UrbDP598 February 26, 2007 Land Use Tools: Transfer of Development Rights (TDR) and Purchase of Development Rights (PDR) By: Jan Jarman, Maja Hadlock, Ming-Yi Hsu, Molly Mathias, Scott Smith Background – Why do we need TDR and PDR? Transfer of Development Rights (TDR) and Purchase of Development Rights (PDR) are planning techniques developed to protect open space** through acquisition of the development rights of land. Both are based on the idea that land ownership involves a bundle of rights (e.g. surface rights, air rights, mineral rights, or development rights, etc.) and that these rights can be separated and sold individually (Bengston et al., 2004; Daniels and Lapping, 2005). The concept of Transfer of Development Rights was first introduced in 1916 in New York City when a zoning ordinance permitted lot owners to sell their unused air rights to adjacent lots and allow the “receiving” lot to exceed their height and setback requirements (Giordano 1988). The first court case review of TDR involved New York City’s limitation of development on two privately owned parks, rezoned to prevent luxury apartment development on the park sites. The park owner sued, alleging this restriction was an unconstitutional taking of his private property without compensation. The Court upheld the legality of the TDR (Fred R. French Investing Co. v. City of New York, 39 N.Y.S.2d 587 (1976), cert. denied 429 U.S. 990 (1976)) (Giordano 1988). ** In this paper, the term “open space” will be broadly used to refer to natural resource lands such as: timberland, farmland, environmental resources such as wetlands and wildlife habitat, as well as a variety of other socially valued landscapes such as wilderness areas, scenic sites, cultural and historic resources, and recreation areas (Bengston et al., 2004). 1 UrbDP598 February 26, 2007 Purchase of Development Rights programs began in the 1970’s in response to growing alarm in the Midwest and Western states over the loss of open space, farms, and ranches and an awakening to the need for protection of land with significant agricultural, historic, cultural, natural, and recreational benefits. This led to the development of a number of planning and policy techniques to protect open space** on private property under impending development pressure such as TDR and PDR (also known as conservation easements). Land use conversion to residential and other development is occurring rapidly in the United States. In the decade from 1982 to 1992, more than one million acres per year of agricultural land across the greater United States were converted to residential and other development, one-third of which were classified as prime and unique farmland. From 1992 to 1997, the conversion rate doubled, with 11.2 million acres converted into developed lands (Western Governors’ Association, 2002). Purchase of development rights programs have arisen as a popular means to compensate landowners for the voluntary retirement or restriction of their right to develop their land (Bengston et al., 2004). Definition – What is TDR/PDR? TDR and PDR are typically incentive-based programs that allow property owners to separate and sell the development rights for their property from the bundle of property ownership rights they retain (Bengston et al., 2004; Daniels and Lapping, 2005). TDR is the sale of one parcel's development rights to the owner of another parcel, which allows more development on the second parcel while reducing or preventing development on the 2 UrbDP598 February 26, 2007 originating parcel. Under such a program, development rights are severed from a lot designated for protection (sending area), and the severed rights are transferred to a lot in an area where additional development is permitted (receiving area). PDR is the sale of development rights to a qualified conservation entity (typically a non-governmental organization or government agency), resulting in the retirement of those development rights from the property and a conservation easement placed on the parcel for perpetuity (Bengston et al., 2004; Daniels and Lapping, 2005). Function – How are TDR/PDR designed to work? TDR and PDR are methods designed to protect open space through acquisition of the development rights of land (Bengston et al., 2004; Daniels and Lapping, 2005). Both TDR and PDR involve voluntary development rights sales by property owners and cash compensation to the seller while the owner maintains the ownership of the property. Both protect the land by a deed restriction prohibiting development using an easement recorded on the property title which stays with the land and applies to all subsequent landowners (Daniels and Lapping, 2005). TDR programs can be classified into two categories: mandatory and voluntary. Mandatory programs create separate, pre-zoned sending and receiving areas, where the sending area is down-zoned and the receiving area is rezoned at a low base density. The developer of a receiving area parcel must purchase the development rights of a sending area parcel in order to develop his parcel at a higher density. Another method consists of designating the receiving area as any area outside the boundaries of the sending area (Johnston and Madison, 1997). 