information could easily be included in the first section of the projected folders.

D. FEDERAL STAMP AND CAPITAL GAINS TAXES Sales and rentals of real estate are subject to a federal stamp tax (Timbre). In the case of sales, the tax is based on a percentage of the property's value as determined by bank valuation.30 Stamp tax rates vary from 2 per cent for properties up to M$50,000 in value to 5 per cent for properties whose value exceeds M$750,000. Sales of multiple unit properties in which more than half of rentals are controlled are taxed at 2 per cent regardless of value, as are rural properties. The rate of tax on leases and subleases varies from 1 to 3 per cent, according to monthly rentals, and the appropriate rate is applied to the total rent due

27. Property Registry Regulations, Arts. 146-55. Art. 3043 of the Federal Civil Code (Código Civil para el Distrito y Territorios Federales) (hereinafter referred to as Civil Code) provides as follows: "Cancellation (of a record of mortgage) shall be accomplished in the manner prescribed by regulations; but, in order to be valid, the memorandum of cancellation must contain all data necessary for ascertaining which record of mortgage is cancelled, the reason for cancellation, and the date of the same." 28. Property Registry Regulations, Art. 43. 29. Memorandum of Lie. Francisco Vázquez Pérez, July, 1965. 30. General Stamp Tax Law (Ley General del Timbre), Arts. 2 and 25, D.O., Dec. 31, 1953.

OTHER

TAXES

AND

CHARGES

ON

URBAN

LAND

under the lease, though not in excess of 10 years' rent. 31 Since 1962, the federal income tax law has contained provisions for taxing capital gains arising from sales of securities and urban real estate. Depending upon how short a time a property is held before sale, up to 80 per cent of the gain is taxable at regular income tax rates. Gain is computed by deducting from the sale price the capital costs of the property. Because the cost basis of property is determined by a bank appraisal of value as of January 1, 1962, or as of the date of acquisition if later, the capital gains tax does not reach appreciation in value which occurred before 1962.32

E. TRANSFER COSTS AND EFFICIENT LAND USE The cumulative effect of the taxes and fees described above is to impose a considerable burden on parties transferring land. The transfer tax, stamp tax, notarial fees, and recording charges normally amount to between 5 and 7 per cent of appraisal value for properties worth from M$50,000 to M$ 1,000,000 and may reach 20 or even 30 per cent for inexpensive parcels. 33 Transfer costs of this magnitude can discourage urban development by obstructing the transfer of inefficiently used property. Transfer costs which burden low cost housing in particular appear to conflict with recent reforms in the private housing field. Furthermore, to the extent that exemptions and the ability to avoid some of the taxes favor particular uses or individuals, these reductions may operate unfairly or may achieve an undesirable distortion of urban land use. In reducing transfer costs, the reduction or elimination of the Federal District transfer tax and the federal stamp tax should be the primary targets of action. No change is suggested for the new federal 31. Ibid., Art. 4, as amended by Decree of Dec. 30, 1958, D.O., Dec. 31, 1958; see also World Tax Series, Taxation in Mexico, "1962 Tax News Release" (Published for Harvard Law School International Tax Program by Commerce Clearing House, Inc., Chicago, 111., 1962). 32. Federal Income Tax Law (Ley del Impuesto Sobre la Renta), Arts. 60 (III), 68, 70, 75. D.O., Dec. 31, 1964. See also Henry J. Gumpel, 'The International Tax Law of Mexico," in Tax Institute of America, Symposium ort Taxation of Foreign Income by the United States and Other Countries (Princeton, N.J., Tax Institute of America, 1966), pp. 57-63. 33. Memorandum of Lic. Francisco Vázquez Pérez, July, 1965. These figures look even worse to an owner whose property is subject to a large mortgage. For example, the 1.5% transfer tax looks like a 7.5% tax to an owner who has only a 20% equity in his property.

133

134

FINANCING

URBAN

DEVELOPMENT

income tax on capital gains, which is a part of continuing income tax reform at the national level. It affects only those transfers involving a profit in a country in which virtually all other sources of profit are subject to income tax. Notarial and recording fees involve established patterns of remuneration for public services. The high respect in which notaries are held suggests that Mexicans find the present notarial system satisfactory; without drastic reforms in that system, sharp reductions in fees are unlikely. While reduction in at least some recording fees appears appropriate, particularly if reports of substantial surpluses are accurate, recording fees, which are generally low, are less of an obstacle to efficient land use than the transfer tax. Moreover, unlike the other charges discussed in this chapter, the transfer and stamp taxes are not user charges related to specific governmental functions; nor do land transfers themselves occasion any social cost justifying the imposition of special taxes on such transactions. Transfer and stamp taxes are crude ways to tax incremental values, but they are no longer needed for this purpose because the federal capital gains tax now reaches increments subsequent to January 1, 1962. Insofar as the DDF seeks to finance some of its municipal capital expenditures through the transfer tax, special assessments or increased property taxes are more equitable means of spreading the tax burden. Finally, no study was made of the technical means of avoiding transfer and stamp taxes (such as by holding property in corporate form and transferring the shares in the corporation rather than the real property itself), but such practices appear to be widespread, with the result that these taxes are to a significant extent burdens only on the unwary. In sum, no substantial basis exists for the transfer and stamp taxes, and they should be eliminated, even if only through gradual reductions.

H i

RENT

CONTROL

A. INTRODUCTION Rent control was imposed in 1942 as a wartime fiscal control measure. Since then, the Federal District has grown continuously and rapidly. This examination of some of the effects of rent control on the Federal

OTHER

TAXES

AND

CHARGES

ON

URBAN

LAND

District may give some indication of the effect of rent control in other rapidly growing cities in the underdeveloped world, particularly in Latin America. Part III-B discusses the extent of rent control. Part III-C examines its impact and indicates that rent control should be ended. Part III-D is therefore concerned with practical measures for securing its repeal. Before turning to the specifics of rent control in the Federal District, some of the variety in rent control patterns should be noted. For example, rent control may cover all land uses or only some; it may cover only buildings constructed before a certain date or rents above or below a particular amount. A rent control law may be regarded as permanent or temporary. Clearly a law regarded as permanent and covering all properties regardless of land use or price and all structures both new and old would affect the real estate market quite differently from a law which applied only to certain land uses and certain price classes, to old structures only, and which was expected to be repealed shortly. In fact, the second law might affect the real estate market in a way quite opposite from the first. It is therefore necessary to outline in some detail the rent control law now in effect in the Federal District.

B. DESCRIPTION AND ANALYSIS OF RENT CONTROL IN MEXICO CITY 1. D E S C R I P T I O N

The national legislature between 1942 and 1948 issued a series of decrees regulating rents in the Federal District. In December 1948 President Miguel Alemán requested a temporary extension of rent control to permit a thorough study and a "definitive" resolution of the problems. The "transitional" decree of December 24, 1948, had no expiration date. Except for slight modifications made in 1951, it is still in effect. 34 The 1948 decree, in Article 1, extended existing rental contracts or leases indefinitely for housing units occupied by tenants, their families, or household employees, and for commercial or industrial structures. Article 2 excludes leases on units which rented for M$300 or more per month and on premises which the owner needed in order to 34. Decree of December 24, 1948, D.O., Dec. 30, 1948; as modified by Decree of November 30, 1951, D.O., Dec. 15, 1951. See translation in Appendix.

135

136

F I N A N C I N G

URBAN

D E V E L O P M E N T

establish his own home, industry, or store. In addition, Article 3 permits small increases in rents frozen since the first decree in 1942. Rent control persists as long as the original tenant and any member of his permanent family who was residing with him in 1948 continue to occupy the premises. Whether the admission of new members into the household constitutes grounds for rescission is uncertain. 35 However, death of the original tenant does not terminate rent control unless termination was previously agreed upon. 36 Improvements made after the 1948 decree are not subject to control. The vitality of a rent control law not substantially modified for seventeen years depends on the ease or difficulty with which tenants could be induced to move or controls could be circumvented. Also, if owners can let their buildings depreciate sufficiently, fair market rents on controlled units will fall to controlled levels. Decrees issued before 1948 had provided substantial fines if landlords charged excess rents or coerced tenants to move. The 1948 legislation eliminated these fines and substituted no new penalties. The 1948 decree also abolished the machinery for awarding rent increases based on improvements. The courts have had some difficulty in specifying the circumstances in which tenants can be forced to vacate. Although the 1948 decree, in Article 7, forbade tenants to change the use of the property, to damage the premises, or to sublet or assign the property without the owner's permission, the courts have been lenient in recognizing that shop owners may have to sleep on the premises "for protection," and that the extended Mexican family structure may justify the presence of distant relatives or of families arising from common law marriages. 37 The courts have had the most trouble in deciding when the owner may legitimately reclaim property for his own use. The 1948 decree, in Article 2 (II), requires that the courts examine the landlord's need to reclaim. In most cases, but not all, possession of similar property by the owner bars his efforts to reclaim property for his own use. 35. Willebaldo Bazarte Cerdán, Leyes sobre Arrendamientos para toda la República (México, D.F.: Ediciones Botas, 1956), pp. 10, 71, reports that admission of new members to the household constitutes grounds for rescission, but that there are clandestine violations. See also Oscar Lewis, The Children of Sanchez (New York: Random House, 1961). 36. Civil Code, Art. 2408. 37. Amparo Civil Directo 6146/1949, Calderón Ojeda Ignacia, Decided Feb. 21, 1952, Sem. Jud., 111:1295 (S. Aux.); Amparo Civil Directo 1763/1950, Molina Teófilo, Decided July 22, 1952, Sem. Jud., 113:320 (S. Aux.); cf. Amparo Civil Directo 1028/54, González Ana, Decided Aug. 9, 1954, Sem. Jud., 121:1271. See, generally, Bazarte Cerdán, Arrendamientos, pp. 63-82.

OTHER

TAXES

AND

CHARGES

ON

URBAN

LAND

Another provision of the decree, Article 7 (VIII), empowers a majority of tenants to petition the owner to rescind the lease of an undesirable tenant. The law establishes no standards by which the courts may evaluate such petitions, and it has been impossible to ascertain what standards the courts actually have set. The absence of clear standards for eviction makes the results of court action uncertain and, therefore, unattractive to potential litigants. Furthermore, possession of a rent controlled property has become a valuable asset for the leaseholder, one he is unlikely to endanger by careless behavior. Under such conditions, decontrol through attrition seems unlikely. This inference receives statistical support below. 2 . EXTENT OF RENT CONTROL

No thorough study of the effects of rent control in the Federal District has been published. Even the number of residential units affected is subject to considerable uncertainty. A study by IMSS on housing conditions in the metropolitan area of the Federal District and in surrounding communities showed that 113,205 residential units were subject to rent control. This figure was about 22 per cent of all rental units and about 13 per cent of all residential units. 38 The metropolitan area, as defined in the study, covers the Federal District and a number of communities in the State of Mexico, not all of which are listed in the 1960 census. The Federal District plus the listed communities had a population of 5,074,138 in 1960. Allowing for population in the other municipalities and for immigration and natural increase, the total population in the metropolitan area was between 5.5 and 6.0 million. Using the smaller figure, and assuming population densities per residential unit were approximately the same for rent controlled units as for all other units, yields an estimate of 710,000 inhabitants in rent controlled units. This figure will be referred to as Estimate 1. It is probably too low because the density of rent control is highest where population densities are also particularly high, in the horseshoe-shaped downtown area known as "Old Mexico." 39 38. The study is reported in "El Problema de la Vivienda en Mexico," in El Correo Econdmico, January 3, 1965, Supp. 8, pp. 59-61. 39. In 1958 46% of the families in the central tenement area had 4 to 6 members, and 23% had 7 members or more. Bernard J. Frieden, "The Search for Housing Policy in Mexico City," The Town Planning Review, 26:77 (July, 1965).

137

138

FINANCING

URBAN

DEVELOPMENT

The Treasury of the Federal District reported that, in 1964, 20,273 properties or lots (predios) out of a total of 304,099 in the Federal District were subject to special water rates charged only to buildings in which half or more of the apartments were subject to rent control. The majority of these structures were multifamily. More detailed information on a sample of 80 properties, all residential, was supplied by the Treasury, but this sample may not have been random. Among these 80, there were an average of 15 apartments per structure and four-fifths of the units were subject to rent control. There is no indication of the number of rent controlled apartments in buildings that do not qualify for special water rates.

TABLE 2 3 . POPULATION AFFECTED BY RENT CONTROL (IN THOUSANDS).

Inhabitants per apartment

J

Rent controlled apartments per property 10 is

4

405.5

810.9

1216.4

1621.8

5

506.9

1013.7

1520.5

2027.8

6

608.2

1216.4

1824.6

2432.8

7

709.7

1419.1

2128.7

2838.9

20

Table 23 sets rather wide limits on the possible number of residents in rent controlled units. If there are 15 units per property and a population density of six per residential unit, the number of inhabitants in rent controlled properties is over 1.8 million. The difference between this number and Estimate 1 cannot be explained by sampling error or adjustments in population densities. If the sample of 80 properties were biased to include large structures, and if the average number of residential units were less than 15, then the Treasury data would yield an estimate which is closer to Estimate 1. Assuming 10 units per apartment and a unit population density of 6 would yield an estimate of 1.2 million, which will be referred to as Estimate 2. The evidence is deplorably weak and not entirely consistent. Probably 1.0 million is the best guess of the number of inhabitants living in rent controlled units, and 160,000 the best guess of the number of units subject to rent control, but these estimates are so uncertain that they may err by 50 per cent in either direction. The rather incredible dearth

OTHER

TAXES

AND

CHARGES

ON

URBAN

LAND

of information on what is clearly a policy of considerable social and economic importance may be traced at least in part to the fact that no administrative agency is responsible for enforcing rent control. Instead, the courts handle all disputes. In 1962 approximately 55 per cent of all residential units in the Federal District were rented. 40 On the assumption that this percentage was no higher in 1950 when the population of the Federal District was 2,884,113, the population living in rented units was 1,586,273 at that time. Assuming that all these 1950 tenants lived in units subject to rent control, and taking 1.0 million as the number of tenants in 1965 in rent controlled units, then the implied "half-life" of rent control, the length of the period at the end of which half as many tenants would be subject to rent control as at the beginning, is 21 years. In other words, if the rate of decontrol continues as it has since 1950, then by 1985 some 500,000 people will live in rent controlled units. 3. MAGNITUDE OF RENT RESTRICTION

According to one index, prices in general in Mexico City doubled between 1942 and 1948, the period during which the rent control law was created and amended. Between 1948 and 1963 prices more than doubled again. Against this background, the rents of certain residential and commercial properties after 1948 rose not at all. Although no rental price

TABLE 24. PRICES IN MEXICO CITY ( 1 9 4 2 = 1 0 0 ) .

General Index Producers' G o o d s Consumers' G o o d s Construction Materials

1948

1955

I960

1963

215 229 195 179

354 350 368 288

488 490 495 486

504 508 506 486

Source: Banco de México, Informe Anual: 1959 (México, D.F., 1960); Banco de México, Informe Anual: 1963 (México, D.F., 1964).

40. Instituto Nacional de la Vivienda, Investigación Mexicana: 1961-1962 (México, D.F., 1963), p. 239.

Nacional

de la

Vivienda

139

140

F I N A N C I N G

URBAN

D E V E L O P M E N T

indices are published, it is certain that rents for properties not subject to control have risen sharply. If free market rents rose no more than construction costs, then they nearly doubled between 1942 and 1948 and nearly tripled again between 1948 and 1963. This estimate is undoubtedly conservative. First, the period under observation witnessed a spectacular boom in land values.41 Some increase in the price of land relative to other goods and to construction costs seems likely in view of the rapid growth in the Federal District and the attendant scarcity of select locations. Second, rent control removed many residential and commercial properties from the real estate market, thereby concentrating in the uncontrolled segment of the market the burgeoning demand generated by hectic growth. In effect, rent control established a dual real estate market. Tenancy in a rent controlled property has become a valuable capital asset, approximately worth the present discounted value of the difference between the controlled and free market rent. Testimony of several informed persons, including builders and one judge, confirms that occupants of rent controlled properties do regard possession as a capital good and that they demand very substantial payments (in some cases, as much as M$30,000 to M$50,000) as a condition for vacating.

C. ECONOMIC EFFECTS OF RENT CONTROL Rent control is one of the anti-inflationary controls frequently introduced to combat anticipated excess demand. It also functions to protect low income recipients from sharp increases in housing costs and to prevent real estate owners from getting high and socially undesirable returns during periods of anticipated housing scarcity. Critics of rent control argue that it is an inefficient instrument, that the benefits it awards and the penalties it imposes are not clearly related to the economic position of the parties affected, that it hastens deterioration of property by deterring property owners from making improvements, and that it retards labor mobility by paying to workers an implicit subsidy not to move. Here these general criticisms will be considered as applied to rent control in Mexico City. Also considered is another criticism: rent con41. This assertion is based on bank appraisal data (Chapter Two, Part II-C (3) d, supra.) and on the observations of numerous Mexicans interviewed during the summers of 1962 and 1964. The boom ended or slowed in the early 1960's.

OTHER

TAXES

AND

CHARGES

ON

URBAN

LAND

trol freezes land use in patterns which become increasingly suboptimal. Certain additional criticisms of other systems of rent control are clearly inapplicable to the Mexican variant. The fact that rent control ceases when the tenant vacates means that landlords are not driven to transfer properties from the rental market to the sales market. The freedom of new construction from control suggests that rent control does not inhibit, and might even encourage, new construction other than low cost housing. (Construction of low cost housing is hindered by a number of barriers, legal as well as economic. These obstacles are discussed in greater detail in Chapter Four, infra.) Rent control is inefficient according to the strict definition of efficiency used in welfare economics and according to conventional usage. Policy A is inefficient (in the strict sense) if those who gain from A could obtain the same benefits from some other policy B and if those who lose by policy A would lose less by policy B. Alternatively, if policies A and B have the same adverse effects on the losers, policy A is inefficient if policy B accords greater benefits to the gainers. There are two apparently feasible alternatives to rent control which benefit tenants at least as much as rent control and impose no additional losses on property owners. For example, one alternative to rent control is to permit each landlord owning a controlled property to charge any rent he wishes, but the excess over the controlled rent is confiscated by a 100 per cent tax and the proceeds returned to the tenant as an unconditional subsidy. Ignoring costs of collection and transfer, neither tenant nor owner is injured. The money income of each tenant and his rental payments have risen by equal amounts. The increased rental income of each landlord is just offset by the new tax he must pay. All tenants would pay uncontrolled rents, but some tenants would be securing subsidies; and some landlords would be subject to the special tax. Now, if each tenant is free to move without losing his original subsidy, and if he decides to do so, he indicates that he prefers to spend less of his now greater money income on housing and more on other goods. This voluntary choice reveals the new pattern of expenditures as preferred to rent control. For readers who find diagrams helpful, the argument can be shown in a diagram quite similar to the textbook exposition of the pure substitution effect. Let AB represent the purchasing power of the tenant's current money income under rent control. AB is a "budget line,"

141

142

F I N A N C I N G

URBAN

D E V E L O P M E N T

Other Goods A' A

0

D

D'

B Housing

showing the maximum amounts of other goods and of housing that tenants could buy at current prices, on the assumption that housing is freely available at the rent controlled price. The slope of the budget line is the negative ratio of the current market price of other goods and the controlled price of housing, both measured in appropriate units. At the time the tenant first occupied his current residence, before rent control was introduced, we may assume that the amount of housing consumed, indicated at point C, was an equilibrium amount. There is no reason to assume that C is now an equilibrium point; the tenant's indifference map may have shifted and his income and the price of other goods may have changed. Line AB is dotted because no point other than C can in fact be reached, since at the rent controlled price the tenant has access only to the amount of housing he actually possesses. The tenant cannot buy more or less housing at the controlled prices. Since free market rents are higher than controlled rents, the tenant can trade freely along a different budget line, AD, which shows the maximum amounts of other goods and of housing that the tenant could buy at current prices for other goods and at uncontrolled, market prices for housing. Welfare at the most preferred point on AD cannot be greater than at point C, because if it were greater, the tenant presumably would have moved, and point C would no longer be observable. The proposal for decontrol described in the text may be represented by line A'D', along which the tenant is confronted with the free market price ratio and is subsidized so that he can continue to buy as much housing as in the past or, if he prefers, less housing and more of other goods or more housing and less of other goods. If point C on AB were an equilibrium point at the price ratio indicated by AB, then the tenant would always buy less housing when confronted with budget line A'D' (i.e., the substitution effect is

OTHER

TAXES

AND

CHARGES

ON

URBAN

LAND

always negative). But C is probably not an equilibrium point, especially if we abstract from costs of moving. Consequently the tenant may choose to buy less or more housing. At first glance, the former result seems more likely. However, because the tenant's income may have risen substantially since he chose point C, the latter result cannot be dismissed. The other alternative, also demonstrably preferable to rent control, would empower tenants with consent of the owner to sublet at any rent. The owner and tenant would divide, in any agreed manner, the amount by which the rent under the sublease exceeded the controlled rent. If any subletting is done, both tenant and owner indicate that their position is improved or, at least, that they are not injured; the tenant need not sublet unless his welfare is raised and the income of the landlord will rise if the tenant does sublet. This alternative assumes that the landlord has no preference between tenants and suffers no loss of rentals or increase in expenses when the change in tenants occurs. Under both of these alternatives to rent control at least one of the parties gains at no cost to the other. These examples establish a prima facie case against rent control on the grounds of static consumer welfare. However, it must be stressed that they establish no presumption in favor of simple repeal of rent control. That is, all points on line AD may be inferior to C. Rent control, however, is an inefficient instrument in another sense. One of its purposes is to protect the poor during a period when the demand for housing rises and the supply is fixed. Even at the very outset, however, there is no guarantee that rent payments are exactly correlated with family wealth or income, and the likelihood of such correlation decreases with time. In a period of rapid economic development and social change, such as Mexico has experienced in the past two decades, the probability that rental obligations incurred in the distant past are highly correlated with economic status today, is sharply reduced. Also the relative selling prices of different controlled units on the free market would differ today from the relative selling prices in 1948, injecting another random element into the relation between family income and the implicit subsidy of rent control. Furthermore, some owners may be poorer than some tenants, so that the implicit transfer which rent control accomplishes may be perverse in a few cases. Critics also stress the zero rate of return on improvements to existing structures and suggest that owners would make extensive improvements if they could raise rents. There can be little doubt that rent

143

144

FINANCING

URBAN

DEVELOPMENT

control has reduced the quantity of improvements in the past, although precisely what the current rate of return on improvements to existing structures would be in the absence of rent control is an empirical matter. It would be interesting to know the extent to which the reduction in improvements and repairs by owners is offset by improvements and repairs which tenants feel required to make for their own convenience at their own expense. Where labor mobility is a serious problem, rent control impedes adjustments by subsidizing immobility. This problem is probably less serious in Mexico than it was, for example, in the United Kingdom, because of the strong attractiveness of the Federal District for labor. The geographical distribution of rent controlled buildings in the Federal District is quite uneven. Rent control is concentrated in a horseshoe shaped area to the north, south, and east of the Plaza of the Constitution (the Zocalo). Data on the number of buildings subject to rent control in each property tax region indicate a gradual decline in the density of rent control as one moves toward the outskirts. From property tax data it appears that rent control holds down property values most in regions where the density of rent controlled units is highest. This assertion is based on indirect evidence derived from the dual nature of the Federal District's property tax system. The District taxes rental property on the basis of gross rents, as in the United Kingdom. Other property is assessed on the basis of capital value, rather than on rental value, and capital value is based upon an approximation of land prices and construction costs. On the average, the ratio of the capitalized value of controlled rents to the Property Tax Office's estimated values for land is less than unity in the central city and increases as one moves toward the periphery. In other words, rent controlled improvements appear to have negative value in the central city. The sample of 95 properties on which these statements are based is quite small, and considerable uncertainty attaches to the inferences. This correlation between the depressive effect of rent control on prices and the density of rent controlled units in the Federal District, where rapid growth has occurred, is not surprising. The improvement of transportation has been slow and, as a result, the cost of centrally located land has increased markedly.42 As pointed out above, however, 42. This inverse relation between the efficiency of transportation and the price of land in the central city is based on William Alonso, Location and Land Use (Cambridge, Mass.: Harvard University Press, 1964).

OTHER

TAXES

AND

CHARGES

ON

URBAN

LAND

land use in large parts of this central area has been frozen since 1942. Since real estate markets are always quite imperfect, market decisions cannot be characterized as optimal. Nevertheless, it seems likely that the free market, perhaps influenced by Federal District regulations, would generate a pattern of land use better suited to the current urban economic structure than is the land use pattern of the early 1940's. In the absence of rent control, land use in Mexico City would probably change markedly, principally toward greater intensiveness in central areas. Zoning rules and governmental policies pursued in the Federal District, such as those relating to the location of new public buildings, would, no doubt, vitally influence both the transitional and the final character of these areas.

D. PROGRAM TO END RENT CONTROL A proposed modification of rent control should be both politically feasible and capable of correcting the main distortions caused by the present system. Political feasibility in Mexico probably requires compensation for some or all tenants who will suffer from modification of rent control. This requirement rules out abrupt abolition of rent control. Political feasibility also requires additional low cost housing to replace those decontrolled units which get upgraded or converted to nonresidential use. To correct economic distortions, the decontrol plan should remove constraints on the change of land use. It should also bring to an end the random subsidies and taxes implicit in rent control. It is the randomness of the redistribution under rent control that is objectionable, since the governments of most countries, including Mexico, have as an objective the systematic modification of income distribution. The crucial issue concerns the manner in which to finance the decontrol plan. Just as old taxes are "good taxes" because people have adjusted to them, so also, it may be argued, old subsidies are "good subsidies." The adjustments involve expenditure patterns of families. They also include any reduction in wages that occurs because workers who live in rent controlled premises can manage with lower incomes. Such reduction would occur if the labor supply curve shifted to the right, or if some employers were sufficiently noncompetitive buyers of labor to act as discriminating monopsonists. Both kinds of adjustments suggest that residents in rent controlled properties will require assistance even if

145

146

FINANCING

URBAN

DEVELOPMENT

decontrol is gradual. Political feasibility and economic targets appear to conflict. A program under which owners are authorized to increase rents in relation to their expenditures on improvements is unsatisfactory for Mexico City, 43 since such a program would delay or prevent changes in land use and would lead to investments motivated principally by a desire to escape controls. A program of decontrol based on the cost of improvements seems better suited to cities in which growth has been less rapid and in which changes in land use patterns of unaffected properties have been less extensive. The following proposal is not advanced in the belief that it is optimal. It is presented, rather, to show that policies exist which compensate residents for the losses they suffer when controls end and yet permit changes in land use, to elucidate a general approach which may be followed in other cities with similar laws and urban conditions, and to stimulate the necessary fact-finding research and detailed drafting which would lead to the formulation of a practicable plan. The proposal bears certain obvious similarities to the alternatives to rent control presented in Part C in the discussion of the inefficiency of rent control. 44 The decontrol plan starts with a tax on the gross rents of rent controlled dwellings. The proceeds of the tax, supplemented by contributions from general revenues, will be used to finance the provision of alternative forms of housing or cash payments to displaced occupants of rent controlled dwellings. Decontrol will proceed gradually over a number of years and will assist in increasing the supply of housing over that period in the Federal District and, perhaps, in the entire metropolitan area. It is suggested that the approximately 160,000 residential units 43. See, for example, the program advanced by lng. Rafael Sánchez Juárez, "Congelación de Rentas" (unpub. MS, 1960 on file at Harvard Law School Library), p. 39, in which owners would be allowed to raise rents each year by an amount equal to the cost of amortizing the cost of improvements over 10 years at 11% interest. These increases would be cumulative, so that the authorized rent would approach the market rent, providing that market rents did not continue to rise still more rapidly. 44. Readers familiar with the postwar British debate on rent control will also note similarities to the proposals put forward by R. F. Harrod, Are These Hardships Necessary? (London: Rupert-Hart-Davis, 1947) and F. W. Paish, "The Economics of Rent Restriction," Lloyds Bank Review, April, 1950, p. 1. The programs of Harrod and Paish were based upon increased rents which were taxed away from landlords in whole or in part. For a stipulated period of time the proceeds were to be returned either to the tenants directly, as income supplements related to the magnitude of rent increases, or to recipients of low incomes, as transfer payments roughly correlated with need. Tenants were to be free to move without loss of their benefits under either plan.

