"Transfer of Development Rights" (TDR) programs allow local governments to put economic principles to work in encouraging good land use planning. TDR programs most often permit landowners to forfeit development rights in areas targeted for preservation and then sell those development rights to buyers who want to increase the density of development in areas designated as growth areas by local authorities. Although TDR programs must conform to zoning laws, they provide market incentives that make them more equitable (and often more lucrative) for sellers and frequently benefit buyers by allowing them to receive prior approval for their high-density development plans. Since the 1970s when modern TDR applications were first conceived, more than 200 communities in 33 states across the U.S. have implemented TDR-based programs. The most common uses of TDR to date involve protecting farmland, environmentally sensitive land, historic sites, and "rural character," and urban revitalization. Until now, however, there has never been a clearly written, one-volume book on the subject. At last, The TDR Handbook provides a comprehensive guide to every aspect of TDR programs, from the thinking behind them to the nuts and bolts of implementation-including statutory guidance, model ordinances, suggestions for program administration, and comparisons with other types of preservation programs. In addition, six of its twenty chapters are devoted to case studies of all major uses to which TDR programs have been utilized to date, including recent urban revitalization projects that utilize TDR principles.
About the Author
Arthur C. (Christian "Chris") Nelson, FAICP, is Presidential Professor of City & Metropolitan Planning at the University of Utah where he is also Director of the Metropolitan Research Center and Adjunct Professor of Finance in the David Eccles School of Business. Dr. Nelson has conducted pioneering research in growth management, urban containment, public facility finance, economic development, and metropolitan development patterns.
Rick Pruetz, FAICP, was the City Planner of Burbank, California before becoming a planning consultant specializing in TDR workshops, feasibility studies and ordinances. He has written three books on TDR as well as articles on TDR for numerous publications including the Journal of the American Planning Association, Planning and Environmental Law and the Planning Advisory Service Memo.
Doug Woodruff, RLA, LEED AP, is a Landscape Architect practicing in Salt Lake City. He works with communities in open space planning, urban revitalization, and economic development. In addition to a landscape architecture degree, Woodruff has a master of real estate development degree specializing in urban redevelopment, real estate finance, and preservation.
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The TDR Handbook
Designing and Implementing Transfer of Development Rights Programs
By Arthur C. Nelson, Rick Pruetz, Doug Woodruff
ISLAND PRESSCopyright © 2012 Island Press
All rights reserved.
How TDRs Work
Conceptually, the idea of transferring development rights from one property for use by another (TDR) dates from America's first zoning ordinance, adopted by New York City in 1916. The ordinance allowed density to be transferred between lots under common ownership in the same block. The city amended this provision in 1968, allowing for transfers initially between contiguous properties and eventually between lots that were across streets (Hanly-Forde, Homsy, Lieberknecht, and Stone, n.d.). Since then, the TDR concept has evolved steadily.
How do TDRs work? As an example, let's look at the TDR program used in King County, Washington (2010). King County's TDR program allows landowners of designated sending areas to sever the right to develop land from the "bundle" of other property rights (described in more detail later in this chapter). Sending areas are rural or resource lands with farm, forest, open space, or amenities.
The severed right(s) are turned into a tradable commodity that can be bought and sold—essentially, a development credit. Suppose there is one transferable development right per 10 acres, and the owner wishes to sell ten development rights. Those ten development rights are severed from the land, and the owner applies a conservation easement to the affected 100 acres. The landowner retains all other property rights, and the land remains in private ownership.
The development rights held by a property owner can then be sold to developers building in receiving areas. These areas are typically targeted for higher density. The comprehensive plan should clearly show this intention. Figure 1.1 illustrates the basic TDR principles.
TDRs are also used for urban-center affordable housing, urban infill/redevelopment, habitat conservation, and many more functions (see chapter 6). Still, TDRs are probably best understood in the context of farmland preservation, through the sale of TDRs in sending areas to their application in receiving areas.
What Is a Property Right?