3 UrbDP598 February 26, 2007 A voluntary TDR program is useful when it is not necessary to prohibit development in a specific area. In a voluntary program, the sending area is not downzoned. Development “credits” are sold by sending area parcels to developments that exceed the maximum density. The voluntary method is more politically feasible because the land does not lose value until the development credits are sold, compared to the mandatory method that down-zones the sending area, resulting in an immediate loss in property value (Johnston and Madison, 1997). A PDR program is typically initiated to preserve agricultural land or land containing significant environmental or cultural resources. In a PDR program, the development rights are purchased voluntarily from the landowner who retains the title to their land. The land is then in a permanent conservation easement which prohibits future subdivision and development (Bengston et al., 2004). A publicly-funded PDR program is established at the local level, accompanied by enabling and/or funding legislation at the state level. A preserve board is formed, usually on a county-wide basis consisting of a few members of the community. Membership is expected to reflect the makeup of the community with representatives from agriculture and local industries. The board is charged with reviewing of landowner applications who wish to sell their land development rights. The members of the board determine how to operate the program so the public gains the most from its investment. Under what circumstances should you use TDR/PDR? TDRs are a relatively simple concept, but unless their programs are well planned and executed, they are not used. The concept has many advantages to the municipality, community at large, and property owners that can make them politically attractive. 4 UrbDP598 February 26, 2007 (Pruetz, 1997). Seven factors must exist for a TDR market to evolve and the program to be successful. They are incentives for the program to operate efficiently and allow the TDR owners to sell their development rights. These seven factors are as follows: 1. The program must be legally defensible. 2. Commitment from the municipality (politically and administratively) to use TDRs, and refusal to grant rezoning, zoning variances, or increases in density without TDRs. 3. A simple and uncomplicated program that is easy for the municipal staff to administer and the public to understand with designated personnel to manage and track the program. 4. Clear identification of sending and receiving areas. 5. Program-induced incentive for sending area owners not to use or develop the property but to sell TDRs (i.e., market supply of TDRs). 6. Market demand for increased density/development in the receiving area (i.e., market demand to buy TDRs). A key consideration in the valuation of TDRs is an understanding of their market. Unless the program is designed to give TDRs the four market-driving economic factors - utility (use), scarcity (limitations on availability), desire (demand), and effective purchasing power (reasonable price) - there is no market demand for them and hence no market value. 7. Very importantly, public knowledge of the existence of the TDR program and its potential use (i.e., public education program). Two other nonessential factors that can help stabilize a program are: * Set up a TDR credit bank to provide stability to the program. The bank allows the municipality to control the program and assists in the creation and stabilization of a TDR market. 5 UrbDP598 February 26, 2007 * Require TDR deeds to be recorded in the public records to increase public knowledge, establish a market, and permit and value assessments that reflect a property's potential use. PDR programs should be used when a particular property containing publicly desired open space values is under impending development pressure and when the property owner volunteers to sell the development rights. PDR programs are designed to be beneficial to both the property owner, and the public. Many property owners of prime agricultural land or open space are farmers who are typically cash poor and land rich. PDR programs are one way out of this dilemma by providing cash compensation to the landowner for the retirement of development rights and subsequent conservation easement (Western Governors’ Association, 2001) (Table 1). The landowners can use the money from sale of development rights to reduce debt, pay property taxes, invest in business or for retirement, and settle estates. When the development rights are purchased, the value of the parcel declines, which helps solve landowner inheritance tax issues. PDR programs can also financially benefit the public by restricting development which can increase efficiency of provision of public services. PDR programs should be used when they benefit the landowner, and the public by preserving publicly desired open space. Table 1. Example of Development Rights Value Woodinville Farmer’s Market Unit Price Market Value with the Development Right $657,000 Appraised Value: Friends of the Woodinville Farmer’s Market will pay $352,000 Development Rights Value $305,000 (Source: Data from King County. 