Transfer of Development Rights: A simple primer

Matt the Engineer asked for more on Transfer of Development Rights or TDR. So I thought I would respond with a very quick and simple post. Like most things land use, however, TDR is a pretty complicated topic to wade into. But it’s based on a simple idea. A property owner can sell her right, or entitlement, to build on one piece of property to another property owner somewhere else who needs that additional development capacity. A property owner who can’t use or doesn’t want to use their development capacity can sell it to someone who needs it but doesn’t have it.

Imagine we had some hypothetical property owners and developers, in hypothetical town, with a hypothetical zoning code that allowed for TDR. Let’s look at a map of the town for a minute.

Parcels in Parceltown USA

Parcel A is zoned commercial, B is industrial, C is residential, and D is Parceltown Mixed.

Mr. Diggs is thinking about building a 10,000 square foot rendering facility right on the edge of his parcel,  parcel B. It’s zoned for that and he goes to the city to get a permit. Neighborhoods and business owners are outraged. Nobody wants a rendering plant next door!

Over on Parcel D, Mrs. Jones is looking at developing a 80 unit apartment complex. But because of a number of factors (sloping property, water rights, parking requirements) she has to go higher that the code allows to create the units she needs for a return on her investment. If she builds to code she only gets half of what she needs.

Councilmember Smartypants sees an opportunity. He works with staff to write a Transfer of Development Rights ordinance. Nobody wants the rendering plant (send it to Kent!) and housing prices are rising. Those 80 units would increase the supply of housing in Parceltown and create more competition, hopefully lowering price.

The legislation allows Mrs. Jones to pay Mr. Diggs $1,000,000 to buy the his right to develop on Parcel B. That allows her enough additional square footage and height to be able to build 80 units. In exchange for the cash, Mr. Diggs promises not to develop the rendering factory on his plant, instead he’ll create some open space for a new museum in near by parcel A.

Everyone wins! Mrs. Jones gets her project done and makes enough money to more than offset her purchase of the development rights. Mr. Diggs walks away with enough cash to offset his losses at not exercising his development rights on his sight and he got some extra cash from the museum for an easement on his property. The neighborhoods gets additional housing and commercial space and open space.

Councilmember Smartypants however is caught up in an ethics scandal after he accepts donuts and coffee from another local developer. Damn ethics laws! He ends up resigning and becoming manager of the new rending factory in Kent.

This silly example, I think, roughly outlines how TDR works in an ideal world. The “rights” or “entitlement” gets monetized for the purposes of transfer from one owner and one site to another. When it works, TDR can solve lots of problems. The challenges for TDR are:

  • Finding a receiving site–someone has to need or want the additional development rights and be willing to pay for them. If the price is too high it can make the transfer financially infeasible. And if the zoning isn’t right or the site has problems that won’t allow more height there’s no reason to buy it.
  • Financing–some developers might want the rights but can’t afford them. But often cities want to encourage developers to not develop. Buying their right to develop might make sense but if the city can’t come up with the money they can’t bank the capacity. And some developers might look at their options and figure, “hey, I can make a lot more building what I have the right to build that these guys could ever pay for giving that right up.”
  • Real estate market–the old law of supply and demand doesn’t go into abeyance for TDR. Even if there is a healthy, well financed and organized TDR program there has to be demand for additional capacity in the real estate market. People have to want those extra square feet. But when there is no demand for space, then over supply becomes a problem. Even if the market is raging, it can be a problem because the development potential of sending sites raises the price on the sending end.

All these and other problems notwithstanding (including the donuts), TDR is a good idea and it can work. Public benefit can be served when cities facilitate and fund these programs. They also have, through the code, the power to put their fingers on the scale and make it more likely these programs might work.

If, for example, the City of Seattle upzoned an area but also capped the development potential by forcing landmark status on buildings, they could make it lucrative for the building owners with increased zoning but landmark status to sell those rights. I don’t know if that’s legal or not, but it sounds like a cool value capture idea. It turns a seemingly big boost in height and density in one place into density somewhere else while preserving the sending sites.

If anyone out there wants to chime in please do. I may have some things way off here.

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10 Responses to Transfer of Development Rights: A simple primer

  1. Matt the Engineer says:

    I still don’t totally get it. What rules can you break using TDR? Height? FAR? If I want to build a half mile high and 3-block wide building in front of the Space Needle could I just buy up other people’s TDR to do it? Could the guy that wants to build a rendering plant buy TDR from Parcel D to build a double-sized rendering plant? Does some review committee has to review any deal?

  2. . says:

    M the E,

    I mislead if I made it sound like this was about getting around “rules” as much as it is about pushing development capacity around. The rules are set by state and local government and case law and can be changed a lot. But doing that is usually a means to an end, not an end in and of itself.

    Another way of looking at zoning is “permitted use.” If I live in Single Family, I can do single family things without having to ask. It’s just allowed outright. I may have to get clearance to build a deck, get it inspected, and comply with other requirements. But the City can’t deny me my deck–its a “right” or “entitlement.”

    TDR allows me to sell the right to do what I can legally do on my property to someone who needs the benefit of that right somewhere else. But I’m not selling the zoning, just the square footage I get from my right. The receiving site needs a rezone too in order to exercise the right I sell, because if the person there had the right to develop outside of the zoning box they wouldn’t need my right or a rezone.

    Does that make sense?

  3. Mark S Johnson says:

    Also, at present relatively few areas in Seattle are zoned as receiving sites, and the areas they can receive development rights from are also specified. For example, development rights from forested areas in eastern King County may be transferred to parts of the Denny Triangle, but not elsewhere. In Pike/Pine, there are ways to transfer rights from small older buildings to other sites in the neighborhood, but not to anywhere outside of the neighborhood.

    The point is that TDR is not a blank check for anyone who wants to build something bigger, but is established to achieve some policy objective (preserve resource land or historic buildings, for example) within narrow limits.

  4. Mark S Johnson says:

    I had a question about the “donuts”. The link in the artocle goes to the Seattle Ethics Commission. I don’t get it.

  5. . says:

    @Mark S Johnson–that’s my jab at the Ethics Commission.

    Elected officials in Seattle labor under some bizarre and pointless disclosure on what they can accept from people. We’ve gotten a little crazy with disclosure and stuff these days. An official can get in trouble, quite literally, for accepting donuts and coffee from a citizen.

    And as to your point about receiving sites, I’d say it’s something that needs to be worked on as part of any effort to rework the code. It has to happen with an eye toward the larger outcome. But if we decide to support a certain amount of new development, a solid, well thought out TDR program could help us plan and distribute that development.

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