OTHER

TAXES

AND

CHARGES

ON

URBAN

LAND

now subject to rent control can gradually be decontrolled in about 10 years. The magnitude of both the tax and the contribution from general revenues as well as other factors affecting the speed with which rent control could be abolished are discussed in some detail in Part E, infra. An outline of the steps of the decontrol program follows: 1. DECONTROL: S T E P 1

New legislation will authorize controlled rents to be increased either by a set percentage or a flat amount, and a new tax on gross rents will be imposed equal to the authorized increase in rents. In the examples used in Part E, infra, the tax is set at either 10 or 20 per cent of the new gross rents. Additional increases in rents might be permitted in later years. A potential problem with this program for eliminating rent control is that a specific tax on controlled property might conflict with Article 31 (IV) of the Constitution, requiring taxes to be imposed "proportionally and in an equitable manner." It is not at all clear, however, that tenants of rent controlled properties have standing to challenge taxes assessed against their landlords, and it is unlikely that landlords will attack this crucial feature of the rent decontrol program. In any event, similar uniformity provisions in the state constitutions in the United States have not prevented increased charges against properties especially benefited by government programs. 45 Furthermore, if rent control itself has been a valid restriction of a landlord's prerogatives, differential tax rates designed to eliminate rent control would not seem objectionable. The tax, based on the authorized gross rent, will be collected from owners of rent controlled properties whether or not the owner actually collects the increase from the tenants. The proceeds will be deposited in a Special Fund. Since the tax could be added to the bimonthly property tax bills, which are sent out under the present collection system, additional collection costs would be trivial, either for the government or for the owner, who in almost every case will be amply reimbursed by the prospect of decontrol. 45. For example, the Constitution for the Commonwealth of Massachusetts, which requires in Part 2, Ch. 1, Sec. 1, Art. IV that all taxes be "proportional," has not been construed to prevent special assessments for a variety of municipal improvements. Dorgan v. Boston, 94 Mass. [12 Allen] 223 (1866); see, generally, Nichols, Taxation in Massachusetts, 3rd ed. (Boston: Financial Publishing Co., 1938), pp. 750-65.

147

148

FINANCING

URBAN

DEVELOPMENT

2 . DECONTROL: S T E P 2

Annual contributions from general revenues would be made to the Special Fund through the Federal District budget or the national budget or through both. The contributions would probably be large at first and decline with time as other sources of revenue for the Fund increase. The larger the contributions from general revenues, the smaller the taxes under Step 1. Contributions from general revenues are justifiable for two reasons. First, rent control imposes costs on the whole economy through the misallocation of land, particularly of scarce, centrally located, urban land. These costs are reflected in lower private incomes and lost public revenues, as well as in increased expenditures for such services as transportation. Some of the benefits from decontrol will be diffused throughout the population. Second, contributions from general revenues will enable the governments to make more attractive alternatives available to tenants of rent controlled properties than would be possible without support from general revenues. Such contributions will also permit decontrol to proceed more rapidly. 3 . DECONTROL: S T E P 3

The Special Fund will be used for three purposes: (a) the acquisition by purchase or expropriation and the urbanization of vacant land in or near the Federal District and the extension of credit to potential occupants for the purchase of materials and for assistance in construction; (b) the financing of the construction of low cost housing units to be sold or rented to present tenants of controlled properties; (c) the payment of cash, in lump sums or as annuities. Cash payments can be shown to be superior to the two alternative forms of compensation from the standpoint of the individual's appraisal of his own welfare, since he can use the funds for either alternative (a) or (b) or for other commodities if he prefers. If there are social benefits from adequate housing or social costs from inadequate housing, either of which the individual ignores in making his decisions, unrestricted cash payments cease to be optimal. Moreover, the expenditure of public funds may be defended as a conscious attempt to change the preferences of individuals by inducing them to try other expenditure patterns. In carrying out purposes (a) and (b), decisions must be made whether the government should retain title to land or convey it in some manner to new residents and whether

OTHER

TAXES

AND

CHARGES

ON

URBAN

LAND

it should rent or sell any apartments that it constructs. These decisions will determine the form of any subsidy to former tenants. Tenants displaced from nonresidential property would receive cash payments. 4 . DECONTROL: STEP 4

After, say, two years and again each year thereafter a number of properties would be automatically decontrolled, and all restrictions on conversion of these properties to new land uses would be abolished. The longer the period of time elapsed before the first properties are decontrolled the greater the number of units that could be decontrolled initially, but the decontrol would take longer. The tax that had applied to the authorized increased gross rents on these properties while they were subject to rent control would now become a tax on gross, uncontrolled rents and would probably continue until the decontrol program was completed or, perhaps, for a fixed term. Tenants of properties to be decontrolled would be apprised of this prospect in advance and of the fact that they qualify under Step 3 for land and loans, apartments, or cash payments. Accordingly, the government might find it necessary to adjust the value of each approach to ensure that excessive numbers of tenants do not choose one form or another. The technique for selecting the buildings to be decontrolled is of central importance. Some simple, arbitrary formula, such as the distance from the Zócalo (Plaza de la Constitución), should probably be used to minimize the opportunities for bribery. In addition, owners might advance the date of decontrol by paying into the Special Fund more than the authorized increase in rents provided under Step 1. Such contributions would presumably indicate the prospective profitability of converting to a new land use. The size and type of benefits under Step 3 to which each family would be entitled are also critical issues. In principle, such factors as family size, income, the number of rent increases under Step 1 to which a family was subjected, and the levels of controlled rents relative to free market rents should affect these benefits. The manner in which such adjustments might be made would have to be given careful study. The ambiguity of most of these factors, however, together with the lack of reliable statistics, suggest that only a uniform system would be feasible. The flexible structure of Mexican families raises the possibility that a family could adjust its size to take advantage of any formula which might be adopted. Furthermore, it is not clear whether a large family

150

FINANCING

URBAN

DEVELOPMENT

would indicate greater need or less, i.e., whether living space requirements or income potential would dominate. Whether a family whose apartment was grossly underpriced under rent control deserves more or less assistance than does another family whose apartment was moderately underpriced is also unclear. Whether the greater shock which the first family will suffer from decontrol outweighs the fact that it has been benefiting more from control in the past is also not clear. If one family is forced to vacate soon after the plan is initiated, and another is allowed to retain subsidized occupancy for some time at the price of periodic rent increases, which family should receive more aid? Wealthier families presumably require less assistance in making the transfer than do poor families, but what indicators of income can be used, especially among the relatively poor, many of whom shift jobs often or are self employed? In any case, cash payments should be included in taxable income. The poor would be unaffected, while the benefits to the wealthy would be reduced. The Special Fund would be replenished from a number of sources. First, repayments and amortization of loans extended from the Fund under Step 3 would be returned to the Fund. Second, general revenue contributions to the Fund from the Federal District budget could be raised by the amount of any increases in property taxes collected from the newly developed or redeveloped areas. Third, general revenue contributions to the Fund from the national budget could be raised by some portion of the increased income taxes which will be paid by owners of decontrolled properties. Fourth, the estimated change in costs of providing fire and police protection to the former inhabitants of rent controlled properties could be credited to the Fund. If the cost of these services rose, then this increase could be charged to the Fund. In Part E, infra, the values which the variables might assume and their impact on the speed with which decontrol might take place are discussed. Numerical examples under sets of arbitrarily chosen values of the variables are worked out. These examples show that under plausible assumptions rent control can be rolled back at a steady rate.

E. NOTE ON RATE OF RENT DECONTROL The rate at which decontrol occurs will be shown under three different sets of assumptions. Using the plan described above, it is clear that the rate of decontrol depends on the size of the Special Fund relative to the

OTHER

TAXES

AND

CHARGES

ON

URBAN

LAND

unit cost of decontrol. The size of the fund in turn depends on the tax on each controlled unit, the contribution from general revenues, the rate at which funds borrowed by tenants under Step 3 are repaid, and the addition to or subtraction from the fund of any new taxes or expenditures occurring as a result of the end of decontrol. The following assumptions will be made for all examples: a) The cost of relocating one household is M$20,000. This figure is slightly greater than the cost of land, urban services, and materials for self-help housing in the subdivision "Aurora" located outside the Federal District in the dry bed of Lake Texcoco.46 b) Credit extended under Step 3 will be repaid at 15 per cent of the unrepaid previous expenditures per year. The rate of repayment is a critical variable in determining the speed with which decontrol takes place. The larger the proportion of the funds used for grants, the slower will be decontrol, c) Annual gross income from decontrolled properties is assumed to increase on the average by M$2,000 per decontrolled unit. This estimate is conservative in light of current land prices; these average M$500 to M$ 1,000 per square meter in many regions of the central city, where most rent controlled properties are located. A tax on this additional income is assumed to be levied, at least until decontrol is completed. Also larger property tax revenues can be expected from areas newly developed under Step 3. Together, these taxes generate an additional M$ 1,000 per decontrolled unit per year. The level of the tax on each rent controlled unit and the contribution from general revenues have yet to be specified. There are no data on average rents in rent controlled properties. Among all rented units, the median rent is between M$150 and M$299 per month. We shall make the following three sets of alternative assumptions. Assuming that the average controlled rent is M$ 1,000 per year, we shall show that the length of time necessary for decontrol: i) is 20 years if the tax on each controlled unit is M$200 per year, if there is no contribution from general revenues, and if one-fourth of the Special Fund is used for lump sum payments and hence never repaid; ii) is 19 years if the tax on controlled units averages M$100 per year, if the contribution from general revenues is M$300 per controlled unit per year, and if one-half of the Special Fund is used for lump sum payments and hence never repaid; iii) is 15 years if the tax and government contributions are the same as in ii), but if one-fourth of the Special Fund is for lump sum payment and hence is never repaid. 46. For further discussion of "Aurora," see Chapter Four, Part III-B.

151

152

FINANCING

URBAN

DEVELOPMENT

Let: a=

b—

repayment on funds already spent for relocation per household average cost of relocation per household

rise in income on decontrolled properties taxed away by government average cost of relocation per household

c=

taxes plus contributions from general revenues per rent controlled residence per year average cost of relocation per household

Dj=the number of units decontrolled in year j. If decontrol begins one year after the plan is introduced, then the number of units initially decontrolled, symbolized by D0, is given by the expression: D„=c($ 160,000) In general, the cumulative number of units decontrolled by the end of year j is given by equation 1): 1)

Dj=[(a+b)+(l-c)]D,_1+D„

Equation 1) is a first order, non-homogeneous difference equation of the form D j = A D j ^ - f - B , where A equals the bracketed expression in equation 1) and B equals D0. Equations of this form have solutions of the form shown by equation 2) when both A and B are not equal to 0. 2)

Dj=DoA J +D 0 [(1—A3) / (1—A)]

When Dj equals 160,000, rent control will be ended. Under the set of assumptions i), a = . l 125, b=.05, c=.01. Therefore A=1.1525. D 0 =c( 160,000)=.01(160,000)=1,600. Plugging these values into equation 2) shows that Dj=160,000, when j = 1 9 , indicating that rent control is ended 20 years after the program is introduced. Under the set of assumptions ii), a=.075, b=.05, c=.02. Therefore A=1.105, D o =c(160,000)=.02(160,000)=3,200. Plugging these values into equation 2) shows that D j = 160,000 when j = 1 8 , indicating that rent control is ended 19 years after the program is introduced. Under the set of assumptions iii) a = . l 125, b=.05, c=.02. Therefore A=1.1525. D o =3,200. Plugging these values into equation 2)

OTHER

TAXES

AND

CHARGES

ON

URBAN

LAND

shows that D j = 160,000 when j = 1 4 , indicating that rent control is ended 15 years after the decontrol program is introduced. None of these examples takes into consideration the natural attrition of rent control which occurs in accordance with existing law and which is outside the decontrol program set forth in the text. This attrition materially shortens the length of time necessary for decontrol. For example, if 2 per cent of rent-controlled units become decontrolled outside the program each year, the number of years necessary for full decontrol under examples i), ii) and iii) are respectively 10, 11, and 9.

F. CONCLUSION This survey of rent control in Mexico City has attempted to show that rent control is still widespread nearly two decades after it achieved its present form. The data available suggest that about 1,000,000 people are still affected by it. Rent control prevents changes in land use patterns. As a mechanism of income redistribution, it is inefficient. Techniques for ending rent control exist which are politically feasible and economically desirable. These conclusions are advanced with the utmost caution, in view of the paucity and uncertainty of the data on which they are based. Hopefully, this study will inspire further research into the problem of rent control in Mexico City and in other Latin American cities.

153

CHAPTER FOUR FINANCING

PRIVATE

HOUSING

156

FINANCING

URBAN

DEVELOPMENT

Urban development is influenced not only by the taxes discussed in Chapters Two and Three and the urban services which such revenues finance, but also by countless other regulations and institutions both public and private. Chapters Four and Five deal respectively with the set of institutions which regulate the financing of urban residential construction and the planning of urban development. Mexican public policy has revealed a concern, not by any means unique to Mexico, about the rate and kind of residential construction. Regulations require that a part of total reserves of financial institutions must be devoted to moderately priced (social interest) housing. Because the demand for housing by Mexico's rapidly growing middle class is growing as fast if not faster than the class and because Mexican regulations permit financial institutions to satisfy this requirement in a variety of ways, these regulations may do little more than make mandatory an investment pattern which financial institutions would have adopted voluntarily. The government has also established a pair of national institutions, FOVI and FOG A, to encourage social interest housing. In addition, private groups have banded together to enable members more easily to finance private housing. This chapter surveys and evaluates these institutions. One finding of this evaluation is that none of these policies goes very far toward promoting truly low cost housing. Most additions to the stock of low cost housing (other than better quality housing which deteriorates sufficiently to become low cost) are being made through subdivisions on which purchasers of land construct their own housing. Regulations affecting these subdivisions are examined in this chapter, as are other legal and economic conditions affecting the low cost housing market.

F I N A N C I N G

i

PRIVATE MEXICO

AND

PUBLIC

PRIVATE

HOUSING

HOUSING

IN

According to the Bank of Mexico, Mexico's urban housing shortage amounted to 1,100,000 units in 1960. At least 130,000 units annually are believed necessary merely to prevent further overcrowding of the nation's expanding urban population.1 These figures do not include existing units requiring rehabilitation, nor does the source indicate the housing standard used. The magnitude of rehabilitation needs in the Mexico City area alone is reflected in a recent finding that 553,356 of the city's 874,383 housing units fail to meet minimum living standards.2 In response to these needs, the federal government in 1962 initiated a major campaign to stimulate the private housing market, which was then producing approximately 45,000 units annually. 3 This campaign drew upon the resources of bankers, subdivision developers, insurance companies, labor unions, the Bank of Mexico, Nacional Financiera, the Ministry of Finance and Public Credit, the Inter-American Development Bank, and the Agency for International Development. Thus far, the program has led to legislative reform of private banking practices, careful study of techniques for reducing mortgage expenses, and the creation of machinery for low interest "seed capital" loans to banks extending credit for low cost housing. The program's aim is to generate private savings of M$82,746,000,000 (in 1960 prices) over a period of forty years, permitting the construction of 2,819,339 low cost residential units by the year 2000. Together with public housing efforts and private investments not included within the program, it is hoped that as many as 10,000,000 units can be built within this period. 4 Because the 1962 program emphasizes the key role of private institutional arrangements in the financing of urban development, the legal techniques by which this financing is to be accomplished are examined in this chapter. The question is whether or not private credit practices, even as modified by the 1962 reforms, adequately take into 1. Alianza para el Progreso, Comité de los Nueve, Evaluación del Plan de Acción Inmediata de México (Washington, D.C., 1964), p. 41. 2. IMSS, "Investigación de la Vivienda en 11 Ciudades del País," excerpts reprinted in El Correo Económico, Jan. 3, 1965, Supp. 8, "El Problema de la Vivienda en Mexico" [hereinafter cited as Correo Económico], p. 62. 3. Secretaría de Hacienda y Crédito Público, Programa Financiero de Vivienda (México, D.F., 1964) [hereinafter cited as Programa Financiero], p. 111. 4. Correo Económico, p. 104.

157

158

FINANCING

URBAN

DEVELOPMENT

account the low incomes of the families whose housing conditions the federal government hoped to improve through its new program. Part II outlines existing and potential sources of credit for persons seeking low cost homes. Part III, after describing how developers and families building low cost homes have operated within the context of choices thus described, suggests several areas for possible reform or further study in this field. It is important to emphasize that these recommendations are made while recognizing the major reforms already undertaken by mortgage institutions and the present high quality of Mexico's banking system.5 This study does not debate the extent to which Mexico should allocate resources to housing. The Mexican government has undertaken a number of policies which are apparently designed to promote low and moderately priced housing in the Mexico City area and throughout the country. T o some extent, these policies may conflict with determined governmental efforts to prevent further growth of Mexico City and to encourage industrial expansion throughout Mexico. But the resolution of the important problem of whether housing investment in the Federal District should be encouraged or discouraged is not the purpose of this chapter. Rather it attempts to demonstrate the significance of efficient legal institutions for the implementation of those housing policies Mexico has chosen to pursue. Any discussion about private financing techniques would be incomplete without reference to publicly constructed housing. Direct government housing investments accounted for 7.2 per cent of the country's public investment from 1962 to 1964.6 Public housing responsibilities are discharged by several federal agencies, of which the most important are ISSSTE, IMSS, BNH, I N V , and the DDF. The oldest is ISSSTE, which initiated housing programs in 1925 as the Office of Civil and Retirement Pensions (Dirección General de Pensiones Civiles y de Retiro) and has since produced more housing units than any other agency. From 1925 through 1945 ISSSTE built and financed 9,072 dwellings with an average cost of just over M$ 10,000. Between 1946 and 1958 ISSSTE produced an additional 24,144 units. The average cost rose to over M$30,000. Many of these new units were included in large scale projects, such as the Alemán and Juárez developments, 5. See, generally, D a v i d Shelton, " T h e Banking System," in Raymond Vernon, ed., Public Policy and Private Enterprise in Mexico (Cambridge, Mass.: Harvard University Press, 1964), p. 111. 6. Programa Financiero, p. 126.

FINANCING

PRIVATE

HOUSING

completed in 1948 and 1950. Since these and similar ISSSTE projects were intended for federal government employees, both developments were located in the Federal District. In 1958, ISSSTE reduced its direct housing investments, especially for low cost units. Between 1958 and 1964, only 9,077 units were completed, with an average cost of over M$70,000. Instead, ISSSTE expanded an earlier program of 8 per cent mortgage loans to members seeking homes in the private market. During this six year period M$ 1,445,113,228.93 was loaned to ISSSTE members for the purchase of lots or homes. Roughly 57 per cent of these loans were made within the Federal District.7 The next most important public housing agency has been BNH. Between 1946 and 1958 it constructed 11,423 units, mostly single family homes costing less than M$25,000. In the next six years, BNH's housing output was only 689 units, with an average cost of more than M$60,000. 8 The bank's energies were committed instead to the vast Nonoalco project in the Federal District. Both ISSSTE and the DDF contributed to this development, but BNH assumed primary responsibility for its completion. The Nonoalco project, Mexico's most ambitious to date, combines a variety of social, commercial, and cultural facilities with high rise and garden apartments surrounded by large open areas. The average cost, including community facilities, was approximately M$ 130,000 for Nonoalco's 11,916 units. 9 In recent years, BNH has used a variety of techniques for disposing of its housing units. Most units are sold under contracts with reservation of title (reserva de dominio) pending the vendee's completion of installment obligations. Where BNH finances housing projects built by other banks or public institutions, units may be sold subject to first and second mortgages in favor of the seller and BNH. As an alternative device, BNH takes the property in trust, builds a specified number of units, and sells them to or on behalf of the beneficiaries. Again, BNH may issue "certificates of real estate participation" (certificados de participación inmobiliaria) to occupants, entitling them to a share of the development's earnings, though not to title to their residences. On occasion, BNH has also sold its projects as condominiums.10 7. Correo Económico, pp. 27-30. 8. Ibid., p. 27. 9. Ibid., p. 31-33. A lower estimate of M$100,000 for Nonoalco's cost per dwelling unit was given in an interview with Ing. Victor Vila of the architectural firm which designed the project. Different cost allocations may account for the different estimates. 10. Correo Económico, p. 31.

159

160

F I N A N C I N G

URBAN

D E V E L O P M E N T

Another important housing agency is IMSS, which built 9,467 units from 1952 to 1962, when further construction was halted, apparently because the agency had exceeded its permissible limits for housing investments. During those ten years, IMSS made valuable contributions to the Mexican concept of fully integrated housing developments. The Independencia project, completed in 1960, is regarded as IMSS's most successful undertaking. It combines schools, nurseries, clinics, social and sports clubs, commercial uses, generous open spaces, and excellent transportation facilities with well designed, low rent garden apartments.11 In many ways, Independencia served as a model for BNH's more ambitious and modern Nonoalco development. However, recent IMSS experience suggests that such comprehensive projects impose heavy operating costs on the agency since frequently more than the anticipated number of people take advantage of community facilities.12 These difficulties, as well as the statutory limit on its housing investments, have led IMSS to experiment with a new approach to low cost housing. Instead of investing in a completely serviced development, IMSS plans to sell an urbanized tract within the District to 1,000 of its members, payments to be guaranteed by the purchasers' union. To assure prompt development of this area, IMSS will guarantee the amortization of mortgage loans made to lot purchasers and subordinate its vendor's claims to the security interest of the lending bank. Subsidies required by this approach will be reflected in reduced sales prices of lots or in lower rates for mortgage guarantees rather than in operating losses of nurseries, clinics, and social clubs. 13 Thus the subsidies will be applied to a greater number of housing units and to fewer social services for residents of IMSS projects. Mexico's official housing agency is INV. INV was established in 1954 to coordinate all governmental housing programs. The agency managed with very limited funds to build 10,091 units by 1964, at an average cost of just over M$30,000. It is widely believed, however, that during this period INV failed to guide either its own, ISSSTE's, BNH's or IMSS's investments in accord with a national housing policy the agency was intended to develop.14 With the 1964 change in administrations, INV apparently has moved closer to its role of coordinating public housing policies. Other agencies are beginning to report their housing plans to INV, which for the first time is acquiring an overall 11. 12. 13. 14.

Ibid., p. 34. Interview with Lie. Sealtiel Alatriste, Director of IMSS, July, 1965. Ibid. Correo Económico, p. 35.

FINANCING

PRIVATE

HOUSING

view of public housing investments.15 Under its new leadership, INV also is said to be turning toward rehabilitation of private units instead of devoting its limited resources to a few thousand public units.16 This approach may be an early result of greater coordination among public housing agencies, for the 1964 IMSS study describes rehabilitation assistance as Mexico City's greatest current housing need. 17 Within the District, these diverse public housing programs are supplemented by the DDF's low cost developments. From 1952 to 1958, the DDF constructed 1,800 units at an average cost of less than M$6,000. More recently, the DDF has begun several new projects designed to accommodate DDF employees and to relocate persons displaced by the peripheral highway. By the end of 1964, 12,927 new units had been completed, at an average cost of over M$47,000. The principal project within this building program is the San Juan de Aragón development, which was being expanded by an additional 10,000 units in 1965. 18 This brief survey of Mexico's public housing programs yields several general impressions. Public housing has been programmed and executed by five different agencies, each acting relatively independently of the others. However, with the emergence of INV as a central data center and with Nonoalco's example of cooperation between BNH, ISSSTE, and the DDF, the beginning of a coordinated approach to public housing is discernible. Even without formal coordination among the five principal housing agencies, certain similarities of policy are apparent. Most public housing, for example, is located in the Federal District. With the exception of INV, housing agencies have responded more to the District's rapid population increase than to the obstacles faced by private subdividers in less developed regions of the country. Nevertheless, at least one study indicates that these concentrated public housing efforts have failed to keep pace with the District's growth. While the District's population increased from 3,050,442 to 4,870,876 between 1950 and 1960, government agencies provided only 19,000 housing units in the District during this decade.19 15. Interview with Lie. Sealtiel Alatriste, July, 1965. 16. Interview with Dr. Victor Urquidi, July, 1965. 17. Correo Económico, pp. 59-63. 18. Ibid., pp. 27, 36-37. 19. Bernard Frieden, 'The Search for Housing Policy in Mexico City," The Town Planning Review, 26:86 (July, 1965); Secretaría de Industria y Comercio, Dirección General de Estadística, VIII Censo General de Población, I960: Resumen General (México, D.F., 1962), p. 3.

162

FINANCING

URBAN

DEVELOPMENT

ISSSTE, IMSS, and D D F public housing has been principally for organized workers and government employees. Since BNH homes are no longer "low cost," the only public units available for many low income families are those sold by INV. In 1960, 41 per cent of the families in the District earned less than M$ 1,000 per month and, according to one recent study, could afford to pay no more than M$100 per month in rent, but only 21 per cent of the public housing in the District was available at this price. Another 34 per cent of the families earned between MS 1000 and M$2000 and could pay rents up to M$200 monthly; only 27 per cent of government housing was available at this level. The top 31 per cent of families in the District had incomes above M$2000 and could afford reasonable private housing; 46 per cent of the public housing was priced for this income range, with monthly payments of M$200 or more. 20 The public agencies are coming to recognize the private market's role in public housing. Both ISSSTE and IMSS have reduced their own building programs in order to extend or guarantee mortgage loans to members who seek homes in the private market. INV has helped the private market to identify and meet hitherto unnoticed housing problems. BNH, while still dealing in public units, has experimented with a variety of legal devices for stimulating private incentives to improve and maintain its developments. Furthermore, BNH's future urban renewal plans are likely to place greater stress on private conversion of slums than did the Nonoalco project, which relied entirely on public action. 21 While the D D F has apparently not seen its housing program as part of a joint public-private endeavor, such an approach may emerge when the D D F comes to grips with the city's rent control problems. (See Chapter Three, Part III, supra.) This trend suggests that government agencies are moving closer to joint public-private housing programs. Now that private developers have experienced joint public-private ventures, one might look for them to take the initiative in future joint projects.

