13 Components of a Successful Transferable Development Right Program
By: Rocky Mackintosh
For those of you who don’t know, TDR stands for Transferable Development Rights. Simply put, these are typically programs that are designed by local government to allow for the free market transfer of subdivision or development rights from a rural (agricultural and/or conservation) zone to a designated development zone within a jurisdiction. These rights are purchased by a land developer at market value from a landowner in a rural area where there are often more development rights than are allowed to be used by zoning in that area. Referred to as a “Sending” zone, the rights are then legally separated from the farm or rural property in exchange for a land preservation easement. The rights can be held for investment or transferred into a “Receiving” zone, which is a designated growth area for real estate development. In these Receiving zones additional density is allowed to be added when the rights are acquired from the rural Sending zones.
For example, let’s say that Farmer Bob owns a 200 acre property with 30 development rights, and Land Developer Lennie has a property near the city that allows for 20 housing units. Bob’s farm is in a Sending zone, and Lennie’s land is located in a Receiving zone. Lennie bought the property because he knows that he can increase the density from 20 lots to 50 lots, if he can acquire 30 TDRs from a tract of real estate in the Sending zone of his community. Broker Earl connects the two, and Bob agrees that at a fair market price he will sell Lennie his 30 development rights. They enter into a contract and inform the county government that the transaction will take place. Bob then enters into a long term (often permanent) agreement with the County — known as an preservation easement — committing that the property will not be developed. Once completed Lennie is allowed to increase the density of his housing project to 50 units.
That’s a simple explanation of how it works. The benefit of a TDR program verses a government Purchase Development Rights (PDR) program is that the dollars for a PDR program is often funded through various forms of government taxation or financing guarantees, and the former is paid for through the private sector.
The more complex part of the TDR structure is the process of defining the Sending and Receiving areas, as well as establishing how the base development rights will be distributed. Through the many programs that I have studied over the years, it is clear that each program is always customized to fit the specific goals and objectives of the governmental jurisdiction. Some programs allow the real estate developer, who acquires the TDRs, to increase density only in residential areas. Other programs use TDRs to gain approvals for subdivision plats or building permits. There are also programs that use TDRs to increase the amount of square feet in commercial, office and/or industrial real estate projects.
Once the program is in place, the value of a development right should be a function of free market supply and demand. I say should be because there are several cases where the local government has to step in with price caps, floors or subsidies so as to stimulate or control the market. In those cases this usually means that the program was flawed from the inception, causing an increase in the cost of government to support the program. As a matter of fact one study that was conducted several years ago revealed that nearly 95% of the TDR programs that have been established by local governments throughout the country have been unsuccessful.
The key is to make sure the program is structured properly so that values will ebb and flow with the fluctuations if the real estate market, and the government does not have to use its funds in the farm and land preservation effort.
In Maryland there are active Transferable Development Right preservation programs in Charles, Calvert, Saint Mary’s, Queen Anne’s, Howard and Montgomery Counties. Many TDR purists do not include Howard’s successful preservation program on this list, but that is another story.
In the case of Montgomery County, over 30 years ago the county appointed a task force to look into idea on how to stem the rate of loss of farmland in its rural zone. The task force considered strengthening its zoning, funding a PDR program, and/or a TDR program. Interestingly, they also believed that the adoption of a more restrictive zoning would not provide a means of fairly compensating the landowners in those rural zone. In the end they concluded that PDR was too expensive. As a result, the group recommended a blend of the creation of an overlay agricultural protection zone (called the Rural Density Transfer – RDT – zone) that established transferable development rights for the landowners to sell in exchange for preservation easements. The program was adopted in 1980.
The Montgomery County TDR program has become a model that a number of jurisdictions across the county have followed, but in each case they have been customized.
While not for every community, there are many that are ripe for such programs. So, what are the common features and attributes of the most successful programs around the nation?
1. Growth is good: A community that adopts a TDR program must embrace a healthy and consistent level of development activity. For many communities the interpretation of this phrase can cause a lot of debate over what is “healthy” growth.
2. Simplicity for the participants: While the establishment of a TDR program can be very complex to craft, the process must be simple and easy to understand for real estate owners and developers.
3. Synergistic: Transferable Development Right programs work best in conjunction with other Federal, state, county and/or city preservation programs.
4. Public support: Land developers must buy in to the concept and see that it makes economic sense. Real estate developers need to be assured that the addition of a TDR program is not just another way that government will add more layers of costs and/or bureaucratic hurdle on top of what many believe is already a complex process to obtain governmental approvals.
5. Fair and balanced: The rural land property owners must be comfortable with the trade-offs that come with a TDR program. Often elected officials will down zone away subdivision rights from rural property in exchange for an offsetting number of transferable development rights. This can be a slippery slope in that historically, if the program is not properly structured, value can be lost.
6. Bigger is better: Create a large and sustainable market place. The sending and receiving areas should be big enough and balanced so that there is a large number of rural property owners (sending areas) and developer opportunities (receiving areas) to allow the free market system to work.
7. Bank it: In many jurisdictions the local government has created what is known as a TDR Bank. In such cases the bank will purchase TDRs from the sending areas in order to stimulate the market or accelerate the preservation of land in a certain area. Transferable development rights can then be resold to developers who wish to increase density in receiving areas. There are many pluses to such a system; however, it is often easy for government to upset the system by controling the number that they are willing to sell and thereby over influencing the market value.
8. No way around it: Government policy requires the use of TDRs in order to increase density in the designated receiving areas. There can be no way around using transferable development rights to increase the bonus units that are obtainable through the program.
9. The Easement trade off: Land preservation easements (typically perpetual) are placed on the rural land once the TDRs are transferred off of the property.
10. City / County cooperation: In an era where many communities plan for most growth to occur in and around municipalities, inter-jurisdictional cooperation is necessary. This is especially important with annexations which can often take large tracts out of the mix which can throw the ratio of sending and receiving areas out of balance.
11. Nothing lasts forever: It is important to know these programs have a life. Once the goals of the program are accomplished the party is over. Eventually all or most of the development rights will be sold or the receiving areas developed out.
12. Administrative oversight: Without a doubt once established and active, it is essential that there be sufficient staff support to tract the transfers of TDRs, the easements that are placed on the impacted properties, as well as the bonus density that was provided. Without staff oversight, in an active market, it can quickly become a nightmare to easily access which properties still have development rights. This occurred in the early years of the Montgomery County, Maryland program, but much time was devoted to correct it. Washington, D.C. (yes, believe it or not D.C. has TDRs) on the other hand has had an active market, but fell so far behind in tracking transfers that it became mired in threats of lawsuits and bureaucratic red tape.
13. No small task: The idea of transferring development rights from one piece of real estate to another is simple enough, but to establish a successful program it truly requires broad support for all stakeholders in a community. Clear vision of the goals must be established collaboratively. This in and of itself is no small task, but for the few communities who have created successful programs, most would say that it is worth it.
The author, Rocky Mackintosh, is President of MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland and also writes the Macro Report blog.