Transfer of Development Rights

1. Josh Naramore Shannon Finnegan Transfer of Development Rights

2. Introduction • State and local governments are responsible for land use policy • Struggle between a want to preserve open space, historic landmarks, farmland and sensitive environmental areas and need to allow growth • High transaction costs associated with traditional command and control style zoning

3. Define TDR • A market based technique that encourages the voluntary transfer of growth from places where a community would like to see less development to places where a community would like to see more development

4. What is a Development Right? • “Bundle of Sticks” • Product of # of acres and the number of “sticks” allowed per acre under a community’s land use regulation • Varies from community to community • Deed Restrictions

5. How does it work? • Sending Areas • Receiving Areas

6. Why Use TDR? • Landowners: • Continue traditional uses and retain land • Compensated for lost development potential • Local Government: • Preserve open space, historic landmarks, environmental space without paying for it • Allow for controlled growth

7. Assumptions of MDR Programs • Goal: Maximize PV of Land • Land available to designate as “preserved” is close to the zoning authority’s desired amount of preserved land • C/B distributed equitably • Undeveloped land most appropriate for preservation • Reasonable administrative costs

8. Determining Land Bid Functions • Assume 2 types of actors • Developer land bid function: • Farmer/Preservationist land bid function:

9. $ D S A* M Acres Adapted from Thorsnes and Simons, 259 Graphical Illustration • M acres of undeveloped land • S: farmers maximum bid • D: developer’s land bid (assumption) • What happens w/o government intervention? • Is this a market failure?

10. $ MCS D S E A* M Acres Source: Thorsnes and Simons, 259 Graphical Illustration Cont’d. • MCs : Marginal Social Cost of Developing Land • E: external benefits of preserving farmland/pristine areas • Efficient Level of Conservation: A* through M acres

11. $ MCS D S E A* M Acres Source: Thosnes and Simons, 259 Graphical Illustration: Zoning • Need for information • Land value decreases for preserved acres • Land value increases for areas that can be developed

12. $ MCS D S E A* M Acres Source: Thosnes and Simons, 259 Graphical Illustration: MDR • Government decides land to develop • Distributes A* permits to land owners • Market determines permit price (Diff. in dev. Vs. non-dev A*) • W/ external benefits included into value of developable land:

13. MDR Cont’d • Landowners maximize wealth by selling acres A* through M. • Owners of acres A* through M will receive $E, assuming that development rights are distributed proportionally to owners’ total property holdings. • MDR programs are Pareto superior to programs where trading not allowed • Second Theorem of Welfare Economics

14. Potential Challenges • Some assumptions for competitive economy may not hold in land markets • Unequal distribution of permits • Without proper regulation, may not important/prime land • Hot spots around areas of high value to developers • May not preserve contiguous land areas

15. Case Study: Montgomery County, MD • Most successful program in the country • Preserved almost 38,000 acres of farmland • Sending area – one development per 25 acres. If purchased for receiving area this becomes 1 per 5 acres • 5:1 ration = five times more development allowed if rights transferred to receiving area instead of being used at sending area

16. Suggestions for Successful TDR Program • Incorporation into zoning policy as the only means of increasing development density • Real Estate Market Analysis • Public Participation • TDR Bank • Multi-jurisdictional programs to increase the size of the market • State legislation to authorize adoption of TDR programs to avoid takings issues