2005b) 6 UrbDP598 February 26, 2007 Track Record – Examples of cases TDR Case study – Success -- Montgomery County, ML Montgomery County, Maryland, was one of the first municipalities in the nation to adopt a countywide TDR program for agriculture preservation through its 1980 master plan (M-NCPPC, 1980; Brabec and Smith, 2002). The TDR program was mandatory, and created easement restrictions on property from which development rights were transferred. In establishing the program, the county allowed landowners to sell development rights at the rate of one development unit per 5 acres (no fractional development rights), regardless of the quality of the land, proximity to existing development, or other factors. Once a landowner transferred the development rights, the county acquired a permanent easement on the land, limiting residential development to 1 unit per 25 acres which the landowner retained (Montgomery County Code, 1997, Article 28, Section 59-C-9.6; Brabec and Smith, 2002). The TDR program has effectively protected 30% of the agricultural land in Montgomery County. TDR Case study –Failure-- Riverhead, NY Riverhead, New York, has a transfer of development rights program. However, the Riverhead TDR program is not mandatory in the sending area, and the town has only designated a very small receiving zone. This has resulted in the lack of use of this tool in Riverhead (Brabec and Smith, 2002). TDR Case study –Failure-- Milpitas, CA 7 UrbDP598 February 26, 2007 Milpitas, California adopted a TDR program to restrict development to designated sites. Even though it had some features found in successful TDR programs, it failed to reach set goals. The western-most slope of the Los Buellis Hills, referred to in Milpitas as the “Western Face”, forms the eastern edge of the developed portion of this city. In 1981, the City adopted a hillside ordinance designed primarily to reduce the amount of new development in the Western Face. This ordinance included TDR to shift development from this side to the Eastern Hills of the city. However, only the land in the Eastern Hills designated for village development could receive transferred development rights. When property owners relinquished the right to build one dwelling unit on a sending site, they were allowed to build 2.6 units on approved receiving sites in Eastern Hills when all bonus factors were calculated. Developers wanting to transfer development rights needed to apply for a planned unit development (PUD) containing both the sending and the receiving parcels. The sending and receiving parcels could be under separate ownership. The sending site, following approval of the PUD, had to be kept in its natural condition; however through the PUD, the City could authorize consistent uses such watershed, pasture and trails. Open space easements on the sending parcel had to be dedicated to the City. The Planning Commission was required to make a recommendation on the PUD application. In order to approve an application, the City Council had to find that the receiving parcel had area to accommodate both the amount of development allowed by rights plus the additional development granted through TDR. The Milpitas program had elements similar to those found in the successful TDR programs, such as a transfer ratio that provided incentive to participate. Nevertheless, the 8 UrbDP598 February 26, 2007 TDR portion of the ordinance went unused for eleven years. Owners on the Western Face continued to proposed development on their own land rather than transfer rights to Eastern Hills. In 1992, when no transfers were generated since the ordinance took place, the city considered increasing the transfer ratio but ultimately decided to downzone the Western Face properties and eliminated TDR from the code. The TDR program was not successful in Milpitas because of a few elements. First, incentive was partly offset by relatively high by-right density limits in the Western Face. Second, extra cost was generated by the necessity of providing new roads and infrastructure in the Eastern Hills. In addition, the lots in Eastern Hills lacked the view, this tended to make these lots sell at lower prices. Finally, the density limit in the Eastern Hills was one dwelling unit per ten acres while in Western Face density limit was one unit per acre except within the PUD village area. This feature reduced the benefits of transferring development rights (Pruetz, 1997). PDR Case Study –Success-- King County, WA In 1979 the voters of King County approved an initiative authorizing the County to begin the Farmland Preservation Program to preserve the locally diminishing farmland. The program stopped acquiring easements in 1987 when funds were fully spent, but continued to monitor its existing easements until recently when King County Executive Ron Sims used the PDR program to assist Woodinville in acquiring below market value property for its farmers market in 2005. As of July 2006, King County has 12,800 acres that are permanently protected (King County 2005b). 