The TDR Handbook focuses on the right to develop property, which is only a part of the bundle of property rights. The relevant property—especially land—is known as "real property," as opposed to personal property (such as a boat), business property (such as computers), intangible property (such as bonds), and intellectual property (such as patents). In many Western traditions, though not all, real property has certain rights, all or any one of which may be owned by one person or a collection of persons (through a corporation, for instance). That bundle of rights may include the right to farm, mine, grow and harvest timber, harness wind power, or develop the property (figure 1.2). It may also include the right to sell, lease, mortgage, subdivide, or grant easements for the enjoyment of those who otherwise do not own the property (Juergensmeyer and Roberts 2003).
In the United States—and other nations sharingBritish common law traditions—property rights basically include the following:
One's ability to control the use of one's property
The right to benefits of the property (such as farming, mining, and renting)
The right to sell or transfer the property
The right to exclude others from the property
Property rights, however, do not include the following (see Juergensmeyer and Roberts 2003):
Use of one's property that can interfere unreasonably with the property rights of another person. This is known as the "right of quiet enjoyment" and is subject to enforcement in civil courts under the nuisance doctrine.
Uses or activities that can interfere unreasonably with public property rights, such as those that compromise the public health, safety, and general welfare of society. Enforced through such public policies as building codes and zoning ordinances, this is subject to enforcement in either civil or criminal courts under the police power doctrine.
For several hundred years, a deep philosophical debate has surrounded real property rights and the role of government in defining them. "Natural rights" (Blackstone 1765–69) is essentially a libertarian perspective arguing, in its extreme, that individuals are sovereigns over their property, thus severely limiting the ability of government to interfere in the individual's use of property. The alternative perspective, known as "positive law," is generally considered a law that creates new rights. Unlike natural law, it is law made by human beings, that is, "law actually and specifically enacted or adopted by proper authority for the government of an organized jural society" (Black's Law Dictionary 1979). In the context of land use planning, positive law defines rights, and courts adjudicate and enforce property rights.
Property rights are perfected in several ways. One is through title, which clarifies the rights conveyed from a prior owner to the current owner. Another is through legal systems that have evolved to resolve disputes over the possession, use, transfer, disposal, and other activities of and relating to property.
What Is a Development Right?
How land can be used, and especially developed, has been a subject of debate since the human race invented the concept of land and its ownership (Powelson 1989). Considering that the right to develop property is only one of a bundle of rights, we find it odd that no satisfactory definition of "development right" exists. Moskowitz and Lindbloom (1993) define the term simply as "the right to development property."
The Town and Country Planning Act of 1971 provides the meaning of development in a planning context (Hagman 1980): "Development means the carrying out of building, engineering, mining, or other operations in, on, over, or under land, or the making of any material change in the use of any buildings or other land."
Thus, by extension, a development right is the right to carry out such activities. We then find a temporal modification from Random House (2010), which defines development rights as "rights to use real property, such as farmland, in ways that differ from the current use."
In other words, a development right is the right to change land from a current use to another use. It is the act of changing uses that falls under the purview of land use regulations.
For the most part, in the modern American context, local land use regulations define the right to development—and, in particular, what to develop (Byers and Ponte 2005). In the absence of land use regulation, there are not clearly defined development rights (Juergensmeyer and Roberts 2007). Further, without regulations defining what development rights there may be, there can be no transfer of them either from one property to another. As one commentator laments: "The whole concept of transferable development rights is based on the faulty notion that government is the source of all rights and that it can give and take ... rights as it pleases" (Wake 2010).
Yet within constitutional constraints, especially the Fifth Amendment, TDRs would not exist but for government, especially local government, conferring explicit development rights.
What Is a Transferable Development Right?
Even if a development right exists, however, it may not be clear whether the right can be transferred. A market must exist for this to happen: "Markets involve multiple exchanges, multiple buyers and multiple sellers, and thereby a degree of competition. A market is an institution in which a significant number of commodities of a particular, reasonably well-defined type are regularly exchanged" (Hodgson 2002, p. 44).
Thus, to be transferable, a development right needs rules by which to function (Webster and Lai 2003). Typically, government promulgates those rules. In land use planning, rules do not replace but, rather, modify market functions so the outcome is more consistent with the public interest, as advanced by elected governing bodies (Williamson 1975).
