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Thread: Cap and trade system to allocate development rights

  1. #1

    Cap and trade system to allocate development rights

    As a rural planner I am frequently frustrated by developer requests for master plan amendments and zone changes to allow for high density development in undeveloped areas of the county. These requests are typically approved without consideration to the long-term costs of development activities or with much consideration to the additional value that the higher density provides to the developer.

    There seems to be a mindset that everyone has a 'right to develop' without consideration of the externalities of development that are expected to be paid for later by the public. This strikes me as similar to the practice of not considering the cost of pollution that has led to the cap and trade of pollution credits being proposed by some in government.

    In my rudimentary understanding of "cap and trade" the government will establish a maximum allowable limit on pollution (or base). Members of the pollution community receive an allocation of that base. Those with a surplus will be able to sell that surplus, and those needing additional allocation will be required to purchase surplus allocations.

    Which brings me to "cap and trade" of development rights. Rather than give away density to anyone with the ability to convince the governing board, why not establish a base allocation and a limit on the number of "units" (residential parcels) that can be created over a specified period of time (master plan horizon for instance) and require developers to purchase additional allocation. The difference between the base and the limit establishes a credit bank that is held by the municipality. As credits are purchased, the bank invests the funds in land and resource protection programs that mitigate some of the effects of development.

    Has anyone tried this or something similar?

  2. #2
    Cyburbian ThePinkPlanner's avatar
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    Successful Use of Transfer of Development Rights

    Although we are small city of less than 18,000, we have successfully used a Transfer of Development Rights program.

    It is a little different than you have proposed, but still works very smoothly.

    We only apply this to one area of our city, known as the Southeast Quadrant. It is the most rural area of our city, and predominantly conists of large lots or undeveloped farmland. The concept is to zone the entire SEQ at 1.2 units per acre, our lowest density in the city. We've established 'sending' areas and 'receiving' areas based on a comprehensive four year study of wetlands, wildlife corridors, roadways, etc. I'm simplifying here, but sending areas can only sell their TDRs (with the exception of allowing a single, single-family home). Receiving areas vary- some may receive anywhere from 4-8 units per acre depending on the sub-district. We allow this exchange to happen privately- the cost of the TDR is not set nor collected by the city, though we do track them to ensure that we know what density remains on sending parcels. We also require surveys of the sending parcels. We almost think of the entire quadrant as one big PUD.

    Additionally, this required enabling legislation from the State of Vermont. We have been utilizing the program for 4 years now and have had very few problems.

    I could provide more details to anybody interested, or you can check out our regs and maps at www.sburl.com, navigate to planning dept, then planning documents.

  3. #3
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    TDR/PDR

    Virginia has enabling legislation for TDR but no one uses it because it’s not practical. There are a few localities that use a purchase program with open space easements. I am in the process of developing a company that would administer a TDR/PDR/LDR program for localities, and save them a ton of money. The legislation allows density transfers and I want to operate a “bank”, so receiving area property owners can wait until the economic crunch is over.
    In any event, the concept of density transfer is a win- win for everyone… If the legislators would stop messing it up.

  4. #4
    Cyburbian JimPlans's avatar
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    Check out Rural Land Stewardship (RLS) in Florida:

    http://www.dca.state.fl.us/fdcp/dcp/...ndstewardship/

    It is a TDR program designed for rural areas with large tracts of land that are feeling development pressure but would also like to retain their rural character and preserve farmland and natural areas. Adams Ranch was one of the first, and their website has a powerpoint with a good description of the program:

    http://www.familylandsremembered.com/rural-land.html

    Maryland has its own TDR program. There is a good report on how well it has (and hasn't) worked available here:

    http://law.wustl.edu/landuselaw//Articles/REPORT.pdf

    In addition, Maryland has an Agricultural Transfer Tax that collects fees from farmland that is removed from farm use (where it gets a preferential tax rate) and developed. These fees are used to purchase development rights from other pieces of property. So far, Maryland has preserved 480 thousand of the six million acres that lie within the state.