9 UrbDP598 February 26, 2007 PDR Case study –Success-- Suffolk County, NY The Suffolk County PDR program was initiated in 1977 and was one of the nation’s first PDR programs. Between 1987 and 1996, 40 million USD were spent to fund the acquisition of development rights, preserving over 7000 acres of land in the county. Another 9 million USD were spent in conjunction with partnerships between Suffolk County, town governments and non-profits to purchase development rights and conservation easements (Brabec and Smith, 2002). Problems with TDR and PDR TDR programs do have some challenges. They can be complex to administer and may experience resistance from residents already living in receiving areas who are opposed to increasing the development density of their neighborhood (Bengston et al., 2004). Another difficulty in implementing a TDR program is accommodating the new development in a receiving area that may not have the requisite infrastructure (Johnston and Madison, 1997). Market-driven TDR programs have been proposed by economists as a more efficient alternative to governmental designation of “sending” and “receiving” areas (Bengston et al., 2004). The most cited drawback of PDR programs for preserving open space can be the potential high cost of purchasing development rights in areas where land values and development pressures are high (Brabec and Smith, 2002; Bengston et al., 2004; Daniels and Lapping, 2005). There are more landowners willing to sell their development rights than existing funding for purchase. Additional disadvantages of PDR programs are the possibility of landowner holdouts leaving holes of unpreserved land, and the potential to 10 UrbDP598 February 26, 2007 close off future options for land planning by preserving land (Bengston et al., 2004; Daniels and Lapping, 2005). Since PDR is voluntary on the part of the landowner, it does not hold the inherent protection against fragmentation of open space that does a TDR program. The potential of PDR programs to avoid open space fragmentation is dependent on the amount of public funds available for purchasing development rights (Brabec and Smith, 2002). The use of multiple, reinforcing policy instruments is far more effective than relying on a single technique for growth management. Relying on a single technique may actually produce results which oppose the original intent of the technique. For example, if PDR is used in the absence of zoning and other techniques to protect open space, the result will likely be a patchwork of protected lands that will be a magnet for development on unprotected adjacent lands (Bengston et al., 2004). Conclusion: TDR and PDR programs provide a means of compensating landowners for voluntarily selling their property development rights and restricting development on publicly valued open space under impending development pressure. These planning techniques have been used in a number of jurisdictions in the United States to varying degrees of success. TDR and PDR are most effective when they are actively funded and used and not simply “on the books” of the jurisdiction. Their efficacy can be increased when used in conjunction with other reinforcing policy instruments. The success of TDR and PDR to date illustrates their utility and underscores the value of continued exploration of these techniques for preserving open space. 11 UrbDP598 February 26, 2007 References Bengston, D. A., J. O. Fletcher, K. C. Nelson. 2004. Public policies for managing urban growth and protecting open space: policy instruments and lessons learned in the United States. Landscape and Urban Planning 69: 271–286 Brabeca E., C. Smith. 2002. Agricultural land fragmentation: the spatial effects of three land protection strategies in the eastern United States. Landscape and Urban Planning 58: 255–268. Daniels, T., and M. Lapping. 2005. Land Preservation: An Essential Ingredient in Smart Growth. Journal of Planning Literature 19: 316-329. Johnston, R. A., and M. E. Madison. 1997. From landmarks to landscapes: a review of current practices in the transfer of development rights. Journal of the American Planning Association Vol. 63. Issue 3: 365. Boone County, Kentucky, Planning Commission (KBCPC). 2001. A Study of PDR and TDR for Boone County. Accessed: February 13, 2007. http://www.boonecountyky.org/PC/PDR_TDR.pdf Riordan K., 2004. Chesterfield Township TDR Program and Village Plan. Planning. Vol. 70 Issue 4: 10-11. King County. 2005a. Farmland Preservation Program. Accessed: February 12, 2005 http://dnr.metrokc.gov/wlr/LANDS/farmpp.htm King County. 2005b. Purchase of surplus county land to help farmers market, innovative ag projects sprout in Woodinville. Accessed: February 12, 2005 http://www.metroKC.gov/exec/news/2005/0112_farmers.htm. Pruetz, R.. 1997. Saved By Development. Preserving Environmental Areas, Farmland and Historic Landmarks with Transfer of Development Rights. Burbank: Arje Press, Western Governors’ Association, Trust for Public Land, and National Cattlemen’s Beef Association. 2001. Purchase of Development Rights: Conserving Lands, Preserving Western Livelihoods Accessed: February 12, 2005 http://www.westgov.org/wga/publicat/pdr_report.pdf. Wright, J. B. 1993. Conservation easements: an analysis of donated development rights. Planner's Notebook). Journal of the American Planning Association Vol. 59. Issue 4: 487.