20. Frieden, "Housing Policy," pp. 86-87; the allowance of only 10% of monthly income for rent is based on earlier INV and IMSS housing studies as well as on 1960 census data. See ibid., Note 13 and accompanying text. 21. Interview with BNH officials, July, 1965.

FINANCING

H

PRIVATE HOUSING INSTITUTIONS

A.

PRIVATE

PRIVATE

HOUSING

CREDIT

BANKS

1. MORTGAGE B A N K S

a. Credit Qualifications: Before the 1962 Reforms Mortgage terms in the Federal District are nearly identical at all lending institutions. Up through 1962, mortgage banks charged 11 per cent interest on minimum loans of M$ 10,000 to M$25,000 with 10 year amortization periods. 22 The cost of bank services added a one-time charge of from 5 to 10 per cent of the sums borrowed. Casualty and life insurance premiums added another 2 per cent annually. 23 Credit could be extended only up to half of the value of property mortgaged and in some cases could not exceed 30 per cent of that value. For loans not in excess of M$50,000, credit could be granted up to 65 per cent of the property's value if the property were placed in trust with the lending institution. Unless this trust technique were used, first mortgages were always required. 24 Although government agencies were authorized to obtain credit for urbanization, using utility revenues as security, no information was obtained about the use of such credit. 25 Criteria for selecting reliable mortgagors varied slightly from bank to bank, but, in general, no more than 25 per cent of total family income could be applied to mortgage payments. Credit departments customarily examined an applicant's income sources, family employment, and motivation in seeking a house. Banks also required architectural and engineering plans and specifications, including cost data, and carefully reviewed them. 26 This lengthy and expensive process discouraged many low and middle income families from applying for loans. Mortgages were accepted only on fully "urbanized" property, i.e., land serviced with paved streets, storm and sanitary sewers, water mains, sidewalks, public street lights, and electricity. Apparently, the custom of lending only to finance construction grew up some fifteen 22. Interviews with mortgage bank officials, August, 1963, August, 1964. 23. Ibid.; see also Correo Económico, p. 97. 24. Credit Institutions Law (Ley General de Instituciones de Crédito y Organizaciones Auxiliares), Art. 36 (V) (a) (before 1962 reforms), D.O., May 31, 1941. 25. Credit Institutions Law, Art. 36 (V) (b) (repealed by the 1962 reforms). 26. Interviews with mortgage bank officials, July-August, 1963, August, 1964.

163

164

F I N A N C I N G

URBAN

D E V E L O P M E N T

years ago to prevent lending for land speculation. Banks regard "unurbanized" land as bad collateral27 because the process of installing roads, sewers, water, and other services is expensive, time-consuming, involves a great deal of government supervision, and increases the lender's risk. b. Credit Qualifications: After the 1962 Reforms In December, 1962, legislative reforms altered lending restrictions under which Mexico's mortgage banks operated. 28 Credit may now be authorized up to 70 per cent of a property's value if the value of the dwelling unit does not exceed M$200,000. 29 Credit terms change when the property's value qualifies the project as "social interest housing." Social interest housing, as defined by the Bank of Mexico, is urban housing whose unit value, including both land and improvements, does not exceed M$80,000. In rural areas lacking urban type services, the limit is M$30,000. 30 If the unit value does not exceed M$55,000, then mortgage banks, as well as savings departments of commercial banks and savings and loan associations, may borrow from the Bank of Mexico's trust funds, FOVI 31 and, with higher limits in areas of high construction costs, FOGA. 32 Credit is available up to 80 per cent of the combined value of land and improvements. Under certain circumstances, this 80 per cent figure may be increased if guarantees in addition to a first mortgage are given the lending bank, 33 or if FOGA support is specified in the contract. 34 Amortization periods may vary from ten to fifteen years, though twenty year periods are also permissible under the 1962 credit reforms. Interest rates may not exceed 9 per 27. Ibid. 28. Decree of Dec. 29, 1962, D.O., Dec. 31, 1962. 29. Credit Institutions Law, Art. 36 (V) (a) (3). 30. Banco de México, Circular Núm. 1547/65, Nov. 8, 1965, Rules I and II (replacing the previous requisites of Circular Núm. 1478/63). 31. Banco de México, Circular Num. 1500/64, April 15, 1964. 32. Banco de Mexico, Circular Núm. 1531/65, April 12, 1965. FOVI's retention of a flat M$55,000 limitation is difficult to justify, in view of FOGA's increase to M$66,000 within 100 kilometers of the U.S. border and M$80,000 in Baja California, Ciudad Juárez and the Valley of Mexico (including all of Mexico City), Ibid., and the National Banking Commission's authorization for mortgage banks to raise the limit to M$66,000 near the U.S. border and to M$75,000 in Baja California. See Secretaría de Hacienda y Crédito Público, Comisión Nacional Bancaria, Circular Núm. 518, Aug. 13, 1964. FOVI and F O G A are described in Part II-B, infra. 33. Credit Institutions Law, Art. 36 (V) (a) (4). 34. Secretaría de Hacienda y Crédito Público, Comisión Nacional Bancaria, Oficio Circular Núm. 47005-576, Nov. 26, 1965.

FINANCING

PRIVATE

HOUSING

cent for individual loans and 10 per cent for loans to contractors or developers. The National Banking Commission authorizes mortgage institutions to extend credit to include the cost of urbanization of land, especially for social interest housing.35 A few banks have begun financing urbanization costs under strict controls. As yet, no banks grant credit to facilitate the mere purchase of unurbanized land for subdivision purposes.36 c. Foreclosures A special procedure is established for mortgage foreclosures, designed to provide a summary technique of satisfying mortgagees' claims. Following default, the bank notifies the mortgagor of its intention to seek a foreclosure sale. The debtor may move the local court within three days to prevent the sale because he has a just defense. The bank has three days to reply to the debtor's defenses. Proof of the parties' claims is due in twenty days, after which a final hearing is scheduled by the court within three days. The court's decision is then due in five days. If the defense fails, the bank may proceed to sell, after three published notices in the Official Gazette (Diario Oficial) and a five day waiting period. Appeals do not suspend execution of the creditor's judgment. The debtor is liable for court costs and a fine of 5 per cent of the property's value. In the absence of the parties' agreement to the contrary, normal appraisal and notarial expenses are reduced by one-third when mortgage banks are parties to the proceedings.37 Theoretically, this foreclosure process should require no more than sixty days from the bank's notice of intent to foreclose until the final sale. Yet in practice the process requires at least one or two years. Consequently, before 1962, few loans were made to applicants with even small probabilities of defaulting. Despite these precautions, roughly 3 to 4 per cent of such loans are said to be in arrears, though no more than a small fraction of these require foreclosure. 38 This figure indicates that an important goal of any housing finance program should 35. Credit Institutions Law, Art. 36 (VIII). The National Banking Commission has also authorized 20 year periods for most social interest loans. Secretaría de Hacienda y Crédito Público, Comisión Nacional Bancaria, Circular Núm. 517, June 30, 1964, Rule 6. Rules 1 (a) and 5 cover interest rates and credit for urbanization costs. 36. Interviews with mortgage bank officials, August, 1964, February, 1965, July, 1965. 37. Credit Institutions Law, Arts. 141, 142. 38. Interviews with mortgage bank officials, August, 1964.

165

166

FINANCING

URBAN

DEVELOPMENT

be to speed up foreclosure proceedings. The desirability of a similar speed-up for tax foreclosures was noted in Chapter Two, Part I-G. Speed-up of bank foreclosures would enable banks more readily to lend to a larger group of potential housing buyers. d. Mortgage Certificates and Bonds Instead of selling or discounting mortgages to reinvest their capital, banks "sell" mortgage certificates (cédulas hipotecarias) in the private market; this system seems appropriate and efficient for Mexico. At present, these certificates, now sold at face value, entitle the holder to eight points of the eleven points of interest collected from a specified mortgage, with payment guaranteed by the bank. The issuing bank retains three points of the eleven points of interest as a commission and fund to cover losses on its guarantee. Purchasers obtain a relatively safe 8 per cent investment. This system is so well liked that certificates are in constant demand and are sold or resold at face value.39 Banks guaranteeing certificates must deposit between 3 and 10 per cent of the face value of outstanding certificates with the Bank of Mexico. When borrowers default and banks elect to withdraw certificates from the market, their full value must be deposited with the Bank of Mexico for the benefit of holders. 40 Technically, certificates are issued by the mortgagor directly to the holders, the technical mortgagees. In theory, the bank is an intermediary, arranging sales while acting for both the borrower and lenders simultaneously. However, the bank is treated as co-issuer of the certificates and is jointly liable to holders for amortization and interest payments. At the same time, as agents for the holders, the bank is charged with enforcing their collective rights against the borrowers either through suing on the debt or by- foreclosing the collective mortgage. If the bank satisfies the holders' claims, it is subrogated to their rights against the borrower. 41 In practice, the bank is the issuer and guarantor of these certificates, since the customarily anonymous borrower receives his loan directly from the bank, which then shops around for purchasers to assume the roles of nominal mortgagees.42 Aside from guaranteeing certificates, mortgage banks receive funds 39. Interviews with mortgage bank officials, August, 1964. 40. Credit Institutions Law, Art. 37 (V), (VII). 41. Ibid., Arts. 37 (IV) (VII) (VIII), 38. 42. See, generally, Joaquín Rodríguez Rodríguez, Derecho (México, D.F.: Editorial Porrúa, 1964), pp. 435-59.

Bancario,

2nd ed.

FINANCING

PRIVATE

HOUSING

by issuing mortgage bonds. For each bond issued, a bank must hold an equivalent amount of first mortgages, property given in trust, or bonds and certificates of other mortgage banks. While bonds, like certificates, bear interest at 8 per cent at present, they differ from certificates because the bank is recognized as the true issuer, and because holders do not have a security interest in the mortgaged property supporting the bonds. Bond holders do have a preferred claim against the bank's assets but may not proceed directly against borrowers or their property upon default of their obligations to the bank. 43 e. Housing Certificates The 1962 credit reforms were supplemented by subsequent decrees creating a new credit instrument in Mexico—the "housing certificate" (certificado de vivienda) which is issued to installment vendees by fiduciary institutions administering multi-unit projects. 44 These certificates are designed to give installment vendees simplified rights to immediate possession of the transferred property and automatic title upon payment of all required installments. In the event of default, refunds on previous installments are to be made to the purchaser, though the seller is to retain interest on such installments as constructive rent. (See Part III-B (2), infra. These refunds probably satisfy the requirements of Article 2311 of the Civil Code.) In addition to this considerable advantage for installment vendees, housing certificates postpone transfer taxes, recording fees, and notarial charges until title is transferred upon payment of the final installment. The certificates are transferable only by normal succession or inheritance, upon default, or upon special approval of the National Banking Commission.45 Most significantly, the property to which housing certificates refer must be placed in trust with the issuing institutions, which administer the development until title passes. Certificate holders within each development are represented by a common agent in their dealings with the trustee institution.46 The first 43. Credit Institutions Law, Art. 35, 36 (V) (5). See, generally, Rodriguez Rodríguez, Derecho Bancario, p. 435. 44. The limited description of housing certificates included here is taken primarily from "El Certificado de Vivienda," a memorandum prepared by FOVI and made available to the authors in July, 1965. See, generally, Secretaría de Hacienda y Crédito Público, Comisión Nacional Bancaria, Circular Núm. 520, Nov. 19, 1964. 45. Secretaría de Hacienda y Crédito Público, Comisión Nacional Bancaria, Circular Núm. 522, Jan. 28, 1965. 46. Credit Institutions Law, Art. 44-i bis; Leyes Generales de Títulos y Operaciones de Crédito, Art. 228, D.O., August 27, 1932; see, generally, Programa Financiero, pp. 185-88.

167

168

FINANCING

URBAN

DEVELOPMENT

group to experiment with housing certificates are the residents of the Loma Hermosa project in the Federal District. (See Part III-C (1), infra.) 2 . SAVINGS AND L O A N B A N K S

Mexico's savings and loan banks contract with depositors to extend a specific amount of credit for residential construction after the depositor who has subscribed to such a contract has saved a certain percentage of this amount over a specified period of time. This savings period varies from one to ten years, but the total saved must equal at least 25 per cent of the amount subscribed.47 The 75 per cent loan is then repayable over periods which rarely exceed ten years. 48 The maximum for loans, specified by the Ministry of Finance, 49 was M$60,000 before the 1962 reforms. 50 Land cost may amount to no more than 35 per cent of the property's value, according to the Credit Institutions Law, and subscribers may at any time before the loan is made rescind their contracts and demand full refunds within sixty days on their savings, plus simple interest at rates set by the Bank of Mexico. Also, while the contract remains in force, this interest is automatically applied to reduce the number of amortization payments required of subscribers.51 Credit may only be authorized for the purchase, construction, expansion, or repair of residences, and only if secured by a first mortgage. If an excessive number of rescissions or defaults prevent a bank from meeting its obligations to subscribers, a common reserve, created from payments by savings and loan banks, and financial assistance from the Bank of Mexico are available to help member banks through temporary crises. This fund is administered by the Bank of Mexico, which, together with the National Banking Commission and the Ministry of Finance and Public Credit, is charged with general supervision of the operations and procedures of savings and loan banks. 52 47. Credit Institutions Law, Art. 46-d (VIII). 48. Gustavo Galindo Guarneros, Las Instituciones de Ahorro y Préstamo para la Vivienda Familiar (México, D.F.; Editorial Jus, 1962), p. 9 (published before the 1962 reforms). 49. Credit Institutions Law, Art. 46-g (IV). 50. Decree published in D.O., December 30, 1954, Transitory Art. 7. See also Galindo Guarneros, Ahorro y Préstamo, p. 237. 51. Credit Institutions Law, Arts. 46-g (III); 46-d (II), (III). 52. Ibid., Art. 46-g (I), (II); 46-h; 46-d; 46-g (IV), (IX), (XIII); 46-1; 46-ñ; 46o; 46-p. Before the 1962 reforms the Bank of Mexico's functions were largely performed by BNH.

FINANCING

PRIVATE

HOUSING

Large amounts of capital are unlikely to flow into savings and loan banks, unless they pay interest on deposits at least as great as the yield of 8 to 10 per cent available on government securities. Before the 1962 reforms, such banks were legally permitted to pay no more than AV2 per cent on deposits. 53 Thus savings and loan banks relied, as they now do exclusively, on subscribers' deposits and amortization payments as their primary source of funds. One commentator has observed that this closed contractual nature of savings and loan banks severely limits their role in home financing. He further maintains that broader operations and more liberal terms can be achieved if savings and borrowing are not necessarily linked and if savings and loan banks are permitted to pay 8 per cent on deposits. In such an event, greater liquidity would facilitate shorter subscription and longer amortization periods, though it would be necessary to charge more than 8 per cent on loans.54 The rules governing savings and loan banks were substantially reformed in December, 1962. 55 Minimum capital requirements were raised from M$ 1,000,000 to M$3,000,000. As noted above, responsibility for administering the central reserve fund was shifted to the Bank of Mexico, which was also authorized to fix the banks' interest rates. Rates as of March, 1966 were AV2 per cent on individual deposits, 4 per cent on group deposits, 8 per cent on individual and group loans, and 6 per cent on group loans with FOGA support; no rediscount was permitted. Sale of housing savings bonds and mortgage bonds was prohibited, and operations were restricted to subscription savings and loan plans. The bonds, due to lack of institutional prestige, had not been able to compete in the financial market with other 8 per cent interest bearing securities, such as mortgage bank bonds and certificates. Also, there was introduced the innovation of awarding loans to subscribers selected by lot, even before the subscribers have met the 25 per cent deposit requirements mentioned above. This practice enables banks to begin extending credit earlier than would otherwise be possible and may encourage greater popular participation. More important, savings and loan banks were authorized to finance groups of "social interest" residential units according to regulations developed by the Ministry of Finance and Public Credit. No bank service charges are permitted for such group developments.56 53. Credit Institutions Law, Art. 46-c (III) (before the 1962 reforms). 54. Galindo Guarneros, Ahorro y Préstamo, pp. 227-47. 55. Decree of Dec. 29, 1962, D.O., December 31, 1962. 56. See Article 46 of the Credit Institutions Law before and after the 1962 reforms. More particularly, after the 1962 reforms, see Arts. 46-a; 46-d; 46-h; 46-o.

169

170

FINANCING

URBAN

DEVELOPMENT

Because of savings and loan banks' past difficulties in attracting capital and retaining sufficient liquidity to meet mortgage obligations, the Ministry of Finance and Public Credit and the Bank of Mexico conceive of these institutions as playing a rather specialized role in the new housing program. Savings and loan banks' social interest group loans are expected to involve major projects designed primarily for labor unions, trade groups and large scale industries.57 The initial financing for such projects is expected to come through the new FOVI program described below in Part II-B. 3 . SAVINGS DEPARTMENTS

Before 1962, commercial banks' savings departments were not authorized to deal in mortgage financing. The 1962 reforms, however, permitted these departments to establish special savings accounts for and extend mortgage credit to persons seeking "social interest housing." Special savings accounts pay slightly less interest than the 4 Vi per cent paid on regular accounts, but special depositors have priority in obtaining mortgage loans from their banks. Up to 30 per cent of total investments of savings departments may be invested in mortgage loans. These loans must be secured by social interest housing.58 To induce such mortgage lending savings departments are required to invest at least 50 per cent of their new savings deposits in social interest mortgages, mortgage bonds backed by social interest mortgages, or in Mexican currency. 59 Mexico's banking system and monetary policy are not regulated in the same fashion as United States banks are by the Federal Reserve Bank with respect to the use of the central banking tools most familiar to United States readers: reserve requirements (under which banks must keep a required ratio of their deposit liabilities on deposit with the central bank); rediscount rate (interest rate which the central bank charges for secured loans it makes to private banks); and open market operations (the central bank's purchases and sales of debt securities, with a view to affecting the money market). Because of Mexico's insufficiently developed securities market and rigid interest rates the Bank of Mexico, the country's central bank, has developed a fairly complex regulatory system which makes simultaneous use of marginal reserve requirements which vary for different financial institutions, sales 57. Programa Financiero, pp. 152-55. 58. Credit Institutions Law, Arts. 18 and 19 (III) (g). 59. Programa Financiero, pp. 144-46.

FINANCING

PRIVATE

HOUSING

of government securities, rediscount at low rates of interest for loans made by the banks to finance certain activities which the government wants to promote, and required portfolio percentages in order to channel funds into specified activities. The Bank of Mexico exercises regulatory control not only over the operations of commercial banks, but also of financial corporations (Sociedades Financieras), savings departments, and mortgage banks. In short, the Bank of Mexico has developed instruments of financial control to fit Mexican market conditions.

B. FOVI AND FOGA To supplement the 1962 credit reforms directed at mortgage banks, savings departments, and savings and loan banks, the Mexican government obtained loans from the Agency for International Development and the Inter-American Development Bank to establish two new trust funds to be administered by the Bank of Mexico. The purpose of these trust funds is to encourage credit for "social interest housing." 60 The principal organ of this trust fund program is the Bank Discount and Operational Fund for Housing (Fondo de Operación y Descuento Bancario a la Vivienda), commonly known as FOVI. FOVI is designed to extend credit to banks making qualified social interest mortgage loans in order to assure these institutions continued liquidity.61 FOVI lends to banks on the security of social interest mortgages which meet the requirements specified below. FOVI charges approximately 6 per cent interest, thus encouraging banks to obtain funds from FOVI rather than from the sale of 8 per cent certificates and bonds.62 FOVI approval of social interest loans normally will be a prerequisite to mortgage financing of large scale group projects, since most banks will withhold credit until FOVI loans are assured. For individual loans, banks are expected to invest their own funds before seeking FOVI credit or approval. In all cases, FOVI financing is contingent on the project's conformity with FOVI's urban and regional development priorities. 63

60. See Loan Agreement of February 28, 1964 between Nacional Financiera, S.A., the United Mexican States, and the United States of America (AID loan No. 523L-022). 61. See, generally, Programa Financiero, pp. 157-59. 62. Interviews with mortgage bank officials, August, 1964, February, 1965. 63. Programa Financiero, pp. 157-59.

172

FINANCING

URBAN

DEVELOPMENT

The Bank of Mexico has announced that FOVI will support social interest housing only if such housing, in addition to qualifying under the new credit rules outlined above, meets certain further qualifications. FOVI aid is available for social interest housing which meets the following conditions: unit cost not to exceed M$55,000 per unit; purchaser's monthly income not to exceed M$3,000 (of which no more than 25 per cent is devoted to housing); land cost not to exceed 35 per cent of the property's total value; and 80 per cent (in some cases 90 per cent) of cost to be financed by 9 per cent loans amortizable in ten to fifteen years with minimum bank charges and insurance premiums. 64 In addition to equal and declining payment plans of amortization, credit plans where amortization payments increase 7 per cent biannually over the life of the loan qualify for support. The announced purpose of this innovation is to expand the number of families eligible for credit and to encourage repayment by scaling installments to anticipated increases in family income.65 The Guarantee and Credit Assistance Trust for Housing (Fondo de Garantía y Apoyo a los Créditos para la Vivienda), known as FOGA, complements FOVI's activities. While FOVI intends to purchase qualified social interest mortgages, FOGA will advance and insure amortization payments for up to 18 months following the fourth monthly default by mortgagors. This period appears designed to afford banks sufficient time to foreclose mortgage liens and reinvest their capital. If so, these advances are needed less to shift the risk of default to the government than to assure banks the liquidity they now lack because of cumbersome foreclosure procedures.66 FOGA will also pay mortgage lenders 1 per cent additional interest on 9 per cent social interest loans.67 This subsidy is intended to equalize the return on social interest loans for M$55,000 and M$80,000 units since credit for the latter bears 10 per cent interest.68 In addition, where mortgagors are unable to make the required 20 per cent down payment on their homes, the lending bank may apply to FOGA for a guarantee of part of this 64. Banco de México, F O V I , Requisitos para Otorgar Crédito para la ción de Viviendas de Interés Social en Planes de más de 100 Unidades

ConstrucHabitacio-

nales, Folleto No. 3, (México, D.F., 1964), pp. 11-12 [hereinafter cited as FOVI,

Requisitos], No more than 20% of the income of purchasers whose monthly income is less than M$ 1,250 may be devoted to housing. See also Banco de México, Circular Núm. 1500/64, April 15, 1964. 65. Programa

Financiero,

pp. 171-81.

66. ¡bid., pp. 159-60. 67. Correo Económico, p. 20. 68. Programa Financiero, p. 144.

FINANCING

PRIVATE

HOUSING

sum. While FOGA originally intended to guarantee only half of the required down payment, by July, 1965, it had announced its intention to guarantee the entire 20 per cent where this was required. 69 Finally, FOGA subsidizes mortgage institutions for reduced life insurance premiums on social interest loans.70

C. MEMBERSHIP GROUPS A variety of formal and informal groups might play some role in financing private housing in the Mexico City area. Such groups are here called "membership groups" to permit treatment, under one head, of several types of institutions operated for the benefit of their members (the potential borrowers) rather than for outside investors. 1. C R E D I T U N I O N S

Credit unions are authorized by Article 85 of the Credit Institutions Law to help members carry on common agricultural, livestock, industrial, or commercial activities, but no authorization exists for credit unions to be formed for housing purposes. This requirement hinders establishment of a credit union whose purpose is to facilitate loans among neighbors anxious to improve their residences, unless the organization is established by an agricultural community or by employees in a single store or plant. If the broader common productive activity requirement is satisfied, a credit union must still have M$250,000 minimum capital. Even if this hurdle is passed, under Article 87 (II), (IX), the National Banking Commission (Comisión Nacional Bancaria) has discretion not to certify the credit union if it- is not considered desirable. Credit unions have broad powers but must conform to official standards. Total loans are limited to twenty times capital plus reserves. A reserve fund of 20 per cent of annual profits must be established, according to Article 87 (IX), until the minimum capital figure is reached; 10 per cent of profits must be contributed thereafter. Individual secured loans to members may not exceed twenty times the bor69. Interview with Sr. Marcelo Javelly, Director of FOVI, July, 1965. See also Correo Econòmico, p. 20. 70. Programa Financiero, p. 191. For a detailed presentation of the simplified life schedules used for social interest loans, see Ibid., pp. 189-95.

173

174

FINANCING

URBAN

DEVELOPMENT

rower's paid-in or subscribed capital contributions; unsecured loans are limited to ten times the paid-in capital contribution (Art. 88 (IV)). In addition, credit unions may lend money to enterprises which provide urban services and housing for members. They may also guarantee members' obligations to third parties (Art. 86 (II), (VIII)). Even when groups of neighbors cannot meet the statutory requirements for credit unions, they may band together in informal organizations without any juridical personality. Thus the Secretariado Social, a Catholic Church organization devoted to community welfare programs, has sponsored a nationwide movement of informal credit unions to make credit available to low income families, as well as to educate them in community responsibility. These Cajas Populares, modeled on the credit unions of Antigonish, Nova Scotia, Canada, form a network of nearly 600 organizations with a total capital of over M$ 18,000,000. Over a ten year period, loans have totaled approximately M$30,000,000. 71 Loans are usually small (M$100 to M$5,000) and are used for any purpose deemed worthy by the Caja, including rent, home construction, old bills, weddings, operations, starting a small business, or community improvement projects. Although community housing needs have never been directly tackled by the Cajas, the leaders are convinced this movement is mature enough to become a vehicle for housing programs in low income areas. The Cajas have operated quite successfully among co-workers, in factories, and in neighborhoods. Especially in the Federal District, neighborhood Cajas of fifty to several hundred members have stimulated feelings of cooperation and community bonds where little sense of either had previously existed.72 Caja members elect their leadership, including a separate credit committee and a "vigilance committee" to assure officer honesty. Treasurers are instructed in the preparation of balance sheets as well as of monthly statements of credit extended, loans repaid, interest accrued, personal deposits, etc. Interest rates vary among Cajas, but are normally around 1 Vi per cent monthly, indicating the difficulty of applying the credit union concept in the housing field. Through interest on loans and on deposits of the Cajas in banks, year end balances usually show 71. Centro Operational de Vivienda y Poblamiento, A.C. (COPEVI), La Cooperativa, Factor de Acción Habitacional, Report of a Conference in Mexico City, May 25-28, 1964 (México, D.F., 1964). For a general discussion of the Cajas Populares, see Credit Union Magazine, special report on "Credit Unions in Mexico," reprinted from July and August, 1964, editions. 72. Interview with Padre Lie. Carlos Talavera, founder of the Caja Popular movement, and other credit union leaders, July-Aug., 1963, August, 1964.