    Also, the September 2009 issue of APA's Zoning Practice is about TDRs.

  5. #5
    Cyburbian Cardinal's avatar
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    High Plains Drifter is suggesting something different that a typical TDR program. It has some intriguing possibilities. Imagine this scenario: A state projects that it will grow by 100,000 households in a given time frame. Those 100,000 allowable units are distributed to local communities based on population. This would cap growth in rapidly-developing areas, steering some of it to other locations, like the state's central cities. Slow-growing rural communities or those wanting to discourage development might sell their credits, earning income to support capital investments or fund operations, resulting in lower tax rates for their residents. There could be other tweaks to such a program, like density bonuses, skewing the allocation of credits to favor urban cores, etc.
    Anyone want to adopt a dog?

  6. #6
    Cyburbian
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    I had proposed a similar idea several years ago to a Councilman in Montgomery County, Maryland, a suburb of Washington DC. The basic idea was that instead of granting increased development rights in which you just give it away, sell the increased rights at market rates, then use the revenue to build a public transportation system. This way, you'd have the funds to build a light rail system throughout the County by having developers pay for it, and without having to raise taxes.

    He rejected it, not on the merits of the proposal, but because he'd have to run for reelection on a platform of increasing development, when most residents of the County are clamoring to stop or reduce development. He'd be opening himself up on an issue that an opponent could easily exploit.

    He said that a plan like this is better suited for a county that is beginning its growth than for one which is already mature. Here's what I proposed if you're interested in reading.

    -----------------------------------

    The current Go Montgomery plan consists primarily of building new roads and widening existing roads. These measures will not be sufficient to significantly ease congestion in the County, in addition, they conflict with some of the stated goals of the plan. The reason it won't be sufficient is because no matter how many new roads are built, roads by themselves won't have the capacity to handle the future development of the County (not to mention the traffic from the development of Frederick, Howard, and Prince George's Counties). During rush hour, the new ICC will become as congested as the Beltway, and the widened roads will become as filled as they are now. Thus more cars will be on the road than before creating an even harder problem to fix in the future. This plan also conflicts with the goal of reducing air pollution and the goal of making the streets more pedestrian friendly.

    The solution is to build a rail system that has a capacity greater than the capacity of a fully developed County. This could be an underground subway, but because of the costs, will more likely be an above ground monorail or maglev system. The proposal I have is to build an extensive system, around 6 or 7 lines going north-south and another 6 or 7 lines going east-west across the County. These lines could be built underground or built overhead, above the streets, along the major roads, such as Rte 355, Georgia Ave, Rte 28, Randolph Rd, etc. As part of this plan, since a cross county rail system will be in place, the nature of the Ride-On [our local bus system] program could change. The Ride-On vans would have short local routes, traveling down neighborhood streets bringing people from the neighborhoods to the rail stops. This relieves the vans from being stuck in the congested traffic of the major roads, makes the mass transit system faster than driving, and makes it as convenient as possible to move people from one part of the County to another without needing to use their cars.

    To finance this system, the County would issue Purchasable Development Rights (PDR's) and sell them to real estate developers, letting them finance the construction. PDR's would be similar in concept to Transferable Development Rights (TDR's) except that the rights are created by the County instead of transferred from an existing site. In addition to issuing PDR's, the County would need to create new TDR/PDR Receiving Zones for developers to put the PDR's to use. These new TDR/PDR receiving zones would be within walking distance of the new rail stations. This would provide the reasoning to the communities for why they would want to accept the TDR receiving zones. The capacity of the new rail stop will be greater than the extra density of the new TDR receiving zone, therefore the net affect will be to reduce congestion in that area. The communities would also get a rail stop within walking distance of them. In a sense, you would be rezoning certain parts of the County, however instead of giving the new permissible development away, the County would be selling it at market rates and using the revenue to build the rail system. Over a ten year period, several billion to tens of billions of dollars could be raised.