To most people, TDR is simply the sale of a preordained number of rights to develop one's property in sending areas to buyers who would transfer those rights to receiving areas. In the end, density shifts away from urban fringe, exurban, and rural areas into suburban and urban areas at higher density than would have occurred otherwise. To be sure, TDRs work principally because of imperfections in land use planning and zoning.
For instance, once an area is zoned, it is usually difficult to reduce development rights in the future through downzoning. When local governments realize current zoning threatens the long-term viability of landscapes for uses other than development—such as farming, forestry,and open-space preservation—it is often politically difficult to rezone land to sustain these functions. One solution is to retain the underlying development density but restrict development to a lower, more appropriate density. The difference between the underlying zoning and the allowable development density is the basis for transferable development rights.
Why should anyone want to meddle with the market? Thanks to markets, the quality of our lives has been enhanced immeasurably, especially over the past two centuries. And thanks to markets, prices for goods and services fall, people find employment, and total wealth expands. Markets work best, however, when they are efficient.
Economic efficiency occurs when the marginal (incremental) cost of producing the next unit of something equals the marginal (incremental) benefit of consumption. At $5 per slice of pizza, for example, you might buy just one. At $3 per slice, you might purchase two. But at $2 per slice, perhaps you might still purchase two slices because you can't eat more than that anyway (assuming no one else is around to "pool" the purchase). The marginal, or incremental, benefit of the next slice is zero, so the restaurant produces only two slices at $3 each and you eat just two slices. Two slices maximize revenue ($6) and fully satisfy the consumer's cravings. The market for pizza is efficient. There would be little sense for government to regulate the pizza market's supply-and-demand interaction.
When should government consider intervening in markets? Conservative economists would answer, "Hardly ever." Marxist economists would say that government should manage all markets to ensure no one is made worse off from any market exchange. The mainstream school of thought, which borrows features from both extremes and creates its own, characterizes the American economic system.
Douglass B. Lee Jr. (1981) does perhaps the best job of outlining the conditions in a mainstream economic system when it comes to intervening in land markets through planning and zoning. According to Lee, urban sprawl is a form of market failure caused by the land market being unable to fully internalize its marginal social costs—that is, its impacts on society. The market comprises many individual and interrelated markets, such as housing, commerce, recreation, agriculture, public facilities, and so forth. From the perspective of society, efficiency is achieved when resources are allocated to each market such that society gains the largest net benefits for the least cost—or, when marginal benefits equal marginal cost.
In the ideal world, these and related markets operate efficiently without any government intervention. Such markets would require the following:
Many buyers and sellers for any given property, providing plenty of choices and competition among them.
Perfect information about any given real estate choice so buyers and sellers fully understand the tradeoffs they make.
Developers who can enter and leave markets at will, thus meeting market needs just when they arise and leaving markets without inventory overhang.
No transaction costs—such as title searches, negotiations, legal services, and contract enforcement—and no public hearings or zone changes.
Predictable revenues and profits to investors, achieved through constant returns.
Users of property who fully internalize externalities they impose on society. For example, those who pollute pay all damages, and those whose actions improve society receive financial rewards.
All buyers and sellers have about the same needs and preferences.
By definition, land markets fail to provide efficient development patterns because none of those conditions is ever completely present. Many markets don't have many buyers and sellers or choices between options; information is imperfect, so there will always be risks and uncertainties; developers are unable to enter or leave markets at will, even in the least regulated markets; transaction costs are necessary to meet legal, fiduciary, and other obligations; revenues and profits are impossible to predict; users of property simply do not internalize their marginal social costs or receive their marginal social benefits; and buyers and sellers vary widely in their needs and preferences.
Planning and zoning enter into the picture to address these inefficiencies. Communities use planning and zoning to offset inefficient development patterns caused by other government policies—such as inefficient utility pricing or subsidized mortgage financing policies—and to prevent negative externalities by anticipating the nature of conflict between different land uses. They also rely on planning and zoning to assert the overarching public interest in environmental quality, social equity, and other social benefits (albeit not without compensation as necessary), and to achieve development patterns consistent with public policy, as expressed through elected representatives at all levels of government.