FINANCING

PRIVATE

HOUSING

some surplus. This is divided among dividends, reserves, and funds for the education of new members in credit union techniques. For the average member this means fulfilling his commitment to contribute M$50 weekly and understanding that the privilege of borrowing more than he has accrued is not to be abused. 2 . UNIONS

Unions represent another potential source of housing finance, though few Mexican unions have launched any sustained housing programs. Their most ambitious project to date is the John F. Kennedy development, built by the Graphic Arts Union with a loan from the AFL-CIO. This loan was administered by FOVI rather than by the union itself. Like BNH's Nonoalco development, the Kennedy project serves an important purpose, but combined efforts of the federal government, a strong union, and liberal foreign loans were still unable to place this development within reach of most low income families. Kennedy residents are the first group to experiment with a new payment plan which promises them eventual condominium ownership of their apartments. Under this plan, which requires no down payments, monthly payments in the Kennedy project commence at M$339, subject to the usual restriction that no more than 25 per cent of family income may be spent for housing. Therefore, to qualify for the project, a family's income must reach at least M$1356 per month; this excludes approximately half of the District's population. 73 Payments, however, run for twenty years, 74 which is a far longer period than low income families have to amortize "social interest" mortgage loans (in practice, ten to fifteen years), for which 10 to 20 per cent down payments are required. In general, the Kennedy development seems to incorporate many useful ideas for financing low cost developments, particularly in its provision for condominium ownership. As noted, it has not succeeded in applying these techniques to housing within reach of the majority of the District's low income groups. 73. Correo Económico, p. 40; In 1960, 41.1% of families in the District earned M$ 1,000 or less monthly, 27.1% between M$ 1,000 and M$2,000 and 31.8% over M$2,000. Secretaría de Industria y Comercio, Departamento de Muestreo, Las 16 Ciudades Principales de la República Mexicana: Ingresos y Egresos Familiares (México, D.F., 1962), p. 97. 74. Correo Económico, p. 40.

175

176

FINANCING

URBAN

DEVELOPMENT

3 . COOPERATIVES

The Cooperative Law (Ley de Cooperativas) defines cooperatives as nonprofit consumers' or producers' associations formed by ten or more "working class" persons who devote their services to or meet their needs through the association.75 Cooperatives, according to Article 1 (VIII) of this law, must distribute their profits proportionately among members. Article 56 states that producers' cooperatives are those devoted to "the production of goods or the rendering of services to the public." This phrase implies that such organizations produce for the market and not merely to meet their members' demand for specific goods or services. Consumers' cooperatives, according to Article 52, are those whose members seek to obtain goods or services in common for themselves, for their homes, or for their individually productive activities. Although this definition could be stretched to include housing cooperatives, it seems clear that the statute was not intended to foster cooperative housing organization. Despite the doubtful application of this statute to cooperative housing programs, the Secretariado Social in 1956 started what it believes is the only housing cooperative functioning in Mexico. The cooperative, called "México Nuevo," has purchased a large tract in the State of Mexico and has begun the process of urbanization. The cooperative has been chartered as a consumers' cooperative, and its housing efforts are theoretically related to the common farming needs of the members, though many of these members do not appear to be farmers. 76 4 . MUTUAL ASSOCIATIONS

The 1962 credit reforms authorized the formation of mutual associations to stimulate saving and lending for social interest housing. The nature and requirements of such associations were left to be developed in regulations by the Ministry of Finance and Public Credit. 77 However, neither the Ministry nor the Mexican banking community has shown much interest in mutual associations and the necessary regulations had not been issued by July, 1965. 75. Cooperatives Law (Ley General de Sociedades Cooperativas), Art. 1 (I), D.O., February 15, 1938. 76. See, generally, Sociedad Cooperativa de Compra en Común "México Nuevo," 5.C.L., Acta y Bases Constitutivas (1959). 77. Credit Institutions Law, Art. 46-u.

F I N A N C I N G

I H

PRIVATE

HOUSING

MOBILIZING PRIVATE CREDIT FOR LOW COST HOMES

Before the legislative reforms discussed in Part II above, the low cost subdivision developer's position was precarious in Mexico, as it is in most countries. Land acquisition and urbanization were financed without bank credit. Unless he had sufficient capital to meet urbanization costs, the Mexican developer, like many United States subdividers, sought a bridge loan (at interest rates ranging from 12 to 24 per cent) from private lenders. 78 When the tract was fully urbanized, the developer applied for bank financing. Credit was normally limited to half of the combined value of land and proposed improvements. Bank fees, recording and transfer costs, and interest rates were high. If the developer could bear these interim costs, he still faced the problem that banks were unlikely to accept mortgages from his customers because of the rigorous credit standards which prevailed. Banks, not wishing to undermine public confidence in their mortgage certificates and bonds, were skeptical of low cost housing investments. Although land appreciation could be relied upon to protect security interests, foreclosure proceedings were so slow and expensive that banks tried to avoid all risks of default. (See Part II-A, supra, for a fuller discussion of these problems. Transfer costs are considered in Chapter Three, Part II, supra.) Developers preferred to build for middle and upper income families who could make sufficiently large down payments to qualify for bank fees and interest. Large down payments were important to the developer as well, because they accelerated repayment of high interest bridge loans and provided funds for expansion. Thus a United States developer who attempted to build low cost homes in the Mexico City area cited lack of credit to buy and urbanize land as the principal obstacle to low cost developments. 79 Several Mexican developers expressed the same view. The refusal to extend credit for urbanization also presented serious obstacles to individuals building their own houses, particularly to squatters (paracaidistas) living in inadequately serviced areas of the city. Even if imaginative title programs and new savings techniques were 78. Interview with private subdivision developers, August, 1964. 79. Alan Carnoy, / Democracia Sí! A Way to Win the Cold War (New York: Vantage Press, 1962), pp. 123-25.

177

178

F I N A N C I N G

URBAN

D E V E L O P M E N T

successful in bringing squatters to the point where they might reasonably acquire land and better homes, no bank would accept a mortgage until adequate services were installed. Paracaidistas need credit for urbanization in order to make self-help housing practicable and attractive, and banks appear to doubt that the granting of credit would induce that response. Many of these obstacles to housing financing were dealt with by the 1962 credit reforms and the FOVI program. This discussion considers how successful in stimulating low cost developments these efforts are likely to prove. It assumes that municipal land use restrictions do not prohibit private housing developments in Mexico City's metropolitan area. The first topic is current techniques for financing private housing at three crucial stages of a subdivision's development: site acquisition, urbanization of the site, and construction. The second is the potential role of formal and informal membership groups in facilitating the financing of low cost developments.

A. ACQUIRING T H E SUBDIVISION SITE Even after the 1962 credit reforms, developers in Mexico City generally have found that subdivision sites must be acquired without bank credit. As noted supra, Part II, mortgage banks uniformly deny loan applications where the applicant's intention is to purchase unurbanized land. Most developers continue to invest their own money or high interest loans for subdivision urbanization. On occasion, a developer can persuade the present landowner to transfer his tract to a fiduciary institution willing to underwrite the developer's role. This pattern was followed in Ciudad Satélite, a well known middle income development in the State of Mexico, near the Federal District border. Alternatively, a developer might be able to divert to land acquisition a small share of credit intended for the urbanization stage. 80 However, these techniques for the financing of land acquisition apparently do not relieve most subdividers of the need to finance land acquisition themselves. The government is another potential source for land acquisition finance. During the 1950's, the DDF's housing program for the burgeoning low cost residential areas called "proletarian colonies" included subsidized installment sales of residential tracts to squatters (para80. Interview with mortgage bank officials, August, 1964, February, 1965.

FINANCING

PRIVATE

HOUSING

caidistas). These areas grew up sometimes with government or private help, and sometimes haphazardly. 81 Installment arrangements were also used when the National University (Universidad Nacional Autónoma de México) gave perpetual occupancy rights to families living on an ejido expropriated for the University's campus. As indicated at the beginning of this chapter, IMSS has proposed installment sales of land to its members as a means of financing land acquisition on their behalf. Thus far, no public programs have made self-help development land available to professional subdividers.

B. URBANIZING THE SUBDIVISION TRACT After acquiring his site, the developer must finance its urbanization. As indicated in Part II, supra, mortgage banks, savings and loan banks, and savings departments still are reluctant to finance the urbanization stage of low cost subdivisions. Despite a Bank of Mexico ruling that credit for this purpose is permitted under the 1962 statutory reforms, only a few banks regard unurbanized land as adequate collateral for loans to be used to urbanize residential developments. (See Part II-A (1) (b), supra.) Many would-be developers therefore confront the problem of having to finance urbanization as well as acquisition through personal loans or their own capital. Developers who cannot secure mortgage financing can minimize use of their own funds by selling semiurbanized tracts in piecemeal fashion. To the east of the District in the drained bed of Lake Texcoco, developments like "Aurora" sell semiurbanized, unimproved lots along with guarantees of urbanization. Aurora's lots (153 square meters) are sold on IV2 year installment contracts with only 3 to 4 per cent down payments. Lot prices, which include interest, range from M$ 12,000 to M$28,000, and average about M$ 18,000. Average monthly payments are about M$200. Because these payments are the principal source of revenue, the developer's urbanization program is carried out block by block.82 Thus the older sections have well developed street patterns, though few streets are adequately paved. Water from a central tank is piped to the older section and trucked to the new areas. Pumping 81. For a recent summary, with further bibliographic references, of the D D F s policies regarding proletarian colonies, see Frieden, "Housing Policy." See also Chapter One, Part I-J, supra. 82. Interviews with private developers, August, 1964, February, 1965.

179

180

FINANCING

URBAN

DEVELOPMENT

stations have been installed throughout the project to drain the land, a service required during the rainy season because of poor natural drainage. Sewer lines have been laid underground in the older section, but the sewage is transported through open canals in about three-quarters of the development. A few lines have been provided by the electric company. In the older section users have been connected officially to the outlets, but most residents steal electricity by means of wire taps; both the developer and the electric company are aware of this.83 The practicality and desirability of modeling other developments after Aurora is subject to question. An average Aurora lot sells for M$ 13,000 if the purchaser pays cash, which makes the urbanized cost per square meter approximately M$85. Even if Aurora's profit margins do not exceed those of subdivisions to the north of the Federal District, this figure suggests the difficulty of finding equally inexpensive land near Mexico City, where most developers estimate that urbanized land costs at least M$125 per square meter. One developer estimates that Aurora's raw land is worth M$2 per square meter and that its property tax value is about M$.75 per square meter, based, presumably, on a bank appraisal at the time of purchase.84 The lack of other residential land at this price is an important obstacle to duplicating the Aurora pattern on a large scale. Furthermore, this method of financing lengthens the urbanization process considerably; several years have already passed since Aurora's urbanization was begun, and several more will be required to complete this stage. Finally, as indicated in Part III-C, infra, Aurora's urbanization scheme makes satisfactory improvements difficult.

C. I M P R O V I N G T H E

SUBDIVISION

1. W H E R E THE DEVELOPER IMPROVES INDIVIDUAL L O T S

a. Current Obstacles to Credit Once a subdivision site is urbanized, the developer or his vendees must finance the construction of residences on individual lots. Whether or not the developer has financed urbanization, he will normally borrow to finance improvements. However, recent experience in the Mexico City 83. These comments are based on the authors' personal observation of subdivision Aurora, August, 1964, February, 1965. 84. Interviews with private developers, August, 1964, February, 1965.

F I N A N C I N G

PRIVATE

HOUSING

area suggests that he will have considerable difficulty in securing this commitment if his units are to qualify as M$55,000 rather than M$80,000 social interest houses. Because the Federal District bans new subdivisions, most new private housing developments in the Mexico City area are located in the State of Mexico, to the north and east of the District. The numerous developments to the north demonstrate the substantial impact of the credit reforms. Nearly all of these developments consist of houses selling for M$65,000 to M$80,000. These houses are sold on ten to fifteen year 10 per cent mortgages with 20 per cent down payments. Most of these developments were begun before implementation of FOVI and FOGA incentives. FOVI incentives are limited to houses costing M$55,000 or less. (See Part II-A (1) (b), supra.) Banks and developers expect future investments to follow the established pattern rather than to take advantage of these incentives. 85 Such subdivisions meet an important demand for houses by professional and advanced civil servant groups. The housing shortage is so acute that, according to one FOVI adviser, middle class dissatisfaction may generate more political pressure than will the frustrated desires of low income families. 86 If housing which qualifies for FOVI-FOGA incentives can only be obtained at the expense of less new construction in the M$65,000 to M$80,000 category, the above analysis suggests that FOVI will fail to achieve its announced goals. Some developers explain the absence of low cost houses on the ground that it is impossible to meet FOVI's requirements for M$55,000 houses in the State of Mexico. 87 In projects backed by FOVI, urbanized land may amount to no more than 35 per cent of the total price, or M$ 19,250. For 150 square meter lots, this means that urbanized land cost cannot exceed M$ 128.33 per square meter, a figure which many contend is difficult to meet in Mexico City. If this figure were attainable, or if smaller lots were acceptable for M$55,000 homes, this would leave M$35,750 for remaining expenses. Allowing 10 per cent for profit, the total cost of the house cannot exceed M$30,250, which builders also challenge as inadequate for a decent three bedroom home near Mexico City. 88 This position seems dubious. First, the standard of a 85. Interviews with mortgage bank officials, August, 1964. 86. Interview with Ing. Victor Vila, July, 1963. 87. See Banco de México, Circular Núm. 1500/64; compare Banco de México, Circular Num. 1531/65. 88. Interviews with private developers and mortgage bank officials, Aug., 1964.

181

182

F I N A N C I N G

URBAN

D E V E L O P M E N T

three bedroom house seems unrealistically high for low cost housing. Second, reduction of unit costs may be possible through multiple unit construction. Third, at least one bank is financing both houses and lots which sell for M$22,000 in other regions of the country. 89 Even if high land cost does not preclude profitable construction of M$55,000 houses in new developments, for quite other reasons banks have financed and developers have built M$80,000 houses. There is still a large market for M$80,000 units, and there appears to be less pressure to increase amortization periods to fifteen years for such units. Banks run fewer credit risks with purchasers of M$80,000 houses, and less time is spent investigating applicants. In addition, banks may find that capital invested in a smaller number of M$80,000 homes significantly reduces administrative expenses. For similar reasons, developers also prefer to build M$80,000 units instead of M$55,000 units. Banks and developers should weigh the advantages of investing in M$80,000 units against the advantages of securing FOVI and, in areas of lower construction costs, FOGA support for M$55,000 units. FOVI is expected to charge only 6 per cent for credit to banks which finance M$55,000 units. 90 Mortgages financed by FOVI provide a three point margin on 9 per cent social interest loans, while 10 per cent loans for M$80,000 units (which are ineligible for FOVI credit) provide only a two point margin over 8 per cent mortgage certificates or bonds. For savings departments, though, FOVI credit at 6 per cent is more expensive than savings deposits which earn only AVi per cent, provided, of course, that increased deposits are possible. Of course, this differential is not relevant to mortgage banks, a major source of housing finance. FOGA support provides additional incentives for banks to finance M$55,000 homes. FOGA's subsidies compensate banks for reduced service charges and insurance premiums of M$55,000 homes, while FOGA's guarantees of amortization and interest payments remove obstacles which have been important factors in banks' reluctance to finance M$55,000 homes. (See Part II-B, supra.) FOGA's 1 per cent interest payments on 9 per cent loans increase the lender's margin to four points compared with two points on 10 per cent loans. Furthermore, FOGA provides banks with a viable option of operating without FOVI credit if they choose to do so and thus, in the Valley of Mexico, avoid the FOVI M$55,000 limitation. FOVI credit is conditioned upon compliance with FOVI's urban and regional development goals, as well 89. Interview with Lie. Mariano Alcocer, Jr., August, 1964. 90. Banco de México, Circular Num. 1500/64.

F I N A N C I N G

PRIVATE

HOUSING

as with narrower criteria defining reliable mortgagors and acceptable housing plans. If banks prefer to develop their own criteria for resolving such issues, FOGA's guarantees may facilitate greater diversity in mortgage practices. b. Areas for Possible Reform or Further Research Credit Ratings. Since it appears that FOVI and FOGA incentives for financing M$55,000 units have not yet overcome lenders' convictions that such units involve excessive risk, it would be useful if FOVI studied the credit reliability of low income groups. There is little credit experience based on experience with loans to these groups. ISSSTE has successfully made mortgage loans to its members with monthly incomes ranging from M$500 to M$ 1,000, but ISSSTE's interest rates are set at 8 per cent and the borrower's salary is easily garnisheed upon default. Moreover, an ISSSTE borrower's real income exceeds his M$500 or M$ 1,000 salary because he gets substantial fringe benefits. Certainly the 40 per cent default rate in subdivision Aurora, discussed earlier, suggests the need for strict credit controls for low income borrowers, for training programs to educate such families in the need for savings, and for safeguards against the exploitation of low income families. Data on the credit reliability of low income families may be available with respect to home appliances. Many of Mexico City's poorest residential zones boast television sets, stoves, and refrigerators, in part because low income groups have had access to credit for these goods from retail merchants. It might prove helpful for FOVI to study whether the proliferation of household appliances in low income areas derives from residents' preference for these goods over better housing or whether retail merchants' success with liberal credit standards might be acceptable in the housing field as well. The experience of Mexico's informal credit unions, the Cajas Populares discussed above, should also prove relevant in any detailed study of credit reliability among low income groups. Mortgage insurance. FOGA's incentives are intended to reduce risks associated with qualifying mortgage loans. FOGA's insurance was designed primarily to reduce down payments and to shift the risk of delayed foreclosure proceedings to FOGA. Nevertheless, FOGA's insurance will generate default statistics for low income mortgagors. Such information can be used to determine whether or not to expand the insurance program. Despite the belief of FOGA administrators that current guarantees, combined with the mortgage collateral itself, are

183

184

F I N A N C I N G

URBAN

D E V E L O P M E N T

satisfactory for M$55,000 loans, some bankers believe increased insurance is needed to stimulate this type of credit. Administration Expenses. The FOVI program attempts to reduce bank administration charges in a number of ways. One approach, embodied in the 1962 decree regarding savings and loan institutions, permits no service charge on loans for social interest group projects. While this direct resolution does reduce service charges, it makes social interest loans even less desirable than they now appear to savings and loan banks and other lending institutions. If possible, service costs should either be directly subsidized or be reduced without requiring investors to accept smaller returns on capital. One technique for reducing administrative costs is illustrated by FOGA's revised life insurance schedules, which streamline insurance classification procedures. Similarly, high bank charges suggest the need for eliminating redundant paperwork. FOVI has developed a uniform credit application form, 91 but mortgage institutions have complained of its complexity and the amount of information requested. FOVI officials and representatives of mortgage institutions might try to design abbreviated credit forms for social interest loan applications. The possibility of pooling credit reference information in a central office should be explored. It could be staffed either by FOVI or by representatives of mortgage institutions and it could further reduce administrative expenses for those banks without trained mortgage credit personnel. Research sponsored by FOVI on problems of bank administration expenses seems a more promising means of reducing these expenses than either legislative reduction of administration charges or a direct attempt by FOVI to perform these functions itself. Mortgage Foreclosures. Because of the widely acknowledged inadequacy in current foreclosure procedures, reform of these procedures should be undertaken as soon as possible. More efficient foreclosure techniques, designed to protect the interests of both mortgagors and mortgagees, would help expand the range of acceptable credit risks. Such reforms might also permit mortgage institutions to accept second mortgages under certain well-defined circumstances. FOVI's Role in Financing Social Interest Housing. FOVI has found itself with an excess of cash because savings and mortgage banks apparently prefer M$ 80,000 developments, because FOVI has encoun91. The forms are contained in FOVI,

Requisitos.

F I N A N C I N G

PRIVATE

HOUSING

tered difficulty in operating through savings and loan institutions, and because there was a delay of nearly two years in implementing FOVI's own program. Furthermore, private savings have expanded so rapidly that by July, 1965 banks had accumulated large reserves in the Bank of Mexico and were in no immediate need of FOVI credit. 92 It must have been somewhat embarrassing for FOVI to find itself in the position of not having enough applicants for funds for which it pays only 2 per cent interest to AID and the Inter-American Development Bank. 93 In the meantime, FOVI has administered two large housing projects in Mexico City, the Kennedy project and a smaller development known as Loma Hermosa. Loma Hermosa is being sold as a condominium through the use of housing certificates, apparently the first development to use these new credit instruments. The certificates are payable over fifteen years in installments which increase 7 per cent biannually. Despite this gradual increase, monthly installments begin at M$446, a surprisingly high figure. Furthermore, Loma Hermosa residents must make 10 per cent down payments on their apartments. 94 In addition to investing in the Kennedy and Loma Hermosa projects, FOVI is seeking a new role as coordinator of private housing investments. It aspires to the position of a "super-promoter" able to analyze a given city's demand for social interest housing, to coordinate private housing plans with municipal, state, and federal objectives, to achieve considerable economies of scale in home construction and design, and generally to stimulate the private market by demonstrating that social interest housing is good business. Although FOVI has not yet defined the precise terms of this new role, it sees itself as responsible for determining the size, location, and general design of housing projects. Tentative FOVI plans for these projects would be completed on the basis of competitive bidding among architects and construction companies. Once final, these plans would be circulated to all mortgage banks, savings departments, and savings and loan institutions. Those banks desiring to participate in the financing of the project would be announced by FOVI, and individual loan applicants would be referred to them for mortgage credit. 95 Interviews with private bankers revealed that they too are giving considerable thought to FOVI's future role in the housing field, though 92. 93. 94. 95.

Interview with Sr. Marcelo Javelly, Director of FOVI, July, 1965. AID Loan Agreement, Sees. 2.1, 3.1 (d). Correo Econdmico, p. 40. Interview with Sr. Marcelo Javelly, July, 1965.

185

186

FINANCING

URBAN

DEVELOPMENT

opinions so far appear to vary widely. Some bankers support FOVI's new conception of itself; others adhere to the original notion of FOVI as a source of "seed capital," especially among smaller banks; and still others contend that AID and the Inter-American Development Bank should withdraw their funds from Mexico in order to extend credit to less developed countries in Latin America. 2. W H E R E EACH OCCUPANT IMPROVES H I S O W N LOT

a. Current Obstacles in Securing Mortgage Credit The financing of low cost housing is more difficult in subdivisions like Aurora, where individual vendees, rather than the developer, need credit for home construction. Average family incomes in Aurora are about M$ 1,000 monthly,96 and since M$200 already is committed to land payments, such payments exceed FOVI's 20 per cent ceiling on housing expenses for this income group. 97 Thus most residents vacate their former apartments while lacking funds to build permanent homes on their new lots. Many families build shacks (jacales) which they hope to expand into houses with several bedrooms and modern facilities, but high construction costs require many to continue living in jacales for long periods of time. The pressures of land and improvement costs force many Aurora families to default on monthly payments under their installment sale contracts. The developer estimates the default rate at close to 40 per cent, 98 an unfortunately high figure. Defaulting purchasers have some rights to recover prior installment payments, but enforcement of these rights has been a source of controversy in the housing field. Under Article 2310 of the Civil Code, Aurora purchasers agree that a failure to make prescribed payments permits the seller to rescind the contract. Article 2310 provides: "Sales which permit the purchaser to pay the price in installments shall be subject to the following rules: I. In a sale of real property it may be agreed that default of payment of one or more of the installments shall give rise to rescission of the contract. Such rescission shall be valid against third parties who may have acquired the subject property, provided the memorandum of rescission 96. Interviews with Sr. Bernado Eckstein, Aurora's developer, Aug., 1964, Feb., 1965. 97. Banco de México, Circular Num. 1500/64, Rule II (c), limiting the percentage of monthly income allocable to housing to 20% where income is less than M$ 1,250. 98. Interviews with Sr. Bernado Eckstein, Aug., 1964, Feb., 1965.

F I N A N C I N G

PRIVATE

HOUSING

has been filed in the Public Registry." In the event of rescission, Article 2311 of the Code requires full restitution by each party of the goods or money received from the other. However, the seller may retain a sum equal to the property's fair rental value for the period used by the purchaser. The vendor may also claim indemnity for damage to the premises. Each of these sums is to be fixed through judicial proceedings. Article 2311 provides: "If the [contract of] sale is rescinded, the purchaser and seller shall return to each other any consideration received; but the seller who shall have delivered the sold property may demand from the purchaser, for the use of said property, the payment of rent as determined by appraisers, as well as indemnification for the deterioration the property has suffered, also in an amount determined by appraisers. The purchaser who has paid part of the price, has a right to legal interest on the amounts paid. Agreements imposing obligations on the purchaser which are greater than the aforementioned obligations shall be null and void." Although the Code provides that agreements imposing more onerous burdens on the buyer are void, it appears that developers customarily seek to fix both rental and indemnity figures in the contract itself, in effect stipulating "liquidated damages" binding on judicial appraisers. Aurora's contract stipulates the constructive rent to be charged defaulting purchasers and provides in addition that 25 per cent of payments received by the vendor shall be retained as indemnity for damages. Under this contract, tax liens and court costs associated with recovering the property are also deducted from the purchaser's refund. Finally, the cost of demolishing the vendee's improvements is deducted from the refund, unless the improvements are determined judicially to have some commercial value; if so, they are sold and the proceeds credited to the vendee. If these provisions qualify under Article 2311, they leave defaulting vendees with little equity in their parcels. Consider the case of the average Aurora purchaser, whose monthly installments are M$200. Upon default, M$50 of each installment is retained as "damages." Of the M$150 remaining from each installment, a substantial share is retained as constructive "rent." Although it is not clear how much normally is stipulated by contract, any figure from M$75 to M$100 would be consistent with the M$50 to M$75 monthly rentals in totally unurbanized areas on Mexico City's urban fringe. After tax and court costs are deducted, as well as the occasional charge for demolishing worthless improvements, a purchaser would appear fortunate to recover

187

188

F I N A N C I N G

URBAN

D E V E L O P M E N T

25 per cent of his installments. This estimate conforms to those made by several lawyers who handled defaulting vendees' restitution claims. Many Aurora families would like to find a way of saving for a reasonable period of time in order to secure housing loans. They might, therefore, apply either to mortgage banks for credit or to savings departments of commercial banks to open special savings accounts. Even if Aurora residents could overcome the apparent preference of these institutions for M$80,000 homes, they lack collateral to secure bank loans. The only potentially valuable property interest residents have in their land is the right to receive title after 7 Vi years of payments, since the value of the right to redeem past installments upon default is worth little. Even if the value of purchasers' equity in such cases were recognized by lending institutions, banking legislation requires first mortgage collateral. If this policy is based on the expense and delay associated with first mortgage foreclosures, the same objections apply to an installment vendee's equity. The process of cancelling the contract and evicting the purchaser following default could deplete whatever equity he claimed, leaving the lending bank with no security for its loan. Furthermore, the vendee's redemption right might be classified as personal property for mortgage purposes, rather than as the required interest in real property. Again, banks prefer to lend only if a mortgage covers urbanized land. Most residents of Aurora live on partially urbanized land and possess only the developer's written promise to complete the urbanization process. Finally, the obligation to make monthly payments of M$200 for land alone severely limits the capacity of purchasers to borrow from banks which refuse to make loans if more than 20 to 25 per cent of monthly income is devoted to housing. These difficulties equally preclude borrowing from savings and loan banks. Moreover, Aurora's residents are not organized sufficiently to qualify under FOVI's group development policy." b. Possible Reforms The principal parties in the financing triangle have slightly varying, though not inconsistent, interests. Mortgage banks must be assured of definite security easily measured and cheaply reached, which represents the purchaser's equity in his lot. The banks will also require that the developer's own claims do not consume this security in legal expenses. Purchasers want a system which enables them to obtain mortgage loans as well as to recover their equity cheaply in the event of default. 99. See FOVI, Requisitos, pp. 37-38. See also, Credit Institutions Law, Art. 46-o.