Eminent land economist Marion Clawson (1971) proclaimed that the central purpose of planning and zoning is to contain urban sprawl and offset sprawl-inducing effects of both public policy and market imperfections, all while meetingthe development needs of an urban area:
If planning, zoning, and subdivision were firm—enforceable and enforced—then the area available at any one time for each kind of use would bear some relationship to the need for land for this use. That is, area classified for different purposes could be consciously manipulated or determined in relation to market need. Sufficient area for each purpose, including enough area to provide some competition among sellers and some choice among buyers, should be zoned or classified for development, but no more. By careful choice of the areas concerned, sprawl would be reduced, perhaps largely eliminated. (p. 109, emphasis added)
All too often, we have observed that zoning assigns development rights to rural land far in excess of market needs, and that development rights assigned to urban land are insufficient to meet urban development needs. Planning and zoning thus may contribute more to inefficient land use patterns than intended. TDRs become a potential tool for rebalancing the allocation of development rights, especially if downzoning rural areas and upzoning urban ones in a wholesale fashion is not politically expedient.
A key feature of TDR programs is to internalize externalities caused by imperfect market interactions between land uses, plus imperfections caused by policy itself (Field and Conrad 1975). In a world without externalities, the land market will allocate land to urban and agricultural uses (Nelson and Duncan 1995). There would be a clean break ("green line") between those uses at U1 in figure 1.3. Public policy, however, creates positive externalities in the form of tax breaks and underpriced utilities (Peiser 2001) that are capitalized into the urban land market; this artificially increases the value of land for urban development.
On the other hand, the value of land for agricultural uses declines because of negative externalities, such as urban residents preventing agricultural operations that create nuisances on residential land uses, pets interfering with livestock, and sometimes outright theft of ripening crops within reach of (or a short walk from) residential development. TDRs can compensate owners of agricultural land for such negative externalities imposed on them by nearby residential development.
Many TDR programs limit urban development through an urban containment boundary, urban growth boundary, or urban service boundary. When this happens, the value of urban land approaching the boundary internalizes positive amenities because it enjoys exclusive views and improved privacy. As noted in figure 1.4, however, agricultural land internalizes negative amenities the closer it is to the boundary (Nelson 1992).
These interactions might prompt some policy refinements to TDR programs. First, as urban land value rises close to the boundary, it may be able to absorb a higher share of TDRs transferred from sending areas on the boundary's other side. Second, because the value of agricultural land just outside the boundary suffers most, TDR designers might increase the number of TDRs assigned to this band of land. This not only will compensate owners for incremental losses associated with negative externalities but also could dissuade them from lobbying in the future to expand the urban development boundary because of the negative externalities. Third, TDR programs might consider acquiring some of the land just outside the boundary to buffer agricultural and urban uses. The land could be permanent open space.
Excerpted from The TDR Handbook by Arthur C. Nelson, Rick Pruetz, Doug Woodruff. Copyright © 2012 Island Press. Excerpted by permission of ISLAND PRESS.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Table of Contents
Acknowledgments Foreword Prologue: A Simple Concept PART I. Chapter 1. How TDRs Work Chapter 2. Comparing TDRs to Other Preservation Solutions Chapter 3. The Economics of Tdrs Chapter 4. Purchase of Development Rights Chapter 5. Density Transfer Charges PART II. Chapter 6. TDRs and the Planning Connection Chapter 7. The Seven Steps of TDR Planning Chapter 8. Designing Sending Areas Chapter 9. Designing Receiving Areas PART III. Chapter 10. Legal Issues Chapter 11. A Review of State Statutes Chapter 12. TDR Program Administration PART IV. Chapter 13. Programs by Purpose Chapter 14. Farmland Preservation Case Studies Chapter 15. Farmland and Environmental Preservation Case Studies Chapter 16. Environmental Preservation Case Studies Chapter 17. Rural Character Preservation Case Studies Chapter 18. Historic Preservation Case Studies Chapter 19. Urban Design and Revitalization Case Studies Epilogue: The Promise and Future of TDRs Appendix A: A Model TDR Ordinance Appendix B: Sample TDR Form Appendix C: State Listings Of TDR Programs Glossary Notes References and Selected Bibliography Index
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