F I N A N C I N G

PRIVATE

HOUSING

Developers want prompt and cheap recovery of lots upon default in order to prevent the diversion of funds from financing urbanization. Protection of an installment purchaser's growing interest in his lot might be accomplished if the government provided or subsidized legal assistance in pressing vendee's claims under Article 2311, the Civil Code's refund provisions. A way of protecting the interests of all three parties is to permit purchasers to pay their installments directly into a trust fund, administered by a governmental agency, held for the benefit of the vendor and authorized to execute a summary and speedy eviction procedure. The fund would be applied to urbanization expenses as they became due. Should a buyer default, he could recover his equity directly from the trust fund upon return of the land to the vendor and satisfaction of the vendor's claims to constructive rent and other compensation. Under this scheme, banks would be assured of the amount of and access to a buyer's equity. The eviction procedure will help banks by minimizing erosion of the buyer's equity. Similarly, the eviction procedure, which would minimize erosion of the developer's claim, would make him willing to permit a governmental body to hold his installment receipts. By facilitating finance this system would increase the quantity of improvements and thereby would raise the value of unsold regions of the subdivision. Under this system, the new housing certificates used by FOVI in the Loma Hermosa project described earlier could be substituted for the installment sale contracts used in Aurora. A quite different approach to assuring Aurora residents some interest in their land would be to promote a market in which they could sell their installment contracts when they move or default seems imminent. Of course, purchasers would be liable to fulfill all remaining contract obligations. The establishment and maintenance by a government agency of a clearing house which charges little or no commission might be necessary to sustain such a market.

D. NOTE ON THE FEDERAL DISTRICT'S SUBDIVISION REGULATIONS The DDF's subdivision regulations are referred to briefly here because they relate to the private financing of residential developments. Although the DDF has not authorized private subdivisions in recent years, the Federal District's subdivision regulation has served as a model for cities throughout the country and illustrates the tie between private

189

190

FINANCING

URBAN

DEVELOPMENT

financing practices and public land use controls. Under the District's subdivision requirements, the developer must post a series of guarantees to protect the DDF from the possibility of incomplete subdivision. An initial deposit of up to 1 per cent of the estimated cost of urbanization is required. This deposit is returned when the developer fully guarantees the cost of urbanizing the subdivision.100 This guarantee may take the form of a deposit, a bond, or a trust account for the DDF (Art. 15). The developer must also post a bond guaranteeing upkeep of paved areas for a period determined by the Public Works Office (Art. 17). Finally, to protect the DDF's right to recover its expenses in supervising the development, Article 20 specifies that a guarantee of 1 Vi per cent of urbanization costs must be provided. The requirement that developers guarantee for some reasonable period that the DDF will not be burdened with repairing inadequate paving is sound, particularly in light of the District's past experience with "hit and run" developers.101 No doubt this experience also explains the requirement that developers guarantee the complete installation of urban services. Where bank credit is available for the urbanization stage, the mortgagor-developer can easily satisfy the subdivision regulation's guarantee requirement, because the opening of a trust account sufficient to meet urbanization costs, as permitted in the regulation, does not differ significantly from the banking practice of establishing accounts against which borrowers draw as each stage of a subdivision is approved by the lending bank. If the purpose of the guarantee is to assure that developers have sufficient funds to complete their projects, proof of a commitment of bank financing also serves the purpose as well as would other forms of guarantee. If the objective is to assure that developers use their funds for subdivision services, banks have a strong interest, as does the DDF, in rapid completion of financed developments. Where bank financing is used, the DDF might delegate some of its supervisory functions to the mortgage banks. If the purpose of the guarantee is to assure the satisfactory quality of subdivision services, this purpose may be achieved by the DDF's inspection of urban services before any sale is permitted. 102

100. Subdivision Regulation for the Federal District (Reglamento Sobre Fraccionamientos de Terrenos en el Distrito Federal), Art. 14, D.O., December 31, 1941. 101. See ibid., Preamble ("Considerando"). 102. See ibid., Art. 21.

FINANCING

PRIVATE

HOUSING

The guarantee requirement is necessary when financing is unavailable for the urbanization stage. In subdivision Aurora, for example, the developer is financing urban services block by block out of payments under installment sale contracts. However, many lots have also been sold in areas not scheduled to be urbanized for many months or years. If such methods were used in the Federal District, the DDF's need for some guarantee would be great. While the subdivision regulations would not prevent block by block financing, since they permit developers to seek DDF approval of urban services by zones, each zone consisting of a completely urbanized block, they would preclude, by Articles 12, 24, and 28, sale of lots in unurbanized zones. The urbanization trust fund, proposed in Part III-C (2) (b), supra, could also satisfy the need which the DDF's guarantee is designed to fill.

E. THE ROLE OF MEMBERSHIP GROUPS The financing problems discussed above can be dealt with in part by the potential contributions of membership groups. The increased attention focused on such groups by the statutory authorization of "mutual associations," by the Cajas Populares, and by studies of cooperative housing techniques suggests the need for a better definition of the role of membership groups in the private financing of low cost housing. 1. U N I O N S

This chapter has already suggested three techniques by which unions may stimulate low cost housing projects. First, as in the Kennedy development, unions may assume the entrepreneurial role: planning the development, soliciting members' down payments, arranging for institutional financing, and bearing ultimate responsibility for the project's administration. Second, unions may assume more limited responsibilities by merely guaranteeing their members' debts to third parties. This role is to be played by the IMSS unions in facilitating IMSS' plan to sell urbanized land to its members. Third, unions can organize groups of members to apply for social interest mortgage credit from savings and loan banks under the statute's group project authorization in Article 46-o. Unions may thus significantly help members to obtain private financing by permitting economies of scale in both the financing and construction of low cost units.

191

192

F I N A N C I N G

URBAN

D E V E L O P M E N T

2 . COOPERATIVES

a. Some advantages of Housing Cooperatives Housing cooperatives can help their members to achieve many sociological and personal benefits, including nonprofit operation of their own project, participation in the democratic control of their property, community activities such as nurseries and educational and recreational facilities, management of community facilities, low cost transfers of ownership of dwellings, and many other advantages. 103 However, these matters lie beyond the scope of this volume. b. Difficulties of Developing Self-Organized Housing Cooperatives Housing cooperatives can achieve substantial economies of scale in acquiring land, installing urban services, purchasing building materials, and contracting with architects, builders, and engineers. These, of course, are the savings which México Nuevo, the housing cooperative founded in 1956 and mentioned in Part II-C (3), supra, seeks to achieve. However, its experience is proof that such economies will not ordinarily be achieved merely by the organization of a housing cooperative by people who want to get a home. Successful projects demand substantial skills, as well as psychological and financial commitments of the founding members. Decisions concerning appropriate housing design, location, and finance must be faced in the early stages of the organization's life. Even if these hurdles are passed, México Nuevo's progress provides little basis for believing that housing cooperatives so organized can avoid the financing problems which confront housing. In the eight years of its existence, the cooperative has managed to pay for its land and begin the urbanization process. When this is finished, home construction will begin. Thus far, the group has depended entirely on internal financing, but the members' incomes average about M$ 1,000 monthly and payments to the cooperative are limited to M$100 to M$200 each month. 104 The slow pace of México Nuevo's progress suggests that the cooperative structure alone is no magic solution to the 103. See Jerome Liblit, ed., Housing—The Cooperative Way (New York: Twayne, 1964), pp. 71-130; Elsie Danenberg, Get Your Own Home the Cooperative Way (New York: Greenberg, 1949), pp. viii-ix. For a recent statement of these benefits, see the testimony of Mr. Wallace Campbell, Hearings on S. 1481, Before a Subcommittee of the United States Senate Committee on Banking and Currency, 87th Cong., 1st Sess. (1961), p. 980. 104. Interview with representatives of México Nuevo, August, 1964.

FINANCING

PRIVATE

HOUSING

problems found in other semiurbanized developments where residents have similar purchasing power and mortgage credit is unavailable. México Nuevo's problems are not limited to financing difficulties. Because it seeks to operate under a cooperative statute designed for commercial activities, México Nuevo's charter defines the group's principal objective as the purchase of fowl and other goods needed for the members' poultry activities. This not only requires members to engage in nominal poultry activities in order to retain their cooperative shares (and hence their homes), but it raises home costs by necessitating extremely large plots (averaging over 600 square meters) for low income urban families. The internal structure of the cooperative also reflects its ostensibly agricultural character. The housing committee, composed of three members, is appointed by the administrative council and occupies one of the least important roles in the cooperative's organizational framework. Since in practice this committee carries out the cooperative's principal functions, it seems unfortunate that it is so removed from effective control by members. Although the charter requires the committee to act in accordance with housing regulations adopted by the members' assembly and approved by the Ministry of Economy, the committee is primarily responsible to the cooperative's officers, who alone are charged with supervising the committee's handling of funds. 105 Another difficulty of México Nuevo is that its charter fails to provide proper standards for meeting the financing and planning problems inherent in low cost residential developments. The charter provides that a defaulting party shall be refunded the full value of his payments, less administrative costs to the cooperative. 106 If the refund is large, or if all cooperative members already are participating in the housing program, the cooperative might run into difficulties. The charter does not indicate anything about the credit terms to be extended to members or the kinds of obligations the cooperative may assume to outside lenders. Neither interest rates, down payments, amortization periods, nor necessary collateral are so much as mentioned. Nor is there any discussion of standards for defining members eligible for cooperative housing programs or of the kinds of homes to be built. Again, the 105. Sociedad Cooperativa de Compra en Común "México Nuevo," S.C.L., Acta y Bases Constitutivas, Claúsulas 4 and 57-60 (1959). (Since 1958, Cooperatives have been regulated by the Department of Cooperative Development in the Ministry of Industry and Commerce.) 106. ¡bid., Clausula 63.

193

194

F I N A N C I N G

URBAN

D E V E L O P M E N T

charter fails to specify the role of the reserve or social program funds in relation to its housing program, an omission particularly surprising since the statute authorizes cooperatives to guarantee members' obligations to third parties. These omissions, like many of México Nuevo's internal difficulties, spring from the particular statute under which the organization functions rather than from the cooperative form itself. c. Experience with Housing Cooperatives in the United States An alternative method of initiating housing cooperatives is to organize them with the help of a technical, nonprofit agency which brings together the necessary skills for the development of a successful housing project. Such a pattern might be based on the long and successful experience in Sweden, where more than one-third of the housing is built by housing cooperatives. Rather than use the method of self-organization of México Nuevo, cooperatives would be developed with the aid of a nonprofit development organization, such as the United States based Foundation for Cooperative Housing or one of its nonprofit subsidiaries such as the FCH Company. 107 The Foundation would act as the representative of the cooperative in handling the complex problems of building, financing and organizing a multifamily dwelling. In the United States, the Foundation's projects have been many million dollars in size. When a project is ready for occupancy and self-operation, the residentmembers of the housing cooperative would hold their election of officers and Board of Directors, and take over all of the active operation of their own buildings. During the formative first years, the officers would continue to be assisted by the Foundation in order to be helped over the hurdles of running this large property in their own behalf. While in the beginning a nonprofit development organization would need to be subsidized, funds for its continued operation could come from the proceeds of housing cooperative mortgages. For exam107. For a description of F C H Co. see Liblit, Housing—The Cooperative Way, pp. 231-33. See, generally, Foundation for Cooperative Housing, A Program of Assistance for Cooperative Housing in Less Developed Countries (Washington, D.C., 1962), esp. pp. 1-3 (prepared for AID). See also, David L. Krooth, "Cooperative Housing," Journal of Housing, July, 1960, p. 258; David L. Krooth, "New Opportunities for Cooperatives under the Federal Housing Act of 1965," Cooperative Housing, 3:3 (1965). A n organization similar to the FCH Co. has recently grown up in Chile under the name, TECNICOOP. For a discussion of Chile's successful, though limited, experience with cooperatives see Samuel Ruiz Luján, "A Cooperative Approach to Housing Problems in Latin America: The Example of Chile," International Labour Review 91:406-419 (1965), as reprinted in part in Development Digest 4:58-66 (1966).

FINANCING

PRIVATE

HOUSING

pie, the United States Federal Housing Administration (FHA), in approving mortgages which it insures, allows 3 per cent of the mortgage on the property to cover the housing cooperative's organization and selling costs.108 FHA has long realized that these costs are an essential part of the cooperative project, just as are the bricks and mortar in the buildings themselves. In this way, those who benefit from the organization of the housing cooperatives are charged with and pay for these benefits, but over a long period of time in amounts they can afford. As a result of successful development of cooperative housing projects, the nonprofit organization receives the funds needed to continue its work. This description tells nothing of who the occupants of the cooperatives are, or might be, or on what principles the Foundation seeks them out or organizes them. Perhaps this important matter is left to selling techniques employed in the open market. 3 . EVALUATION OF G R O U P FINANCING

At present, Mexican banks are skeptical about loans to housing cooperatives. Two objections are raised. First, defaults by any single member may prevent the group from meeting its obligations; yet political and social considerations would prevent a lender from foreclosing a mortgage if only one member of the cooperative failed to pay his dues. Second, the transferability of each member's share would be sharply curtailed if title to land or improvements were in a cooperative, and the cooperative would have to approve the new members; this reduces the market and might lead to serious conflicts within the cooperative itself.109 In addition, banks and even FOVI appear reluctant to finance cooperatives, at least in part because they are unaccustomed to the idea. Groups of dubious credit risks seem riskier than individuals in the same situation. ISSSTE members, for example, may seek financing through cooperative loans, provided their particular union approves the plan, but ISSSTE apparently discourages this form of credit. BNH also makes some loans to union housing projects, but under extremely rigorous security provisions, usually requiring the guarantee of a successful corporation employing the group's members. 110 Housing cooperatives may not reduce the cost of financing social 108. See National Housing Act, 12 U.S.C. Sees. 1702, 1709, 1713, 1715(e), 1715(y) (Supp. 1965). 109. Interview with mortgage bank officials, July-August, 1963 and August, 1964. 110. Interviews with ISSSTE and BNH credit officers, August, 1963.

195

196

FINANCING

URBAN

DEVELOPMENT

interest projects. In Mexico, banks may well be more effective than cooperatives in supervising land purchases, architects' fees, and contractors' bids. Bank personnel are familiar with the real estate market, the architects and engineers best qualified to design and build low cost housing, the costs of installing urban services and constructing homes, notarial fees, and the transfer and property taxes involved in low cost developments. Even if cooperative sponsors and leaders acquired information on all these factors, the cost of training new leaders for each development would make it more efficient for banks to perform these services. In addition, a bank may induce contractors to lower their bids by offering the chance for a continuing relationship on other housing projects. One frequently cited advantage of cooperative housing is that it provides minimum risk for the lender, because the entire project is mortgaged to secure a single debt. 111 Yet it is precisely this all-ornothing nature of the collateral that has discouraged some mortgage bankers in the Federal District. Although cooperatives' reserves might be useful in allaying this apprehension, it is doubtful that bankers will regard a cooperative's single title as an incentive for mortgage loans. To the extent that a lien on an entire housing development is an incentive to lenders, methods can be devised to create such a lien. Cooperatives may also reduce housing costs because they permit a single title search, a single closing, and a single recording fee. 112 However, a cooperative is not necessary to accomplish these savings. Within a given development, the only title that needs to be searched is that of the tract's vendor, regardless of whether the vendees take title collectively or not. Most of the advantages of closing can be obtained if all purchasers appoint a common agent to sign appropriate documents. While individual deeds and mortgages must be recorded for each housing unit if a cooperative is not used, any substantial differences in cost on this account point to the need for reducing transfer and recording fees rather than stimulating housing cooperatives. (See Chapter Three, Part II, supra.) 4. A D HOC MEMBERSHIP GROUPS AND CAJAS POPULARES

The preceding analysis has questioned the usefulness of housing cooper111. See, for example, Roger Willcox, "Cooperative Techniques and Effective Reduction in Housing Costs" Land Economics, 29:295-301 (Nov. 1953). 112. Danenberg, Own Home Cooperative Way, p. ix.

FINANCING

PRIVATE

HOUSING

atives in the Mexican context. However, there are circumstances in which informal groups of low income families seeking housing credit can achieve many of the financing advantages of cooperatives. For example, mortgage institutions need inducements to finance low cost developments. A bank is able to evaluate equally well the financial attractiveness of a plan for a specific project, whether submitted by a developer or by individual families. There is no need for the bank to sponsor its own project and then sell individual units with the aid of purchase money mortgages. Any group promises an immediate and known demand for the projected development and obviates the need for a promotional campaign. It may be that administrative costs associated with mortgage loans can be reduced through self-help debt supervision by community groups. Although self-help housing itself may be inefficient in the context of Mexico City's relatively high employment rate, self-help mortgage administration should not detract from mortgagors' employable resources. Even before the 1962 credit reforms, one of the leading savings and loan banks was considering a plan which seemed to meet banking standards while encouraging group participation by low income families. In general terms, this plan provided a three year period for the borrower to deposit 10 to 15 per cent of his proposed home's value. After this period, the borrower would receive the remaining 85 to 90 per cent, at about 9 per cent interest, with fifteen years to repay. Loans would be made to individuals, but only in groups of 25 or more coworkers, union members, or neighbors. After a common site and contractor were chosen by the group, a group leader would be charged with supervising amortization payments and other administrative tasks designed to reduce banking charges. 113 In its Loma Hermosa project, FOVI also relies on ad hoc residential groups and group spokesmen to reduce administration costs for the financing institution in respect to the newly created housing certificate. One obstacle to the use of informal residents' groups in housing finance programs is that such groups do not spring up spontaneously. In the United States, developers often take the initiative in establishing cooperatives or informal tenants' organizations to secure the benefits of condominium ownership. It may be that one gap in Mexico's new housing program is a failure to develop means for the creation of such ad hoc groups. Thus the Foundation for Cooperative Housing, men113. Interview with mortgage bank officials, August, 1963.

197

198

F I N A N C I N G

URBAN

D E V E L O P M E N T

tioned above, is helping develop documents for use by cooperative members and residents of condominiums.114 The Cajas Populares, described in Part II-C (1), supra, may prove helpful in this context. While they do not qualify under existing credit union legislation, the Cajas have succeeded in forming a variety of neighborhood groups throughout the District, many of which are anxious to bring their organizational experience to bear on housing problems. Precisely because they lack any juridical personality, the Cajas may be able to perform the informal group functions described above. In addition, an informal credit union could be the depository of members' down payments where straight mortgage credit is requested. The advantage credit unions have over savings banks in this phase of home financing is that, when successful, these unions may elicit greater savings from low income families than do banks, few of which will pay much attention to low income families and their savings habits. Credit union membership might also serve as a credit reference, for the savingsborrowing-repaying responsibilities of Caja members would seem a relevant demonstration of financial maturity. In this field as well, FOVI might join with mortgage institutions, developers, and leaders of existing community groups to draft model agreements for the establishment of ad hoc housing groups. Simplified documents, already familiar to mortgage lenders, could facilitate both the creation and successful operation of such groups.

F. COMPLEMENTARY PUBLIC-PRIVATE FINANCING TECHNIQUES Housing policies of the Mexican government envision a system of complementary public and private programs, as noted at the beginning of this chapter. Private financing institutions seem willing to play their part. INV, ISSSTE, IMSS, and BNH have concluded that delegating specific investment functions to individual borrowers, homeowners, or private bankers increases each agency's efficiency. Similarly, this study suggests the possibility that limited public participation in private financing schemes can reduce the cost of low income housing. The creation of FOVI as a public agency within the private housing field is 114. Foundation for Cooperative Housing, Action Programs in Cooperative Housing (Stamford, Conn.: n.d.).

F I N A N C I N G

PRIVATE

HOUSING

a prime example of this trend. Starting as an agency for stimulating private housing finance through "seed capital" loans, FOVI has redirected its energies toward guiding and organizing private investors, builders, and buyers in a way which differs only slightly from the roles of IMSS and ISSSTE in arranging mortgage financing for members. Even if FOVI's expectations prove unrealizable, many of the suggestions set forth here point toward greater public and private coordination in mortgage financing techniques. While FOGA insurance and FOVI finance will enable mortgage lenders to expand social interest credits, reduction of banks' administration expenses might be facilitated through a central FOVI credit application office. More important, FOVI could play a valuable role in reforming bank credit standards through studies and demonstration projects aimed at testing default probabilities among low income families, examining the need for expanded mortgage insurance, and encouraging the creation of ad hoc housing groups. The DDF could also make useful contributions to mortgage financing practices by urbanizing tracts for self-help housing and by adjusting current subdivision requirements to the financing needs of low cost developers. In short, private financing practices in Mexico are moving toward greater reliance on governmental agencies to fill specific gaps in the private housing market. Instead of distinctly separate housing activities within the public and private sectors, as was the rule through 1960, Mexico can expect its government agencies to reduce direct housing investments, to stress legislative reform, educational campaigns, and insurance schemes, and to stimulate the private financing of social interest housing.

199

CHAPTER FIVE

CURRENT

ISSUES

PLANNING

FOR

IN

DEVELOPMENT

MEXICO

CITY

202

F I N A N C I N G

URBAN

D E V E L O P M E N T

In which ways should a metropolitan area's physical expansion, land use, and population growth be controlled? How do decisions regarding open space programs, supply of urban services, industrial location plans, and public housing affect the choice and use of the techniques of housing finance discussed in the preceding chapter? How can private citizens participate effectively in planning the future development of their city and in formulating land use controls? How significant is the relationship between land taxation and appropriately designed land use controls? This chapter discusses these basic questions and presents some tentative answers. Mexican planners are facing the same questions, and some of their proposals are reviewed. In an urban center growing as fast as the Federal District has in recent decades, concern about the course of urban growth is inevitable and healthy. Officials and private citizens have discussed a great variety of ideas about how future growth should be controlled. Many forms of government control over land use, including a land bank, limited proprietary control, and zoning are reviewed in this chapter. Just as the substance of decisions about urban planning is important, so is the method by which such decisions are reached significant. Accordingly the chapter also discusses the present lack and the potential use of citizen participation in land use planning. In addition, some effort is made to measure the importance of tax factors in the location decisions of businessmen who located in the State of Mexico, where property and other taxes are lower than in the Federal District. The chapter concludes with the suggestion that intelligent use of existing powers—including authority to tax, zone, establish subdivision regulations, and control the use of creditwill enable officials to plan future urban development without having to turn to untried planning instruments.

CURRENT

i

ISSUES

IN

DEVELOPMENT

PLANNING

AN I N S T I T U T I O N A L FRAMEWORK DEVELOPMENT PLANNING

FOR

A. CURRENT PLANNING INSTITUTIONS FOR THE FEDERAL DISTRICT The DDF has been responsible for rapid expansion of public works in the last decade.1 These include extension of many avenues, construction of numerous markets and municipal buildings, provision of critical urban services to outlying areas, construction of the peripheral highway, and a new public housing program. These important achievements testify to the D D F s active participation in urban planning. Nevertheless, professional planners are increasingly concerned about the Federal District's planning institutions, because, despite concrete achievements, the DDF has yet to coordinate the diverse aspects of urban growth. The Federal District's formal planning structure centers around a representative council, the Planning Commission created by the Planning Law.2 It is headed by the Jefe of the DDF, and composed of: the Ministers of Finance and Public Credit, Water Resources, Communications and Public Works, Public Education, Health and Welfare, National Resources, and Administrative Inspection; an executive secretary, the Subdirector of Planning and Programming in the Public Works Office of the DDF; the Director of the Public Works Office of the DDF and the Director of the Water and Sanitation Office of the DDF; the Head of the Regulatory Plan Branch (Plano Regulador) 3 of the Public Works Office; the Head of the Planning Branch of the Public Works Office; the Director of the National Institute of Anthropology and History; the Director of the National Institute of Fine Arts; representatives of the Mixed Planning Commission, the Confederation of National Chambers of Commerce, the Confederation of Chambers of Industry of the United Mexican States, the College of Civil Engineers of Mexico, the College of Military Engineers, the Bankers' Association of Mexico,

1. Much of the following discussion is based on personal interviews with D D F officials, private planners, and representatives of several federal agencies, JulyAugust, 1963; August, 1964; February, 1965; and July, 1965. 2. Planning Law (Ley de Planificación del Distrito Federal), Art. 6, D.O., Dec. 31, 1953. Articles referred to in this chapter will be those of the Planning Law. 3. The Regulatory Plan Branch will be referred to as Plano Regulador in this chapter.

203

204

F I N A N C I N G

URBAN

D E V E L O P M E N T

the Bank of Mexico, BNH, and the real property owners' association of the Federal District. The Planning Commission is charged with reviewing general development policies for the city, under Article 22 (IX). Article 22 empowers the Planning Commission to conduct studies on urban problems, to fix land use zones, to advise on the preservation of historic sites or buildings, to examine the costs of certain proposed urban projects, and, upon request of the DDF, to approve or reject such proposals. Article 13 provides for a more specialized body, the Mixed Planning Commission, to be responsible for arranging the financing of individual DDF projects and, at least in theory, for supervising the execution of public works undertaken by the DDF or its executive committees or ad hoc bodies created to plan for or execute specific DDF projects. The Mixed Planning Commission is composed of the District's Treasurer, an official of the Ministry of Finance and Public Credit, two tax attorneys, and three engineers or architects familiar with the problems of planning. Article 13 also provides that, in some cases, the Mixed Planning Commission may also assume supervisory duties over executive committees assigned to develop or implement specific projects. In addition, the DDF itself has considerable authority in the urban planning field. The DDF acts as the Planning Commission's executive arm by preparing plans for the Commission and, following approval of these plans, by implementing those projects which have not been delegated to an executive committee (Art. 26). The DDF, by virtue of its power to exercise all planning functions not assigned to the Planning Commission, the Mixed Planning Commission, or executive committees, is more than a secretariat for the Planning Commission. The DDF determines whether either planning or implementation responsibilities will be assigned to an executive committee, selects most executive committee members, and fixes the priority of committee projects (Arts. 20 and 26). More important, the DDF decides whether a proposal is to be submitted for Planning Commission approval in the first place. This is set forth in Articles 26 (IV), 22 (III), (VIII), and 37. If no such approval is requested, the DDF is free to implement the project on its own authority. This is the clear implication, followed in practice, of Articles 26 (I), (VII), and 37. Even when a project is approved by the Commission, the DDF's control, under Article 26 (IX), over implementation gives it the power to phase development according to its own planning goals.

CURRENT

ISSUES

IN

DEVELOPMENT

PLANNING

The Planning Commission is one of the few governmental organizations which could integrate local and national programs for Mexico City. The presence of commercial, industrial, and financial representatives on the Commission invites coordination of public and private plans. In practice, however, the DDF rarely refers projects to the Planning Commission. There are few occasions when the Commission meets. From 1952 to 1958 it met only once—and then merely to reject a project submitted from outside the DDF and to approve the widening of a street.4 Consequently, the Commission has not contributed to the coordination of development planning. As a result, the DDF has not formally participated in regional planning done by the national government. Informal participation could have been extensive, but until recently the principal housing agencies, IMSS, ISSSTE, BNH, and INV, pursued their District housing programs with only minimum contact with DDF planners. Similarly, the DDFs own development plans for municipal services and public housing units have been formulated with little participation by the private sector. Within the DDF itself, the Public Works Office (Dirección General de Obras Públicas), charted in Table 25, is charged with planning and building for urban development. Public Works is divided into three suboffices: Construction and Maintenance, Planning and Programming, and Auxiliary Services. Ostensibly, most planning functions are discharged by Plano Regulador within the suboffice of Planning and Programming. However, Piano Regulador's principal functions are limited to establishing zoning rules and designing the DDF's street layout. Street plans must await final adoption (which may require five years or more) by the Planning Branch, a parallel branch of the same suboffice. In addition to scheduling street extensions, the Planning Branch supervises subdivision applications and condemnation of land required for DDF projects. These operations are pursued without reference to project priorities suggested by Plano Regulador. Within the suboffice of Construction and Maintenance, five branches influence DDF development plans, but maintain only minimal contacts with Plano Regulador. The Buildings and Monuments Branch (Oficina de Edificios y Monumentos) constructs municipal buildings, markets, parks, schools and monuments. The Suburban Works Branch 4. Francine Rabinovitz, The Political Feasibility of Areawide Planning in Mexico City, a study prepared for Regional and Urban Planning Implementation, Inc. (RUPI), under contract A I D / L A / I I I with the U.S. A g e n c y for International D e v e l o p m e n t (Cambridge, Mass.: R U P I , 1965), p. 34.

205

206

F I N A N C I N G

U R B A N

D E V E L O P M E N T

2 a S £ s •a • s l * u £ 60X1 a JS « 3 PL, £ ft.

a o, 3

U a •o §

o PÖ

m

O vi ca w -J 0 < H

c a c

c o U

m CA g |

.c

of the proceeds of sale be utilized for the construction of markets. In a case of sale, the subdivider shall have the right of first refusal. The location of the land to be donated shall be precisely specified by the Office of Public Works. Art. 38. Both the donations of land to be used for public ways and those donations referred to in the preceding Article shall be set forth in the public document referred to in Art. 4. Art. 39. In the case of new subdivisions to be laid out within other previously established subdivisions which, in conformance with the laws, regulations, or provisions in force on the date of their having been commenced, or in accordance with contracts made with a competent authority, have satisfied the requirement of donating lands for public services, such new subdivisions shall not be required to make the donation referred to in Art. 37. Proof of this requirement having been satisfied shall be verified through duly recorded public documents. Art. 40. In a case in which the subdivider does not post the guarantee referred to in Art. 15 of this Regulation within the time period established by said Article, all proceedings relative to the respective subdivision shall be null and void, without prejudice to the provisions of the final part of Art. 14. Art. 41. The D D F , through the Office of Public Works, shall require that the contracts or documents of purchase and sale of lots in authorized subdivisions contain such restrictive covenants as are necessary to make sure that the purchasers of said lots will not further divide them into lots of dimensions smaller than the authorized minimum, that said lots will be utilized for the purposes and uses for which the subdivision has received approval, and that in rural subdivisions construction will take place on no more than 20% of the total area of a lot. Art. 42. As soon as the urbanization of the subdivision of authorized zones has been completed to the satisfaction of the DDF, appropriate documents will be issued. The D D F shall provide the subdivision or the completed zones with all urban services, an obligation that it shall fulfill within a period of 90 days, in accordance with the demands of construction progress in said subdivision or zones. Art. 43. When the approved plan for a subdivision includes the establishment of parks, the subdivider shall be required to landscape only the donated area. On donated land on which parks are not constructed, the D D F shall take necessary steps to make sure that they are not converted into dumps or, in general, do not get to the point of presenting an appearance which does not harmonize with the rest of the land in the subdivision. Similar steps shall be taken with regard to lots for markets, schools, or other public services until such time as the improvements are constructed. Art. 44. The construction of schools, markets, and other public services shall be carried out by the appropriate authorities, as soon as the needs of the subdivision population justifies it, budgetary conditions permitting. Art. 45. In a case in which the subdivider deviates from the approved subdivision plan without the authorization of the DDF, he shall be required to redo, at his own cost, all the urbanization and planning works improperly carried out, in order to conform them to the authorized plan. Art. 46. If the subdivider does not carry out the urbanization of the subdivision or the authorized zones within the specified time periods, the D D F shall complete it and charge it to the trust, the bondsman, or the deposit provided for in Art. 15. The Treasury of the D.F. shall collect the amount of such cost in the

TRANSLATIONS

OF

LAWS

manner established in Chapter XXXVIII 3 2 of the Finance Law of the DDF. Art. 47. The subdivider shall not commence urbanization on the land to be subdivided until such time as: he has received both authorization and the planning outlines of the subdivision; the bond has been given, the trust set up, or the deposit made as a completion guarantee for such urbanization; the cost of supervision has been covered, and the donated areas conveyed, thus satisfying the requirements referred to in Arts. 11, 15, 19, 20, and 37 of this Regulation, and until the amounts specified in each case by the respective laws have been paid. Art. 48. As an absolute prerequisite to notarizing an instrument of purchase and sale of subdivision lots, notaries shall require the vendor to prove that he has complied with the requirements of this Regulation, as they pertain to his subdivision, through certification which the vendor shall request from the Office of Public Works. The Public Property Registry shall not record any contract of purchase and sale of subdivision lots, unless it is proven to the authority responsible for the ratification of signatures that the owners of the subdivision have fulfilled the requirements established by this Regulation. Such proof shall consist of a certification issued by the Office of Public Works which shall be reproduced in its entirety into the memorandum of ratification. Similarly, public documents of purchase and sale of subdivision lots shall not be recorded, unless they have a clause containing the same aforementioned certification issued by the Office of Public Works. This requirement pertains only to original sales. Art. 49. All costs of legal documents pertaining to agreements between the D D F and the subdividers, and executed in compliance with the provisions of this Regulation, shall be borne exclusively by the subdividers. Art. 50. In the case of subdivisions in which lots are sold, construction takes place, streets are established or urbanization is carried out, without prior permission having been requested as referred to in Art. 2 of this Regulation, or where such a request has been made and then abandoned, the D D F , upon discovering any of the above infractions, shall order the immediate suspension of the work being carried out and shall reserve the right to authorize or not authorize the subdivision, proceeding furthermore in each case as is established below: I. In a case in which the subdivision is to be authorized: a). A period not greater than 10 days will be accorded the interested party to submit a report on the sales of lots and on the state of the urbanization of the subdivision; b). The D D F shall publish the fact that the particular subdivision has been carried out without official authorization, and that, consequently, the transactions of purchase and sale of lots are subject to the consequences deriving from the provisions of this Regulation; c). Within the same period plus 5 days, the subdivider must request authorization for his subdivision by presenting the plan thereof. Once this plan is initially accepted by the Office of Public Works, it shall be circulated among the Branches in charge of the different public services, so that each of them, within a period of 30 days of the date they receive the plan, may present the budgets for the respective urbanization. As soon as said Office receives the budgets, it shall specify a period of ten days for the interested party to present proof of having paid a fine of no less than 31% of the total value of the urbanization budgets, a fine which shall be imposed for the violation committed in carrying out work on a subdivision without having previously requested the permission referred to in Art. 2 of this Regulation. Upon compliance with this requirement, the remaining processing of the request of the guilty property owner shall be subject to the provisions of this 32. Corresponds to Title XXVII of the present Finance Law.

327

328

FINANCING

URBAN

DEVELOPMENT

Regulation. The guilty party is required to demolish, at his own cost and within the period specified, those works carried out in the subdivision which the DDF considers to be inadequate or unacceptable, either for planning or urbanization considerations. In a case which the guilty party does not comply with the provisions of this Article within the specified time periods, the DDF shall proceed to formulate the budgets for the urbanization and planning works it deems necessary. For the purpose of carrying out these works, the Treasury of the D.F. shall collect from the guilty party the amount of the abovementioned budgets and fine through the procedure established by Chapter XXXVIII of the Finance Law of the DDF. If the guilty party refuses to make the donation required by Art. 37 of this Regulation he will be subject to a fine equivalent to the value of the land that should be donated, such value to be determined by the Office of Public Works. II. In a case in which the establishment of a subdivision is not to be authorized: a). The same public notice shall be given as referred to in Sub-sec. 1-b above; b). There shall be imposed on the guilty party a fine of not less than 31% of the total amount the urbanization of the subdivision would have cost; c). The guilty party shall be required to demolish, at his own cost and within the period specified, those works which were constructed without authorization and which the DDF considers to be unacceptable or inadequate, either for planning or urbanization considerations; d). If the guilty party should not comply with the provisions of the foregoing subsection within the specified period, the DDF shall proceed to demolish the respective works, at the cost of the guilty owner. Art. 51. In a case in which the owner of a subdivision being processed by the Office of Public Works carries out urbanization in that subdivision without the express and written authorization of the same Office, a fine shall be imposed on him in an amount no less than 10% of the total value of the works carried out prior to the date of authorization by the Office of Public Works, without prejudice to the Office's ability to order the immediate suspension of the works until such time as authorization to complete them is obtained. The subdivider, at his own cost, must rebuild any urbanization and planning works carried out contrary to the approved plan. Art. 52. In a case in which the owner of a subdivision being processed by the Office of Public Works sells lots or builds [a house] prior to the granting of the document referred to in Art. 4 of this Decree and prior to the approval or completion of the urbanization works to be carried out in the subdivision for the particular house, the DDF shall order the immediate suspension of the subdivision and shall impose on the subdivider a fine of not less than 20% of the total value of the missing works, collection of such fine to be made in the manner prescribed by Art. 30 of this Regulation, without prejudice to requiring the donation of land for public services referred to in Art. 37 of this Regulation. The DDF shall then proceed to carry out the urbanization of the subdivision as a charge against the bond, trust, or deposit referred to in Art. 15 of this Regulation. In a case in which no bond, trust or deposit exists, the Treasury of the D.F. shall, in accordance with Art. 28 of the Finance Law of the DDF, proceed to attach the necessary lands so that with the proceeds obtained from their sale the DDF is enabled to carry out the urbanization. Art. 53. Any other infraction or violation of any of the provisions of this Regulation for which no special or expressly specified sanction exists shall be punished by a fine of from MS100 to M$ 1,000, at the discretion of the Head of the DDF and in accordance with the seriousness of the violation.

T R A N S L A T I O N S

OF

LAWS

Art. 54. The DDF, through the Office of Public Works, shall insure practical compliance with all the provisions of this Regulation. Art. 55. The Head of the DDF is empowered to resolve any case of doubt arising as to the interpretation to be accorded any of the provisions of this Regulation.

329

330

F I N A N C I N G

U R B A N

D E V E L O P M E N T

G E N E R A L LAW O F C R E D I T I N S T I T U T I O N S A N D A U X I L I A R Y ORGANIZATIONS D.O., May 31, 1941 TITLE T w o

C R E D I T INSTITUTIONS

CHAPTER II

SAVINGS DEPOSIT OPERATIONS

Art. 18 Art. 19

Special savings plans for social interest housing Social interest housing loans as a percentage of assets; mortgage loan conditions Savings institutions, need for rules and requirements

Art. 23 CHAPTER IV

MORTGAGE CREDIT INSTITUTIONS

Art. 34 Art. 35 Art. 36

Authorized activities of mortgage banks Mortgage bank bonds, description Rules governing activities, capital and liabilities, loan purposes and terms, and other investments Mortgage certificates: procedure and rules for issuance, default Holders' rights Prohibited activities

Art. 37 Art. 38 Art. 39 CHAPTER VII

SAVINGS AND LOAN BANKS FOR F A M I L Y HOUSING

Art. Art. Art. Art. Art.

46-a 46-b 46-c 46-ch 46-d

Art. Art. Art. Art. Art. Art. Art. Art. Art. Art. Art. Art.

46-e 46-f 46-g 46-h 46-i 46-j 46-k 46-1 46-m 46-n 46-n 46-o

Art. 46-p Art. 46-q Art. 46-r Art. 46-s Art. 46-t Art. 46-u T I T L E FOUR CHAPTER III

Art. 141 Art. 142

Minimum capital Authorized activities Limit of liabilities Rules for capital investment Rules governing transactions; terms of savings and loan plans and contracts Special deposits Borrowing from other banks Loans to subscribers, purposes and terms Regulatory savings and loan fund Repayment to regulatory fund Anticipatory reserve Investment of funds Powers of National Banking Commission Duplicate contracts Conduct of selling agents Resolution of conflicts Savings and loan plans for social interest housing, requisites and procedure Area of operations Locus of loan Prohibition against savings and loan operations for other institutions, mutual associations excepted Opinion required from Bank of Mexico Prohibited activities Formation of mutual associations

331 331

331 33 j 331 331

331 332 332 334 335 335 336

336 336 336 336 336 337 338 338 339 339 339 339 339 340 340 340 340 341 341 341 341 341 342

G E N E R A L PROVISIONS SPECIAL PROCEEDINGS

Procedure for collecting loans Reduction of service fees

342

342 343

TRANSLATIONS

TITLE TWO

OF

LAWS

C R E D I T INSTITUTIONS

CHAPTER II

SAVINGS DEPOSIT OPERATIONS

Art. 18. . . . (paragraph four) Institutions may set up special savings account deposit plans for the benefit of depositors who are interested in obtaining loans, guaranteed by a mortgage, for the construction of social interest housing. Art. 19.... III. Without prejudice to the power granted to the Bank of Mexico in Art. 35 of its Charter, total liabilities in the nature of savings deposits shall be balanced by assets having the following characteristics: . . . g). An amount not exceeding 30 per cent of said liabilities may be in loans for social interest housing guaranteed by either a mortgage or trust, or in mortgage bonds secured by loans of the same nature; III. bis. With regard to the special savings account plans referred to in paragraph 4 of Art. 18, institutions may continue granting mortgage loans for social interest housing, as permitted by the funds available for this purpose, and provided the financial condition of the soliciting institution permits this type of operation. Institutions shall accord preference in the granting of mortgage loans to those depositors who maintain accounts under special plans, such preference to be accorded over other depositors, or other persons who are not depositors, but institutions may not assume the contractual obligation of granting any such loans. The general requirements of the plans shall be approved by the Ministry of Finance and Public Credit in conformance with the provisions of Art. 23. Mortgage loans shall be subject to the following conditions: a). They shall be granted exclusively for the construction or purchase of social interest housing which meets the regulations specified by the Bank of Mexico; b). They may be granted only in an amount not exceeding 80% of the value of the real property. Nevertheless, the Ministry of Finance and Public Credit may raise this percentage limit in a case where collateral is pledged over and above the collateral securing the loan; c). The legal form and other characteristics of the loan shall be specified, through the promulgation of general standards, by the Ministry of Finance and Public Credit, subject to the opinion of the National Banking Commission and the Bank of Mexico;. . . Art. 23. Institutions engaging in savings operations shall be obligated to formulate general Rules and Requirements which, prior to commencing operations, shall be submitted for approval to the Ministry of Finance and Public Credit. . . . The Rules and Requirements shall establish standards of special application for the plans referred to in Art. 18 paragraph four, Art. 19 Sub-Sec. g, and Sec. Ill bis. . . . CHAPTER IV

MORTGAGE CREDIT INSTITUTIONS

Art. 34. Institutions which have franchises to carry on mortgage credit operations, shall be authorized to issue mortgage bank bonds and to guarantee the issuance of mortgage certificates, as well as to negotiate, acquire or assign these certificates; to grant loans under the terms of Art. 36; to administer and act as custodian for the securities issued by them or guaranteed by them; to acquire the real property wherein their offices or branch offices may be located; to receive loans, in accordance with standards set by the Bank of Mexico, from official organizations established to promote social interest housing, utilizing as a guarantee for such loans, the mortgage loans thereby extended; and in general to act and carry on operations in connection with this type of activity.

331

332

F I N A N C I N G

URBAN

D E V E L O P M E N T

Art. 35. There shall be designated as mortgage bank bonds, those bonds which are covered by assets of the issuing institution, consisting of loans, under the terms and conditions of Secs. IV, V, VI, VII and VIII of Art. 36, or consisting of mortgage certificates or mortgage bank bonds issued by other institutions of this same category. Mortgage bank bonds shall be issued for a term not to exceed twenty years, shall bear a stipulated fixed interest, payable at intervals not to exceed six months, and the issuing institution may reserve the right to call them prior to maturity. As against other obligations of the institution, mortgage bank bonds shall have preference in all rights deriving thereunder to the assets mentioned in the first paragraph of this Article, and also to the other assets of the institution for the unsatisfied balance; without prejudice to the preference of savings deposits, under the terms of Art. 21, should the institution also have a franchise for savings operations. Mortgage credit institutions may not accept either demand or time deposits, nor grant loans or credit other than those mentioned in this Chapter, nor issue securities other than mortgage bank bonds, nor guarantee issues of other than mortgage certificates. Art. 36. The activities of mortgage credit institutions shall be subject to the following rules: I. They shall have minimum capital of between M$500,000.00 and M$3,000,000.00, no matter where they propose to conduct operations, which figure shall, according to the circumstances of each case, be specified by the Ministry of Finance and Public Credit upon the granting of the respective "franchise." II. The total of their current liabilities, defined as the sum of the issued bonds and the guaranteed certificates, plus other obligations, shall not exceed twenty times the paid-in capital plus capital reserves. This multiple may be increased by as much as ten, as specified by the Ministry of Finance and Public Credit, both in the case of mortgage bank bonds, covered by loans granted for social interest housing and secured by collateral over and above that required for this type of operation by current law, and also in the case of loans received from the official organizations referred to in Art. 34 of this Law; III. The total amount of mortgage bank bonds in circulation shall be precisely covered by loans, according to the terms of the following Sections; or by bonds and mortgage certificates issued or guaranteed by other institutions of the same class; or by cash deposits in a special account in the Bank of Mexico, which bank shall invest such deposits in securities offering, in its judgment, the greatest liquidity and security; IV. Loans referred to in this Article may only be granted for investment in real property, or in works or improvements on same, or for any other type of rent-producing or productive investment. The lending institution may intervene as to the use to which loan funds are being applied; V. Loans may only be granted under the following terms: a). The amount shall not be in excess of: 1. 30% of the total value of the real property, when structures of a limited use, machinery or other fixtures represent more than half the value of the property used as collateral. 2. 50% of the total value of the real property, if the structures are not of a limited use or, if so, they are, in the opinion of the National Banking Commission, so constructed as to be easy to convert; 50% also, when the loan is made by a specialized mortgage credit institution; and 50%, in the case of loans granted for schools or hotels, so long as, in such cases, the loans are secured by collateral

T R A N S L A T I O N S

OF

LAWS

over and above that referred to in Sub-sec. 5 of this Section. 3. 70% of the value of the real property, when the loans are made for the construction, acquisition or improvement of dwellings of a value not in excess of MS200,000.00. 4. 80% of the value of real property, when the loans are made for the construction or acquisition of social interest housing, which meets all the requirements specified by the Bank of Mexico. This percentage may be increased with the approval of the Ministry of Finance and Public Credit, when the loan agreements provide for collateral over and above that specified in the following paragraph. 5. In all cases, the loans shall be secured by a first mortgage on the property for which the loan is granted, or on other real property or fixtures, or through the delivery of such property, free of mortgages or other such encumbrances, as security to be held in trust. VI. T h e cost of the structures, the value of the works or property, or the rental or productive value, shall be determined by appraisers appointed by the lending institution; VII. The structures and property used as collateral shall be insured against fire in an amount at least sufficient to cover total loss; VIII. The term of the loans shall not exceed twenty years. Loans of a term exceeding three years shall be payable in installments no more than twelve months apart. However, when the nature of the investment so warrants, it may be agreed that amortization and interest may be deferred during the time of construction or carrying out of the works, for a period not to exceed three years; IX. A cash deposit shall be made in a special account in the Bank of Mexico, in a ratio of no less than 3% nor greater than 10% of the face amounts of bonds in circulation, as specified by the Bank itself, which deposits shall be invested by said Institution in securities offering, in its judgment, the greatest liquidity and security; X. The following shall not exceed 40% of the paid-in capital and capital reserves: the estimated value of the furnishings and premises of the offices of the institution, plus the total investment in shares of corporations organized exclusively to acquire title to and manage buildings, with the further provision that in one building which is the property of that corporation, there has already been established or is to be established the principal office, or some branch, agency, or sub-office of the shareholder credit institution, and that in each case the authorization of the Ministry of Finance and Public Credit has been obtained. These corporations shall comply with the requirements of Sec. X of Art. 11 of this Law. Total organizational expenses shall not exceed 5% of the paid-in capital and capital reserves. The total amount of investments in shares of credit institutions or auxiliary organizations shall not be greater than the excess of the paid-in capital and capital reserves of the mortgage institution over the minimum capital prescribed by this Law, nor greater than 50% of the paid-in capital; nor shall the investment in any one credit institution or auxiliary organization exceed 15% of the paid-in capital of the shareholder institution. The sum of the following shall not exceed the sum of the paid-in capital and capital reserves: [a] investments referred to in the two preceding paragraphs; [b] the estimated value of the furnishings and real estate or rights in real property not held as security for loans; [c] the amount of the investments in shares referred to in the first paragraph of this Section; [d] the value of goods, rights and titles, not characteristically within the scope of operation of these establishments, but which have been received in payment of loans; [e] plus a percentage specified by the National Banking Commission, which shall be between 20 and 30% of the amount of loans unpaid as of maturity or not repaid within a term of

333

334

FINANCING

URBAN

DEVELOPMENT

twenty years and thirty days. Art. 37. The institutions of this class which guarantee the issuance of mortgage certificates shall have the following appropriate rights and duties: I. They shall take all steps necessary: to verify the estimated value of the assets securing the certificates; to intervene in the determination of boundaries and other particulars relating to the subject of the mortgage; to inspect the title and registration of such assets, in order to assure the loan's meeting the conditions prescribed in Art. 36; to make sure the investment conforms to the provisions of the indenture and the requirements of law; to make sure in each case that the security is duly constituted in accordance with Sec. V of Art. 36; to verify proper issuance of the certificates; and, in general, to take all necessary precautions to make sure that the issue is correct according to law and that the mortgaged property offers the holder and the institution itself the security specified in the certificate. II. [Omitted.] III. They shall have the right to demand of the debtors who have issued mortgage certificates with the bank's guarantee, that they not rent the mortgaged property for terms greater than one year, in the case" of urban real estate, or two years in the case of rural real estate, and that they not accept prepaid rent for more than two years or six months, respectively; IV. They shall be fully liable for the amount of the principal, interest and other rights attributable to the certificates to the same degree as is the debtor; V. They shall make a cash deposit, in a special account, in the Bank of Mexico, in a ratio, specified by that Institution, of between 3% and 10% of the face amounts of the guaranteed certificates in circulation, which amount shall be invested in securities offering, in the judgment of said Institution, the greatest liquidity and security; VI. They shall represent, and shall act as attorney for all the certificate holders in all acts and contracts duly performed as mortgagee; They may also, in the name of all certificate holders, discharge the mortgage, and cancel documents, deeds and contracts made with the common debtor, in accordance with the terms of the deed of indenture, notifying the National Banking Commission thereof; VII. In case of default in payment of either principal or interest of the certificates, institutions must proceed against the debtor in appropriate actions, without prejudice to the right of the certificate holders to bring individual actions against the debtor or against the institution guaranteeing the issue. Once collective suit has been brought by the guarantor institution, it shall not be necessary for the certificate holders to bring individual actions. The collective action brought by the institution guaranteeing the issue, shall, in any event, absorb any and all other actions already brought or which may be brought subsequently by the certificate holders, all of which actions shall merge in the collective action, so long as there has not yet been a judicial sale of the mortgaged property. In a case of failure or liquidation of the guarantor institution, the collective action shall be brought by the referee, liquidating committee or by the designated institution, as appropriate, in lieu of by the certificate holders. The collective action may be brought in any of the forms specified in Art. 141. In a case of default by the debtor, the [guarantor] institution is empowered to call in the certificates, depositing a sum equivalent to the amount of same in the Bank of Mexico or in a fiduciary institution. In such a case the [guarantor] "Institution shall be subrogated to all the rights and causes of action of the certificate holders, which it may exercise upon the non-payment of the certificates in question, by means of the deed of indenture and receipt by the former holders of their corresponding portions of the deposit. VIII. They shall be liable for the amortization of the certificates in circula-

T R A N S L A T I O N S

OF

LAWS

tion, as of the time of receipt of proceeds of judicial sale or as of the time of taking title to the mortgaged property by reason of judicial proceeding, unless at the time of execution a lien is preserved in favor of the certificate holders, in which case the guarantor institution shall continue to be obligated to pay amortization and interest, and shall redeem the certificates still in circulation as soon as the mortgaged property is sold. Art. 38. The Mortgage certificates shall be in the nature of credit instruments in favor of each holder by reason of their participation in the underlying mortgage loan, and shall confer on the respective holder the right to bring an individual action for execution against the debtor or the guarantor institution, to claim the monies owing and due, provided, in either case, that protest has been made to the guarantor institution. Mortgage certificates may be issued for a term not exceeding twenty years; they shall specify the conditions of repayment of the underlying mortgage loan, shall earn interest at the agreed rate, and, as to the conditions of the loan and guarantee, shall be subject to the standards and limitations established in Art. 36 of this Law. The certificates and the shares deriving from them shall prescribe three years from date of maturity, as to interest coupons or as to interest and principal represented in the same coupon; and as to certificates which have matured or been called in, they shall prescribe within five years of the date of their maturity or the date on which the list of certificates called in is published, respectively. Art. 39. Mortgage credit institutions are prohibited from: I. Carrying on discount operations or granting loans or credit other than the guaranteed loans referred to in this Chapter; granting loans secured by mortgages on factories, workshops, mercantile or industrial installations other than those referred to in Sub-sec. a) of Sec. V, Art. 36, such loans to be used for the construction of railroads and public-service-type works, unless repayment, profits, taxes, or duties, as referred to in Sub-sec. b) of the same Section, 33 are pledged in trust; as well as making investments in securities, other than those specified in Sec. HI of Art. 36, except as provided in Sec. X of that Article; II. Issuing or placing securities other than mortgage bank bonds or mortgage certificates; III. Accepting sight or time deposits, or acting as custodian for securities other than the securities issued by them or issued with their guarantee; IV. Acquiring real property or rights in real property other than by way of guarantee, except for those acquired as payment for their loans or as provided for in Sec. X of Art. 36; V. Giving surety bonds or guarantees, except in the case of guaranteeing the issuance of mortgage certificates under the terms of Art. 37; VI. Buying or selling, at less than face amount, bonds issued by them; VII. Carrying on the operations referred to in Sees. Ill, IV bis, V, VI, VII, VII bis, VIII, IX, X, XII and XV of Art. 17. As to guaranteeing mortgage certificates, the provisions of the next to last paragraph of Sec. XV of Art. 1734 shall not be applicable to these institutions. The rules contained in Sec. XVI of Art. 1735 shall be applicable to the liquidation of assets and rights and title to property referred to in said Article.

33. Subsec. b) of Sec. V of Art. 36 was repealed by Decree of Dec. 29, 1962, D.O., Dec. 31, 1962. 34. Relating to borrowing by insiders. 35. Relating to disposition of property received in payment of loans or through judicial or administrative sale.

335

336

F I N A N C I N G

CHAPTER VII

U R B A N

D E V E L O P M E N T

SAVINGS AND LOAN BANKS FOR FAMILY HOUSING

Art. 46-a. Savings and loan institutions for family housing shall be capitalized at a figure set by the Ministry of Finance and Public Credit, upon the granting of the particular charter, which figure shall be not less than M$3,000,000.00, no matter where they are to carry on operations. Art. 46-b. Savings and loan institutions, under the terms of this Law, may carry on only the following activities: I. Executing savings and loan contracts for family housing; II. Obtaining loans from other institutions; III. Granting mortgage loans; IV. Acquiring securities; and V. Acquiring real and personal property where their offices or branch offices are located. Art. 46-c. The total amount of current liabilities of savings and loan institutions for family housing may not exceed 25 times the amount of paid-in capital plus capital reserves. Current liabilities shall be deemed to be the sum of savings balances plus loans payable. Art. 46-ch. The investment of paid-in capital and capital reserves shall be governed as follows: I. The total amount of investments in shares of credit institutions or auxiliary organizations may not exceed the difference between minimum capital and the sum of the institution's paid-in capital and capital reserves, nor may it exceed 50% of the paid-in capital and capital reserves. II. Neither may a sum exceeding 15% of the paid-in capital and capital reserves be invested in the shares of any one credit institution or auxiliary organization. III. The provisions of Sec. X of Art. II 3 6 of this Law shall be applicable to savings and loan institutions, as regards both real and personal property and shares in companies which are organized to acquire and manage the buildings wherein they (the institutions) establish their offices, and IV. The rest shall be invested in mortgage loans, as authorized for these institutions, or in securities, as specified by the Bank of Mexico. Art. 46-d. Savings and loan transactions shall be subject to the following conditions: I. They shall be formalized by the execution of an appropriate contract which shall contain all the conditions to which they are subject, and which shall specify the obligation to grant loans to depositors in accordance with Art. 46-g; II. During the period for completion of deposits, the depositors may rescind their contracts at any time without obligation to make subsequent deposits, in which case the institution shall return to them, within 60 days of the date of receipt of such request, the total amount of savings plus interest, less the amounts referred to in Sec. IV of this Article; III. The amount of interest which institutions shall credit to savings installments shall be specified by the Bank of Mexico, and shall only be paid out in cases of rescission of the contract. In all other cases, the institutions shall credit the interest to amortization of the depositor's loan by means of an equivalent reduction of the final amortization installments. Institutions may make agreements with the depositors as to the periods for computing interest; IV. During the savings period, the only charge to depositors made by the institutions shall be in an amount specified by the National Banking Commission, 36. Relating to a limitation on such assets, not held as collateral for loans, of 40% of paid-in capital and capital reserves, and the necessity of obtaining official authorization prior to the acquisition of such assets.

TRANSLATIONS

OF

LAWS

not to exceed 3.25% of the total amount subscribed to. Said amount shall be satisfied out of the first installments and shall be used to cover banking expenses. Said Commission is empowered to modify the percentage, whenever circumstances or the nature of the [savings and loan] plan so warrants; V. The Commission referred to in Sec. IV above, may authorize [savings and loan] plans obligating the institutions to refund the banking expenses to those subscribers who, having paid all of their savings installments or having been the beneficiaries of drawings under Sec. IX of this Article, may make use of such credit. In order to create the reserve necessary for this purpose, the National Banking Commission, upon approving the respective savings and loan plans, shall specify the additional amount to be charged the depositor, which amount shall also be refunded along with the banking expenses as a credit under the terms of Sec. Ill of this Article; VI. The ordinary savings installments shall be paid in equal amounts during the deposit period. Failure to pay three consecutive installments shall cause an automatic rescission of the contract, but the depositor may revive the contract by paying the overdue installments within 30 days of the due date of the third defaulting installment. In cases of an automatic rescission, as referred to in the preceding paragraph, the institutions shall make appropriate refunds as prescribed by Sec. II of this Article; VII. In accepting transfers of contracts, modifications of subscribed amounts, or conversions of [savings and loan] plans, institutions must follow the standards set by the National Banking Commission. [Savings and loan] plans may only be converted into like plans with a longer deposit period; VIII. Minimum total deposit percentages shall be fixed by the National Banking Commission through general rules, but such percentages shall never be less than 25% of the subscribed amount, which shall be defined as the sum of the savings deposits to be made plus the amount of the loan the institution is to grant; IX. The National Banking Commission may authorize [savings and loan] plans to include the benefit of monthly drawings during the deposit period, in which subscribers who are up to date in payment of their installments may participate. The purpose of the drawing will be to advance the date on which the subscriber is entitled to receive the loan, for the purposes of which the institution shall credit him with the balance of the savings deposits to be made. This credit shall accrue to the subscriber only if he makes use of the loan within a period of six months, during which period the institution shall credit to his account the interest earned by the credit. If he does not make use of the loan within such period, he shall lose his right to the credit. All subscribers who have contracts with benefit of drawing in force, without regard to the [savings and loan] plan or sum subscribed, shall participate jointly in the monthly drawings, in accordance with the general provisions to be set forth by the National Banking Commission, inasmuch as this Law only provides for special application in this matter; X. Once the deposit percentage has been reached and the minimum period has run under the terms of the contract, or alternatively upon receiving the benefit of a drawing, the depositor shall have the right to obtain his loan, which shall be equal to the amount subscribed, less the amount of savings deposits made or credited as of the completion of deposits under the [savings and loan] plan. Art. 46-e. Subscribers may make special deposits in institutions, subject to the following rules; I. They shall be returned in their entirety, along with interest equivalent to that paid on ordinary installments, only in cases of rescission of the contract; II. The institutions may apply them to payment of ordinary installments in

337

338

FINANCING

URBAN

DEVELOPMENT

default of payment; I I I . T h e amount in excess of the deposit percentage provided f o r in the contract, and not applied in conformance with the preceding Section, shall be credited to the depositor f o r amortization of the loan under the terms of Sec. I l l of the preceding Article, or may be used to reduce the amount o f the loan, at the election of the subscriber. Art. 46-f. In order to comply with their obligation to grant loans to subscribers, banks may obtain loans, guaranteed by their o w n mortgage portfolio, f r o m the regulatory fund referred to in Art. 46-h or f r o m other credit institutions in accordance with rules established by the Bank o f Mexico. Art. 46-g. Loans granted by institutions to savings and loan subscribers shall be subject to the f o l l o w i n g conditions: I. T h e y may only be utilized f o r the f o l l o w i n g purposes: the purchase, construction, expansion or repair o f dwellings; the purchase of land, and construction o f dwellings thereon; the purchase, construction or repair o f apartments in buildings held in condominium, and the removal of mortgage liens encumbering any o f the aforementioned properties, up to the limit fixed by the Ministry o f Finance and Public Credit; II. T h e guarantee shall consist o f a first mortgage, the value of which, in no event, shall be less than the amount subscribed, according to a valuation made by the creditor institution; I I I . Loans made f o r the purchase o f land and for construction thereon, may include land valued up to 3 5 % o f the total value o f the property; I V . T h e loan may in no case exceed 7 5 % o f the total amount subscribed which, in turn, may not exceed the limit fixed by the Ministry of Finance and Public Credit, taking into consideration the opinion of the Bank o f M e x i c o and the National Banking Commission. Said Ministry may fix different limits f o r different regions; V . Institutions shall notify the subscribers, by certified mail sent to their last registered home address, of the date on which they have a right to take out their respective loans. If the depositor, within a period o f 180 days f r o m the date of notification, does not exercise his right to make use of the loan, the institution shall no longer be obligated to grant same, and the contract shall be deemed to be rescinded. During the time in which the subscriber does not exercise his right to take out the loan, he shall continue to pay the specified savings installments which shall be deemed to be special deposits; V I . F o r repayment o f loans, a system of periodic monthly amortization payments shall be employed. Interest payments may be in fixed or diminishing amounts; V I I . Expenses for valuation and inspection of works shall be charged to the depositor, according to a schedule established by the National Banking Commission, as shall notary expenses, tax payments, and premiums on the insurance referred to in the following Section; V I I I . Properties shall be insured in the amount o f their destructible values against loss f r o m fire, earthquake and explosions; I X . Subscribers shall have complete freedom of choice as to the real property they wish to purchase or as to the contractor f o r any construction, expansion or repair, without affecting the applicable regulatory standards or the right of institutions to supervise the work f o r purposes of better protecting the loan granted. T h e National Banking Commission may, at any time, verify exact and goodfaith compliance with the conditions agreed upon f o r the carrying out o f the work, and institutions shall furnish the Commission with anything necessary to effect such verification;

TRANSLATIONS

OF

LAWS

X. The subscribed amount shall be paid by the savings and loan institutions on behalf of the debtor, to the contractors, in cases of construction, expansion, or repair of property; to the vendors, in cases of purchase, and to the creditors, in cases of removing encumbrances; XI. Interest shall be computed on the sums paid out during the time in which the construction, enlargement or repair of property is being carried out, as of the time utilization of the loan itself commences, taking into account that the first payments made to the contractors shall be the equivalent of a return of savings deposits to the subscribers. Interest on payments utilizing the loan shall be computed upon completion of the work, or may be paid at that time by the subscriber. The maximum period for completion of works shall be six months, for purposes of commencing the amortization. If the work is not completed within the specified period, the amortization installments shall commence as of the date of the expiration of such period, and the payment of the savings installments referred to in the following Section shall be suspended; XII. The payment of amortization installments shall be suspended during the period construction is being carried out, but only for periods not in excess of those mentioned in the preceding Section, as measured from the date of granting the respective loan; XIII. The type of interest charged for loans granted by institutions shall be specified by the Bank of Mexico, through general rules. Art. 46-h. Institutions shall contribute to the formation of a regulatory savings and loan fund for family housing, through trust deposits made in, managed and invested by the Bank of Mexico, in such amounts as, through the application of general standards, the Ministry of Finance and Public Credit shall specify, under advisement of the National Banking Commission and the Bank of Mexico. The purpose of the aforementioned fund shall be to assist institutions in fulfilling their obligations to grant loans to subscribers of savings and loan contracts. The Bank of Mexico shall pay to institutions the interest authorized by the Ministry of Finance and Public Credit. Said Ministry shall specify the sources of funds to assist institutions in the event the assets available from the regulatory fund are insufficient to meet their needs. Art. 46-f. Amounts loaned to institutions by the Bank of Mexico from the regulatory fund, or from other sources specified by the Ministry of Finance and Public Credit, to assist said institutions in conforming with the preceding Article, shall be repaid to the Bank of Mexico as permitted by repayments emanating from the savings and loan operations of each institution. Art. 46-j. Savings and loan institutions shall form an anticipatory reserve, with such funds as are specified by the National Banking Commission, which shall be used exclusively for the granting of mortgage loans to subscribers of savings and loan contracts. Art. 46-k. An amount equal to an institution's total current liabilities shall be invested or carried in mortgage loans to subscribers of savings and loan contracts; in deposits in the regulatory fund, in accordance with the provisions of Art. 46-h; in cash; in bank deposits; in State obligations; or in securities authorized by the Bank of Mexico for such purposes. Art. 46-1. The National Banking Commission shall specify through general provisions, the documents which must be presented in order for it to authorize the technical bases of savings and loan plans. The proportions of sales, as between different plans, shall be determined by the Commission. Similarly, through general provisions, the Commission shall specify the maximum periods for repayment of loans, as well as the data institutions shall furnish monthly as to

339

340

FINANCING

URBAN

DEVELOPMENT

the progress of their operations. The Commission itself shall approve all printed model forms for requests and installment receipts, as well as for savings and loan contracts. Finally, it shall determine, through the promulgation of general rules, the maximum amount of commissions, premiums or other monetary incentives institutions may award their sales agents, as well as the method and periods of payment to such agents, and shall maintain close supervision to prevent any deviation from the standards prescribed. Art. 46-m. Savings and loan institutions shall be obligated to issue, at the request and expense of the subscriber, duplicates of the respective contracts as well as of the declarations accompanying such requests. Whenever a duplicate contract is issued, the original document shall be cancelled. Art. 46-n. The provisions of Art. 42 3 7 of this Law and the Regulations thereof shall be applicable to savings and loan institutions for family housing. Art. 46-n. Any conflict arising under a savings and loan contract shall be submitted to a conciliatory proceeding before the Ministry of Finance and Public Credit. If the decision rendered by the Ministry is not acceptable to any of the parties, such party shall forthwith have the right to appear before a competent court. The court shall not entertain any petition, unless all administrative remedies have been exhausted. Savings and loan contracts shall set forth the provisions of this Article verbatim. Art. 46-o. In addition to the activities referred to in preceding Articles, savings and loan banks may offer plans for the financing of social interest housing projects which meet the requirements established, through the promulgation of general standards, by the Ministry of Finance and Public Credit, which projects shall be subject to the following conditions: I. The Ministry shall establish the general criteria for the determination, by the agency of its designation, of the total amount and the nature of the project plans that institutions may offer; II. The aforementioned agency shall be responsible for the prior revision of building plans presented and for the supervision of the execution of such plans; III. Contracts shall be executed without the intervention of agents, and institutions may not in any way charge subscribers for banking costs related to purchase, administration or collection; IV. The institutions themselves shall pay interest, computed every six months, on the sums received from depositors, as specified by the Bank of Mexico; V. Whenever a subscriber requests the cancellation of a contract, the institution must return the amount of the deposits plus interest accrued, under the terms of the preceding Section, and such repayment may be made over a period of up to six months, through equal monthly payments commencing with the first month following receipt of the request; VI. The loans granted shall only be used for the construction of single or multi-family dwellings or for the purchase of land and construction of such dwellings thereon. The value of the land shall in no case exceed 35% of the total value of the property. These loans shall earn interest at a rate not exceeding the annual percentage paid on unpaid principal, as determined by the Bank of Mexico; VII. The maximum amount which may be subscribed shall be determined by the Ministry of Finance and Public Credit, through the same agency referred to in Section I of this Article, taking into account the nature of the savings and loan plans presented by the institution and the locality wherein construction is to be carried out; 37. Relating to a bank's liability for the conduct of its selling agents.

TRANSLATIONS

OF

LAWS

VIII. The minimum deposit percentages under these plans, and consequently the maximum amount of the loans, shall be determined by the National Banking Commission, talcing into account the opinion of the Bank of Mexico, as expressed in their letter of approval, and shall not be governed by the limitations established by Arts. 46-d, Sec. VIII, and 46-g, Sec. IV; IX. For this type of operation, it is permissible for the loans to be granted by priorities established through drawings or other systems, in conformance with the conditions established by the National Banking Commission; X. Institutions, for the benefit of their debtors and with the consent of same, may contract for life insurance, for the account of the debtors, to cover unpaid balances of the loans in case of death, in accordance with standards established by the Ministry of Finance and Public Credit; XI. Institutions shall keep the books and accounts for these plans separate from those of other plans they are authorized to administer; XII. The aforementioned agency responsible for supervising these operations; shall grant loans to the banks in order to supplement the funds used for the granting of mortgage loans to their subscribers. The Bank of Mexico shall specify the type of interest payable of said funds as well as the amount of all sums owing to the agency for all its supervisory operations. Art. 46-p. Savings and loan institutions may only conduct operations in localities expressly approved for same by the Ministry of Finance and Public Credit. Art. 46-q. Savings and loan institutions must fulfill the terms of their contracts in any locality authorized by the Ministry of Finance and Public Credit, unless said Ministry, subsequent to receiving the opinions of the National Banking Commission and the Bank of Mexico, authorizes the deferment in the granting of loans when financial or economic conditions so warrant. Despite the contract having been signed in a specified locality, the subscriber shall always have the right to request that the institution grant him the loan in any other locality in which it is authorized to conduct operations. This provision shall be reproduced in savings and loan contracts. Art. 46-r. All persons and entities, other than credit institutions authorized by the Ministry of Finance and Public Credit, are prohibited from habitually executing savings contracts which provide either for periodic installment payments or one single payment, and which, no matter under what type of instrument the deposits are received, contain a promise to grant real estate loans, in the present or future, for the purpose of completing the purchase, repair or construction of dwellings. The violation of this Article shall subject the violator to punishment and intervention under the provisions of Art. 146 of this Law. Mutual associations organized in accordance with the provisions of Article 46-u., and expressly authorized to conduct operations by the Ministry of Finance and Public Credit, are excepted from the foregoing prohibition. Art. 46-s. Prior to the issuance of rulings under Arts. 46-d, Sec. VIII, 46-1, and 46-o, Sec. IX, the National Banking Commission shall first obtain an opinion from the Bank of Mexico. Art. 46-t. Savings and loan institutions for housing are prohibited from: accepting bank deposits of money, or of time or demand-instruments; backing enterprises; taking part in or guaranteeing issues of securities; conducting discount, loan, credit or investment operations, other than those referred to in this Chapter; and, in general, from conducting any operations not permitted under this Law. They shall be subject to the provisions of Sec. XV of Art. 17 38 of this Law. 38. Limiting the amount of loans made to "insiders."

341

342

F I N A N C I N G

URBAN

D E V E L O P M E N T

Art. 46-u. Under the terms established by the Regulation, which, for this purpose the Federal Executive shall request [from the Congress], the Ministry of Finance and Public Credit may authorize the formation of mutual associations having as their purpose the procurement of deposits, which shall be used only for the granting of mortgage loans for the construction and purchase of social interest housing. The Regulation itself shall establish the standards for the organization, functioning, internal and external operations and all other conditions to which the associations shall be subject. T I T L E FOUR

GENERAL PROVISIONS

CHAPTER III

SPECIAL PROCEEDINGS

Art. 141. In cases of mortgage loans, general financing loans, or loans as advances on construction, which are secured by real property, creditor institutions may proceed to effect collection of such loans, at their election: I. By commercial enforcement proceedings; II. By mortgage foreclosure; III. By sale of the real properties given as security, either through a broker at the previously specified contract price, or by auction at a judicial sale, as provided by the following Section. To carry out the subject sale, the creditor institution shall proceed to notify the debtor, through a notary or through any judicial process, of the intended sale or of their intention to hold a judicial sale. The debtor, within three days of notice, shall have the right to contest the sale by appearing before the judge of first instance in the jurisdiction within which the real property is located, or before the competent judge in the domicile of the credit institution. The debtor may file the legal exceptions he takes. The creditor has three days to reply to the notice of contest. If the issue is joined, this term shall not exceed twenty days. The judge shall forthwith call a session to be held within three days for the purpose of hearing the allegations of the parties, and within five days thereafter he shall render a decision. If the defense is held to be without merit, the creditor institution may thereafter proceed to a sale or judicial sale. The debtor shall be liable for all costs, as well as payment of a fine of 5% of the value of the property involved, the latter amount to be turned over to Public Charities. The decision of the judge shall be appealable only for purposes of a monetary refund; IV. The judicial sale referred to in the preceding Section shall be held at the place of business of the creditor institution, after publication of three notices thereof in the "Diario Oficial" of the Federal Government and in one of the newspapers of general circulation in the capital of the Republic and one in the State where the subject real property is located. Between the date of last publication in the "Diario Oficial" and the day specified for the judicial sale there shall transpire at least five days. The judicial sale shall be by way of an auction through a broker or a notary. A record of the sale shall be prepared and shall be sent to the competent judge in the domicile of the creditor institution, so that if the debtor has contested the sale, the institution may proceed to prepare the appropriate documents and have the respective entries and cancellations made [in the Property Registry]; V. The provisions of this Article and the preceding Article 39 shall also be applicable to the collection of loans resulting from the acquisition of mortgages 39. Art. 140 relates to personal property given as security for a loan.

TRANSLATIONS

OF

LAWS

by a credit institution as well as to loans represented by mortgage certificates, when, in the latter case, collection is made by the issuing institution. Art. 142. Unless agreed otherwise, the fees of appraisers, notaries, and other persons whose services are subject to scheduled rates, shall be reduced to twothirds of the authorized amounts, in the case of transactions carried out by creditor institutions and auxiliary organizations. In no case, in the aforementioned transactions, shall the provisions be applicable which permit an increase in fees due to the fact that one of the parties is a corporation.

343

344

F I N A N C I N G

U R B A N

D E V E L O P M E N T

RENT CONTROL DECREE D E C R E E OF D E C E M B E R 2 4 , 1 9 4 8 (AS MODIFIED) 4 0

D.O., December 31, 1948. Art. Art. Art. Art. Art.

1 2 3 4 5

Art. Art. Art. Art.

6 7 8 9

Extension of duration of rental contracts Excepted rental contracts Rent increases authorized Rescission permitted Compensation required for tenant upon vacating due to owner occupancy Required notice of owner occupancy Reasons for rescission of contract No right of indemnification upon rescission Nullity of agreements in contravention of this law

344 344 344 344 344 345 345 345 345

Art. 1. All rental contracts for dwellings or premises, as below specified, are hereby extended by operation of law, with no change as to any clause thereof, except as provided by Art. 2: a). Those which are used exclusively for dwelling purposes and are occupied by the tenant and members of his family living with him; b). Those occupied by domestic servants; c). Those occupied by workshops, and d). Those used for business or industry. Art. 2. The extension established by the preceding article does not include rental contracts pertaining to: I. Inhabited dwellings, if the rents in force as of the date of this Decree are more than MS300.00; II. Dwellings or premises which the landlord must of necessity inhabit or occupy in order to establish within them a business or industry owned by himself, subject to court-approved justification of such necessity; III. Houses or premises used as bars, pubs, night clubs, "vice centers," or for the playing of games of chance as permitted by law, as well as structures for public shows, such as theaters, moving picture houses, and amphitheaters. Art. 3. The rents which are provided for in rental contracts extended by this Law and which have not been increased since 24 July, 1942, may be increased as follows: a). U p to 10%, if the rent is between MSlOO.OO and MS200.00; b). Up to 15%, if the rent is between M$201.00 and M$300.00. Rents not exceeding MSlOO.OO may not be increased. The increases established by this Article do not apply to locations used for business or industry, the rents of which remain frozen. Art. 4. The extension referred to in the preceding articles does not deprive a landlord of the right to seek rescission of the rental contract and vacation of premises in cases coming under Art. 7 of this Law. Art. 5. In cases arising under Sec. II of Art. 2, the tenants shall be entitled to compensation for vacating the rented premises as follows: a). An amount equal to three months' rent, in the case of premises used for dwelling purposes; b). The amount specified by a competent court, in cases of premises used for business or industry, taking into account the following factors: 40. Modified by Decree of Nov. 30, 1951, D.O., Dec. 15, 1951.

TRANSLATIONS

OF

LAWS

The extra fees the tenant has paid, the commercial credit rating he enjoys, the difficulty of finding a new location, and the indemnification he must pay his workers, in accordance with the decision of employment authorities. Art. 6. When the landlord utilizes the right granted to him by Sec. II of Art. 2, he shall give the tenant bona fide notice, three months in advance in cases of dwellings, and six months in advance in cases of mercantile or industrial establishments. The tenant shall not be obligated to vacate the rented premises, within the periods specified in the preceding paragraph, until the landlord gives a sufficient guarantee of payment of the compensation referred to in Art. 5. Art. 7. Rescission of the rental contract is lawful in the following cases: I. By reason of non-payment of three months' rent, unless the tenant tenders the amount of all back rent prior to the completion of eviction proceedings. II. By reason of total or partial subletting of the real property, without the express consent of the owner. III. By reason of express or implied transfer or assignment of rights under the rental contract without the express agreement of the landlord. IV. By reason of the tenant, his family, or the subtenant using the rented premises for purposes other than those agreed upon in the rental contract. V. By reason of the tenant or subtenant, without the consent of the owner, carrying out works of such a nature, as to substantially alter the condition of the real property, in the opinion of experts. VI. By reason of the tenant, his family, servants or subtenant causing damage to the rented premises which does not result from normal use thereof. VII. Whenever the majority of the tenants of a house request, with just cause, that the landlord cancel the rental contract as to any one or several of the tenants. VIII. Whenever the property is in such a state of ruin that its total or partial demolition is necessary, in the opinion of experts. Art. 8. The rescission of a rental contract for the reasons established by the preceding Article does not give rise to any right of the tenant to the payment of any indemnification. Art. 9. Agreements which in any way modify a rental contract in contravention of this Law shall be totally null and void. Therefore, any credit instrument signed by the tenant, and having for its purpose the payment of rent greater than that authorized by this Law, shall have no legal effect.

345

INDEX Actuario fiscal, see Fiscal marshal Administrative Control Branch (Departamento de Control Administrativo), D F Treasury, 38 Administrative Services Office (Dirección General de Servicios Administrativos), 35, 36 Advisory Council (Consejo Consultivo), 33-34 Agency for International Development, 157, 171, 185, 186 Agrarian Advisory Board, 213 Agriculture, in Federal District, 14-15 Alameda Park, 112 Alatriste, Lie. Sealtiel, Jr., 88 Alemán, Miguel, 135 Alemán, public housing, 158 American Federation of Labor— Congress of Industrial Organizations, 175 Amparo Law, 44; efforts to broaden, 46 Amparo suits, 38, 43-47, 62, 226; defined, 43n. Annual revenue law (Ley de Ingesos), 30 Antigonish, Nova Scotia, Canada, 174 Appraisal, as basis for property taxation, 87-97; compared with rental basis, 82-85; and cadaster, 87-88; and separate valuation of land, 88; and "fair market value," 88-89; and replacement methods, 88-90; and assessment-sales ratios, 90, data, 90-91, results, 91-93, conclusions, 93-94; by banks, 91-92; and reappraisal, 94-96, of transferred properties, 96-97, five year cycle, 96 Appraisal Manual, DF, 56, 57, 58, 68, 115; and typical lot, 69; and replacement cost less depreciation, 69-70; and improvement unit value tables, 70 Appraisal Manual, Morelos, 103 Assessment, and real property tax, 5460; rental basis, 54-56; appraisal basis, 57-58; special situations, 58 (changes of basis), 59 (dividing, joining of properties, subdivision) Assessments Branch (Departamento de Liquidación y Giro) D F Treasury, 38 Attorney General's Office, 34, 35

Atzcapotzalco, delegación, 9 Aurora, subdivision, 151; urbanization, 179-180; installment contracts and defaulting purchasers, 186-188, 189 Avenida de los Insurgentes, 8, 10, 11, 112

Baja California Norte, 22; per capita revenues, 32 Bank Discount and Operational Fund for Housing (Fondo de Operación y D e s c u e n t o B a n c a r i o a la Vivienda, FOVI), 128, 164, 170, 175, 178, 188, 189, 197, 198, 221, 241; support of social interest housing, 171-172, 184-186; incentives for developers, 183-186; and cooperatives, 195; and trend toward public-private financing, 198199; and coordination of land use, 236; and credit reliability of low income families, 242 Bank of Mexico, 157, 164, 166, 168, 170, 171, 172, 179, 185, 204, 241, 242 Bankers' Association of Mexico, 203 Banks: and tax appraisals, 73-75, 9192, 101; and housing credit, 163171 (see Mortgage banks; Savings departments; Savings and loan banks); and FOVI-FOGA incentives, 182-183; and loans to cooperatives, 195-196 Benefit principle of taxation, 109 Billing Control Branch (Departamento de Control de Emisiones), D F Treasury, 38 BNH, see National Mortgage Bank Bribery (mordida), and property tax, 85 Budget, DF, 27-28 Budget Formulation Branch, 38 Budget Office (Dirección General del Presupuesto), DF Treasury, 38 Cabecera, 33 Cadastral values, 115, 125, 126, 127, 240; allocation by, 116 Cajas Populares, 183, 191; function, 174-175; potential for solving housing problems, 198 Capital gains tax, 93, 125, 133, 134, 240

348

INDEX

Caracas, Venezuela, compared as property tax jurisdiction, 75, 76, 7778, 79-80, 82 Casas proletarias, 25 Casas de vecindad, see Vecindades Catholic Church, sponsors credit unions, 174-175 Central domination, 4 Central Machines Branch (Departamento Central de Máquinas), D F Treasury, 38 Chamber of Commerce, FD, 34 Chapultepec Park, 112, 219 Chiapas, 22 Chihuahua, State of, and transfer taxes, 128 Citizen participation, and D D F policy, 34 Citizens' Relations Board, proposed, 224-226, 243 Ciudad Guayana, Venezuela, 220, 225 Ciudad Satélite, 10, 178; tax concession for, 13 Civil Code, 131-132 Civil Registry (Registro Civil), 35 Cline, Howard F., quoted, 13 Colegio Americano, 10 Collections and Payments Office (Dirección General de Recaudación y Pagos), D F Treasury, 38, 60, 68 College of Civil Engineers of Mexico, 203 College of Military Engineers, 203 Condominiums, 159, 175, 197; and taxation, 55, 72, 116, 122 Confederation of Chambers of Industry of the United Mexican States, 203 Confederation of National Chambers of Commerce, 203 Congress, Mexican, 33 Constitution, Mexican, 43n., 118; quoted, 39; articles 14, 16, 46; and equitable taxation, 147 Construction, in Federal District, 1820 Controlaría General, see Controller's Department Controller's Department (Controlaría General), 34, 35; functions, 36 Cooperation fees (Derechos de Cooperación), 30, 109, 119-124, 125, 240; history, 119-120; scope, 120121; assessment zone, 121; and

properties assessed, 121-122, payment, 122; exemptions, 122-123; review procedures, 123-124 Cooperatives, see Housing cooperatives Cooperatives Law, 176 Correo Económico, 208 "Cost index," and property assessment, 114 Coyoacán, delegación, 9 Credit: mortgage, 163 (see Mortgages); and private banks, 163-171 (see Mortgage banks; Savings dep a r t m e n t s ; Savings and loan banks); mobilizing for low cost housing, 177-198; problems for low cost homes, 177-178; and urbanization, 179-189; ratings, 183; and 1962 legislative reforms, 241 Credit Institutions Law, 168, 173, 174 Credit unions: minimum capital, 173; powers, 173-174; informal, 174-175 (see Cajas Populares) Cuajimalpa, delegación, 9 Cuernavaca: property tax reform, 102105; regional councils, 104 Cuerpo de Bomberos, see Fire Department D D F , see Department of the Federal District Delegaciones, 12; representation in D D F , 33 Delinquent Accounts and Enforcement Office (Dirección General de Rezagos y Ejecución), D F Treasury, 38 Delitos fiscales, see Fiscal crimes Departamento de Auditoría Fiscal, see Fiscal Audit Branch Departamento de Avalúos y Estimaciones de Rentas, see Valuation and Rent Estimate Branch Departamento Central de Máquinas, see Central Machines Branch Departamento de Contabilidad y Estadística Fiscal, see Fiscal Accounting and Statistics Branch Departamento de Control Administrativo; see Administrative Control Branch Departamento de Control de Emisiones, see Billing Control Branch Departamento de Liquidación y Giro, see Assessments Branch

INDEX

Departamento de Revisión de Multas Fiscales, see Fiscal Fines Revision Branch Departamento Técnico, see Technical Branch Departamento de Topografía, see Topographical Branch Department of the Federal District (Departamento del Distrito Federal, DDF): and government revenues, 31-32; and citizen participation, 34, 222, 223; component offices, 34-36; and public housing, 158, 161, 162; and squatters, 178-179; subdivision regulations, 189-191, 211-212, 214; and trend toward public-private financing, 199; and district planning institutions, 203210; and limited proprietary controls, 214; and open space planning, 216-217; and proposed land bank, 217-221; citizens' board proposed for, 224-226 Derechos de Cooperación, see Cooperation fees Dirección General de Acción Deportiva, see Sports Activities Office Dirección General de Acción Social, see Social Action Office Dirección General de Administración de Mercados, see Market Administration Office Dirección General de Gobernación, see Government Office Dirección General del Presupuesto, see Budget Office Dirección General de Recaudación y Pagos, see Collections and Payments Office Dirección General de Rezagos y Ejecución, see Delinquent Accounts and Enforcement Office Dirección General de Servicios Administrativos, see Administrative Services Office Dirrección General de Servicios Generales, see General Services Office Dirección General de Servicios Legales, see Legal Services Office Dirección General de Servicios Medicos, see Medical Services Office Dirección General de Trabajo Previsión Social, see Labor and Social Welfare Office Direcciones Generales, of D D F , 3436

Ejidos, 14-15, 51, 223; land, 87, control of, 212-213 Enforcement Branch, 60, 64, 129 Equalization, in property valuation, 97-98 Exempt properties, 67 Exemptions, tax: in State of Mexico, 12-13; and real property tax, 51-53, 76-79, 238, permanent, 51, 52-53, temporary total, 51-52, temporary partial, 52, cost of, 76, computing method, 76-77, and rural areas, 77; and proletarian colonies, 52, 77; and ISSSTE borrowers, 77; for low income families, 117; and planning tax, 117-118; and cooperation fees, 122-123; and real property transfer tax, 127-128 Expenditures, DF: for education 25, 26; for investment, public works, water supply, 26 Expropriation Law, 219 F C H Co., 194 Federal Chamber of Deputies, 38 Federal District: geographical area, 4n.; population, 5-7, growth, 6-7, projections, 7, 210; territorial growth, 8-11; political subdivisions (delegaciones), 9; m e t r o p o l i t a n area, 11; and the State of Mexico, 11-13; labor force, 13; occupational distribution, 13-14; economic structure, 13-14; agriculture, 14-16; services, 16; industry, 16-18; construction, 18-20; income and welfare, 20-25; finances, 25-33; and D D F , 33 (see Department of the Federal District); governmental structure, 33-38; Treasury, 36-38 (see Treasury, DF); and Federal Fiscal Court, 39-47 (see Federal Fiscal Court); planning institutions, 203-209 (see Planning, in Federal District); search for new planning institutions, 209-210; as choice for industrial location (vs. State of Mexico), 227-230 Federal Fiscal Court (Tribunal Fiscal de la Federación), 38, 73; criticized on constitutional grounds, 39; jurisdiction, 39-41; and contercioso de anulación, 40; composition, 4142; ex parte conferences, 42; jurisprudence, 42, 44; oral argument vs. written submissions, 42; seven

349

350

INDEX

c h a m b e r s (salas), 42; o p i n i o n (ponencia), 42, 43; procedure, 4243; role of ponente, 42-43; provision for appeal, 43; and Revista, 43; and amparo cases, 44-47, 62; and property tax appeals, 62-64; and property tax litigation, 85-86; overvaluation and inequality appeals, 99; rule on Mixed Planning Commission, 118; and assessment appeals, 123; and administrative review of special assessments, 123, 124 Federal Housing Administration, U.S., 195 Federal Reserve Bank, U.S., 170 Federal stamp tax (Timbre), 132-133, 240; as target for reduction or elimination, 133, 134 Finance Law, 51, 64, 65, 111,120 Fire Department (Cuerpo de Bomberos), 36 Fiscal Accounting and Statistics Branch (Departamento de Contabilidad y Estadística Fiscal), DF Treasury, 38 Fiscal attachment, 60-61 Fiscal Attorney (Procuraduría Fiscal), D F Treasury, 63-64; functions, 38; and finés revision, 64 Fiscal Audit Branch (Departamento de Auditoría Fiscal), DF Treasury, 38 Fiscal Court, see Federal Fiscal Court Fiscal crimes (delitos fiscales), 64-65 Fiscal Fines Revision Branch (Departamento de Revisión de Multas Fiscales), DF Treasury, 38 Fiscal marshal (actuario fiscal), 60-61 Flores, Edmundo: quoted, 10; Economía Agrícola, 11 FOGA, see Guarantee and Credit Assistance Fund for Housing FOVI, see Bank Discount and Operational Fund for Housing Foundation for Cooperative Housing, 194, 195, 197-198

G. A. Madero, delegación, 9 Gardens, public, and taxation, 111, 112, 113 General Services Office (Dirección General de Servicios Generales), 35; functions, 36

Government Office (Dirección General de Gobernación), 35 Graphic Arts Union, 175 Gross National Product, Mexican, 22 Guarantee and Credit Assistance Fund for Housing (Fonda de Garantía y Apoyo a los Créditos para la Vivienda, FOGA), 164, 169, 241; support of social interest housing, 172-173; mortgage insurance, 183-184 Harvard University, 102 Hidalgo, revenues, 32 Highways, and taxation, 109 Housing, types of, 24-25. See also Housing cooperatives; Private housing; Public housing Housing cooperatives, 176, 242; advantages of, 192; difficulties in developing, 192-194; and U.S. example, 194-195; financing problems, 195-196 Housing Finance Program, 241 Impuesto de Planificación, see Planning tax Impuesto de Plusvalía, see Incremental value tax Impuesto predial, see Real property tax Impuesto sobre Traslación, see Real property transfer tax IMSS, see Social Security Institute, Mexican Income, in Federal District, 20-22; distribution, 1960, 20-21 Incremental gains taxes, 125; in Caracas, 124 Incremental value tax (Impuesto de Plusvalía), 111, 119, 124, 125 Independencia project, 160 Industrial Association of the State of Mexico, 228 Industrial properties, and tax appraisal, 69 Industry, in Federal District, 16-18, 227-230 "Influence index," for assessment zone, 113 Inter-American Development Bank, 171, 185, 186 International Association of Assessing Officers, 88 INV, see National Housing Institute

INDEX

Investment, expenditures for, 26 ISSSTE, see Social Security Institute for Federal Employees Ixtacalco, delegación, 9 Ixtapalapa, delegación, 9 Jacales, 24 Jefatura de Policía, see Police Department Jefe, of DDF, 203, 224; duties, 33; and Advisory Council, 34; manner of decision making, 207-208; opinion of Planning Commission, 222 John F. Kennedy development, 175, 185, 191 Juárez (avenue), 11 Juárez, public housing, 158 Kennedy development, see John F. Kennedy development Labor and Social Welfare Office (Dirección General de Trabajo y Previsión Social), 35 Lagos, Nigeria, tax valuation in, 83 Lake Texcoco, drained basin, 8, 151, 179, 211, 235 Land bank, proposed, 217-221, '243; purposes, 217; and land acquisition, 218-219; disposition techniques, 219-221; relation to other government agencies, 221 Land taxes: and zoning restrictions, 227-233; subdivision requirements and special assessments, 233-236; and coordination of land use and fiscal policies, 236; further research suggested on, 243 Land use controls, 210-221; D D F subdivision policy, 211-212; limitation on ejido land use, 212-213; and land for public use, 213-214; and official mapping, 214; and proprietary interests, 215; and development rights, 216-217; and land banks, 217-221 (see Land bank, proposed); and land taxes, 227-236 (see Land taxes); and zoning, 230-233 Land use objectives, 34 Land use planning: and citizen participation, 222-226; current attitudes and practices, 222; potential contributions of citizens, 223-224; institutional framework for, 224-226

Land values; changes in, 10-11; and speculation, 11 Legal Services Office (Dirección General de Servicios Legales), 130; functions, component agencies, 35 León, State of, and transfer taxes, 128

Lewis, Oscar, 22 Liability, tax, 54 Loma Hermosa project, 168, 185, 189, 197 Low income families, and exemptions, 117 Magdalena Contreras, delegación, 9 Market Administration Office (Dirección General de Administración de Mercados), 35; function, 36 Medical Services Office (Dirección General de Servicios Médicos), 35; function, 36 Mexico: and regional autonomy, 4; revenues, 25; central government domination, 32 Mexico, State of, 24, 137, 176, 178; and industrialization, 10, 227-230; tax exemptions, 12-13; and property taxation, 78-79; and transfer taxes, 128; new housing developments, 181; as choice for industrial location (vs. Federal District), 227230; incentives to industry, 228 Mexico City, 4n.; population growth, 6-7; representation in DDF, 33; construction costs, 1954-1960, 70; projected population growth, to 1980, 210. See also Federal District México Nuevo, housing cooperative, 176; financial progress of, 192-194 Michoacán, State of, and transfer taxes, 128 Migration, and urban upsurge, 7 Milpa Alta, delegación, 9 Ministry of Agriculture, 213 Ministry of Finance and Public Credit 36, 38, 40, 41, 157, 168, 169, 170, 176, 204, 242; and coordination of land use, 236 Ministry of Government, 225 Mixed Commission of the National Border Program, 209 Mixed Planning Commission, 111, 116, 117, 203; assessment procedure, 118-119; role in administrative reviews, 123; role and makeup of, 204

351

352

INDEX

Monterrey, 16 Montivideo, Uruguay: compared as property tax jurisdiction, 75, 76, 78, 79-80, 82; and formula readjustments, 95-96 Mordida, see Bribery Morelos, Property Tax Office, 103; Technical Valuation Branch, 103, 104 Mortgage banks, 188, 190, 241; credit qualifications, 163-164 (pre-/962j, 164-165 (post-/962); and foreclosures, 165-166; and mortgage certificates and bonds, 166-167; and housing certificates, 167-168 Mortgages: and "urbanized" property, 163-164; and mortgage banks, 163168 (see Mortgage banks); and "unurbanized" property, 164; foreclosures, 165-166, 184; certificates and bonds, 166-167; and savings and loan banks, 168-170; and savings departments, 170-171; and FOVI, 171-172; and FOGA, 172173; and credit problems for low cost projects, 177-178; obstacles to securing credit for, 180-183 (for developer), 186-188 (for occupant); insurance on, 182, 183-184; for new developments, 182-183; for cooperative groups, 194-195; and self-help housing, 197-198; and 1962 legislative reforms, 241, 242. See also Credit Municipal improvements, and taxation, 109 Mutual associations, and social interest housing, 176 Nacional Financiera, 74, 157 National Autonomous University of Mexico, 51, 179 National Banking Commission, 165, 167, 168, 173 National Ejido Credit Bank, 213 National Housing Institute (Instituto Nacional de la Vivienda, INV), 90, 91, 158, 162, 212; 20-year appraisal study, 101-102; history and function, 160-161; and public-private projects, 162, 198; and D D F planning, 205; expanded role, 208 National Institute of Anthropology and History, 203 National Institute of Fine Arts, 203

National Mortgage Bank (Banco Nacional Hipotecario Urbano y de Obras Públicas, S.A., BNH), 103, 204, 208; and tax appraisals, 73-75; and public housing, 158, 159, 160, 161, 162; and public-private projects, 162, 198; loans to union projects, 195; and D D F planning, 205; and land bank functions, 221; and coordination of land use, 236 Navarrete, Ifigenia M. de, 21 "Net cost," 120; and property assessment, 114 Nonoalco project, 159, 160, 161 Notaries, notary fees, 129-130, 133, 134; and taxation, 67 Nuevo, State of, and transfer taxes, 128 Oaxaca, revenues, 32 Obregón, delegación, 9 Office of Civil and Retirement Pensions, 158 Olympic Games, 1968, 217 Ordaz, Diaz, 208 Organic Law, 34 Paracaidistas, see Squatters Parks, and taxation, 109, 111, 112, 113 Paseo de la Reforma, 8, 11, 112 Pemex refinery, 9 Permanent exemptions, property tax, 51, 52-53 Planning, in the Federal District, 203209; Planning Commission, 203205 (see Planning Commission); Mixed Planning Commission, 204 (see Mixed Planning Commission); Public Works Office, 205 (see Public Works Office); PRI, 208, 210; suggestions for improvements in, 242-243 P l a n n i n g C o m m i s s i o n , 46, 222; makeup of, 203-204; duties, 204; role in development planning, 205 "Planning index," and property assessment, 114-115 Planning Law, 203 Planning tax (Impuesto de Planificación), 109, 111-119, 125; history, 111; scope, 111-113; and assessment zone, 113; ancl assessment of individual properties, 114-116; payment, 116-117; exemptions, 117-

INDEX

118; review procedures, 118-119 Plano Regulador Branch, Public Works Office, 203, 211; zoning power, 45-47, 231-233; planning functions, 205; survey of District needs (c. 1960), 207; and coordination of land use, 236 Plaza de la Constitución, 10 Plazas, and taxation, 111, 112, 113 Police Department (Jefatura de Policía), 34, 35, 36 President of the Republic, 33, 41 PRI, political party, 208; Center for Political, Economic and Social Studies, 210, 222 Prices, 1953-1963 rise in, 26 Private housing: financing, 155-199; credit for, 163-176, 177-199; suggestions for further development, 241-242 Procuraduría Fiscal, see Fiscal Attorney Proletarian colonies (colonias proletarias), 24-25, 178; and tax exemptions, 52, 77 Proletarian Colonies Branch, 207 Property Tax Office, 11, 57, 59, 87, 91, 96, 104, 129, 144, 243; branches and offices, 36-38; Technical Branch, 57, 58, 66, 68; Valuation Branch, 57, 66, 68, 99, and piece rate basis, 99; and valuation, 64; description of, 65-68; personnel, 65-66; Tax Roll Branch, 66, 6768; Topography Branch, 66-67, 72; Assessment Branch, 68, 99; and tax rates, 73; and bank appraisals, 7375; and reappraisal, revaluation, 9495; analysis of, 99-101; and coordination of land use, 236 Property taxes, see Real property tax; Rent control; Special assessments; Transfer taxes Property transfer declaration, 67 Public housing, 24, 158-162; and BNH, 158, 159, 160, 161, 162; and D D F , 158, 161, 162; and IMSS, 158, 160, 162; and INV, 158, 160161, 162; and ISSSTE, 158-159, 160, 161, 162; and joint publicprivate ventures, 162, 198-199 Public Ministry (Ministerio Publico), 55, 64 Public Registry of Property and Commerce (Registro Público de la

Propiedad y de Comercio), 35, 129; recording system, 130-131 (indices), 131-132 (reforms, regulations) Public ways: and taxation, 111, 112, 113; and assessment zone, 113 Public works, installation of (urbanización): expenditures, 26; and taxation, 59 Public Works Office, 35, 190, 203, 222, 231; scope of Plano Regulador Branch, 45-47 (see Piano Regulador Branch); and coordination of land use, 236 Real Property Registry Branch, control of D D F land, 217 Real property tax (impuesto predial), 51-75 (description), 75-105 (analysis); exemptions, 51-53, 76-79, 238, permanent, 51, 52-53, temporary total, 51-52, temporary partial, 52, cost of, 76, computing methods, 7677, and rural areas, 77; and taxable property, 51-53 (description), 76-79 (analysis); base and rates, 53-54 (description), 79-82 (analysis); liability, 54; assessment, 54-56 (rental basis), 57-58 (appraisal basis), 5859 (special situations); Appraisal Manual, 56, 57, 58, 68, 69-70, 115; and rental estimation, 56; and typical lot, 58; collection offices, 60; discounts, 60; minimum, 60; surcharge, 60, 78n.; fiscal attachment, 60-61; payment, 60-62; and foreclosure, 61; and notarization, 6162; penalties, 64-65; and Property Tax Office, 65-68 (description), 99101 (analysis); and appraisal procedure, 68-75; revenues, 75; and progressivity, 80-81; valuation, 8285, rental basis, 83, 85-87, 238-239, appraisal basis, 84, 87-97, 238-239, comparison of appraisal and rental bases, 83-85; municipal investment and property values, 101-102; reform in Cuernavaca, 102-105; as factor in industrial location—DF vs. State of Mexico, 227-230; and zoning restrictions, 227-233; rates, 238; modifications urged, 238-239; appeals, 239, described, 62-64, and surcharges, 63, and equalization, 9799. See also Rent control; Special

353

354

INDEX

assessments; Transfer taxes Real property transfer tax (Impuesto sobre Traslación de Dominio de Bienes Inmuebles), 68, 127-134, 240; base, 127; exemptions, 127128; administration, 128-129; sanctions, 129; recording fee, 130; as target for reduction or elimination, 133, 134 Real Property Transfer Tax Branch, 90 Registro Civil, see Civil Registry Registro Público de la Propiedad y de Comercio, see Public Registry Rent control, 74, 134-153; and land values, 11; described, 135-137; coverage of 1948 decree, 135-136; and eviction, 136-137; extent, 137139; and water rates, 138; estimate of units under, 138-139; and magnitude of rent restriction, 139-140; economic effects, 140-145; alternatives to, 141-143; program to end, 145-147; steps toward decontrolling, 147-150; rate of decontrol, 150-153; decontrol study urged, 240-241 Rental basis, for taxation, 85-87; compared with appraisal basis, 8285; and bribery, 85; and evasion methods, 85; and litigation, 85-86; and gross rents, 86 Rental estimation, 56, 86 Rents, capitalization of, 75 Revenues, 31-32 Revolución (avenue), 112 Revolution, Mexican, 8 San Juan de Aragón development, 161

San Luis Potosí, State of, and transfer taxes, 128 Savings departments, commercial banks, 188, 241; and mortgage credit, 170-171 Savings and loan banks, 241; and credit for private housing, 168-170; rules governing, 169-170; and FOVI, 184 Sears, Roebuck, 10 Secretariado Social, 174, 176 Services, in Federal District, 16 Sewage lines, and taxation, 109, 120, 121

Social Action Office (Dirección General de Acción Social), 35-36 Social Security Institute, Mexican (Instituto Mexico del Seguro Social, IMSS), 40, 128, 179, 191, 212; study on housing conditions, cited, 137; and public housing, 158, 160, 162; and public-private projects, 162, 198, 199; and DDF planning, 205 Social Security and Service Institute for Federal Employees (Instituto de Seguridad y Servicios Sociales de los Trabajadores al servicio del Estado, ISSSTE), 52, 128, 212; and borrowers' tax exemptions, 77; and public housing, 158-159, 160, 161, 162; and public-private projects, 162, 198, 199; and mortgage loans, 183; attitude on cooperative loans, 195; and DDF planning, 205 Social interest housing, 171, 241; FOVI role in, 184-186 Sonora, revenues per capita, 32 Special assessments: and benefit principle, 109; user charges, 109; and s u b d i v i s i o n r e q u i r e m e n t s , 110; planning tax, 111-119 (see Planning tax); cooperation fees, 119-124 (see Cooperation fees); and proposals for reform, 124-126; recommendations for, 239-240 Speculation, real estate, 11 Sports Activities Office (Dirección General de Acción Deportiva), 35; function, 36 Squatters (paracaidistas), 8, 25; credit difficulties, 177-178; subsidized sale of tracts to, 178-179 Streets, neighborhood, and taxation, 109, 112 Subdivision Regulation, 234, 235 Subdivisions, 64, 110; and taxation, 59; and credit, 177-191; acquiring sites for, 178-179; and urbanizing of tract, 179-180; and current obstacles to credit, 180-183 (for developer), 186-188 (for occupant); improvements, 180-186 (by developer), 186-189 (by occupant); areas for credit reform, 183-186 (for developer), 188-189 (for occupant); and defaulting purchasers, 186-188; and installment purchase,

INDEX

186-189; DDF regulations on 189191, 211-212; and guarantees by developers, 190-191; and land donations, special assessments, 233236; effect of "urbanization" on credit, 241; self-help, as area for research, 242 Superior Court System, 34, 35 Supreme Court of Justice, Mexican, 39, 56, 62, 118; jurisprudence and Federal Fiscal Court, 39, 40, 43, 44, 45; and Plano Regulador decisions, 47; and equal property valuation, 97; ruling on plusvalía tax, 119; decision on administrative review of special assessments, 123124 Supreme Court, U.S., and property valuation decision (1923), 98 Sweden, housing cooperatives, 194

charges, 126; real property, 127129 (see Real property transfer tax); notarial and recording fees, 129-130; and Property Registry, 130-132; federal stamp and capital gains taxes, 132-133; and efficient land use, 133-134; changes recommended, 240 Transit Office, 35, 207 Treasury, Federal District, 34, 35, 40; component departments, 36-38; and coordination of land use, 236 Tribunal Fiscal de la Federación, see Federal Fiscal Court Topographical Branch (Departamento de Topografía), D F Treasury, 38 Tucker, William P., quoted, 4 Tutitlán, 12 Typical lot, and appraisal procedure, 68-69

Tax base, 51, 76 Tax lists, 67 Tax rate, property', 79-82; effective rate, 79; and proportionality, 8081; and site valuations, 81-82 Tax Police, 65 Tax Roll Branch (Departamento de Padrones), DF Treasury, 38 Tax system, 28-32 Taxes: commercial receipts, 28, 29, 30; 15 per cent additional, 28, 30, 53; real property, 28-29, 51-105 (see Real property tax); minor, 30; planning, 30, 111-119 (see Planning tax); capital gains, 93; other assessments on urban land, 107-153; special assessments, 109-126 (see Special assessments); cooperation fees, 119-124 (see Cooperation fees); transfer, 126-134 (see Transfer taxes); (in kind) rent control, 134153 (see Rent control); land, 227236 (see Land taxes) Technical Branch (Departament Técnico), D F Treasury, 38 Temporary exemptions, property tax: total, 51-52; partial, 52 Timbre, see Federal stamp tax Tlahuac, delegación, 9 Tlalnepantla, 12 Tlalpan, delegación, 9 Transfer Tax Branch, 129 Transfer taxes, 90, 94, 126-134; user

Unions, labor: and housing finance, 175; as potential stimulant for new housing, 191 Urban improvements, 110 Urban planning, 11 Urbanización, see Public works, installation of Urbanization, 6-7; and credit, 179-189 Valley of Mexico, 11, 12, 18, 182; Water Commission, 209 Valuation and Rent Estimate Branch (Departamento de Avalúos y Estimaciones de Rentas), D F Treasury, 38 Value of improvements, and taxation, 57 Value of land, and taxation, 57 Values, property, determinants of, 102 Vecindades, 19; described, 24 Venezuela, property right, 220n. See also Caracas Water Commission of the Valley of Mexico, 209 Water mains, and taxation, 120 Water rates, and rent control, 138 Water and Sanitation Office, 35, 207 Water supply, 13; in substandard housing, 24; expenditures for, 26 Water Works Office, 35, 207 Welfare, in Federal District, 22-24

355

356

INDEX

"Width index," and property assessment, 114 World War II, II; effect on territorial growth in Federal District, 8 Xochimilco, delegación, 9 Yates, Paul L„ 7, 11

Zócalo, the, 10, 11, 144, 149 Zonas de tugurios, 24 Zoning: and molestia criterion, 45, 231-233; and Plano Regulador decisions, 45-47; mixed use, statutory framework, 230-232, and land use charges, 230-233; goals and their achievement, 232-233 Zoning Regulation, 231