    There are several nice features to this approach. First, it can start as a Montgomery County only project, needing only minimum outside funding and approvals, thus implementing it will be faster and easier. Second, the administrative mechanisms for implementing it are already in place; the County Attorney's Office has experience at creating TDR documentation which can be readily transferred to creating PDR's; Development Rights banks already exist to purchase and sell the credits; and the precedence for creating TDR Receiving Zones has been in place for many years. And third, it can be implemented piecemeal over time. This would allow you to try it on a small scale in certain areas before implementing it throughout the whole County--or allow you to achieve other goals first, such as building a line where the proposed Purple Line was supposed go. The piecemeal implementation over time also means the PDR's would be sold on an "as needed" basis over time. This guards against overdevelopment and also guards against inflation of construction costs--Inflation will cause property values to rise, and therefore the price of PDR's will rise to keep pace with the rail costs.

    A plan such as this would allow you to attract more businesses into the County, spurring economic growth, and possibly creating more environments throughout the County like Bethesda and Silver Spring. Furthermore, it is a real solution to easing congestion for the long term.

  7. #7
    Cyburbian
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    Almost any good idea you come up with is going to be wrecked by the State Legislature--thereby guaranteeing that we have to spend the next thirty years trying to fix those problems.

    In my opinion, the best way to deal with things that you don't want is to tax them. That doesn't require that small towns hire big professional staffs. When folks come in and complain about some big, new development, propose that the town tax those kinds of developments according to how much people don't want them. Numerous towns have come up with a "big box tax," and they work. (I think that the courts have been mixed on the issue.)

    In the same way that you tax pollution (or apply impact fees), you can tax developments that are harmful. In the same way that towns offer variances in exchange for making certain changes, fee-for-waiver can be the offer. If someone wants a conditional use permit, the town just charges a fee, depending on what rule is being waived.

    Just my two cents.

  8. #8
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    TDR and Zone Changes

    Those of you who are familiar with TDRs, can you tell me what happens around future zone changes once the sending/receiving areas are established and TDR goes into effect? Is it simply a premise of TDR programs that the zoning for TDR areas remains frozen forevermore?

    I may be missing something, but it seems like, unless the underlying zoning stayed in-place, any upzoning would devalue the TDR credits, and any downzoning would totally neutralize them. For example, at T1, TDR goes into effect with existing zoning, and the TDR market consists of X number of credits which get valued at $Y/credit. At T2, the town holds a public hearing and changes the zoning, increasing (or decreasing) the allowed density in the TDR areas. If an increase, then a) the value of the credits plummets because the receiving area no longer needs as many and the sending area has even more to sell. If a decrease, property which previously had unused density either have less or none of that unused density now, and, if they were mad about getting downzoned, they'll be even madder when you downzoned them with the added bonus of taking away their sellable TDR credits. Therefore, it seems like the zoning would have to stay constant, once a TDR system was put in place.

    And yet, freezing zoning, while good for making TDRs work, would not be a good thing for a community, which ultimately grows over time, and must adjust the zoning to accommodate that growth.

    Can anyone show me the way out of this TDR catch-22?

  9. #9
    Cyburbian
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    There are problems when you change zoning, property owners are either helped or hurt depending on whether you’ve increased or decreased their allotted density. When the zoning density is increased, the value of property in that area increases because of the extra potential development, and the town is essentially giving away free money to the owners of those properties. The opposite is true when the town decreases zoning density, and the town is taking away value from the owners of those properties. This is usually both politically and legally contentious since you’re also taking away rights that people already have.

    A way to reconcile this is to use a TDR system instead of changing the zoning. You would setup TDR sending and receiving areas whenever you wish to decrease or increase density in the future. Since the rights are sold on an open market, those in a receiving zone pay a fair price for the increased density, and likewise, those in the sending zone receive a fair price for the rights they’ve lost.

    If the town grows and wishes to increase receiving areas without corresponding sending areas, then the town creates the TDR’s themselves and sells them at market rates to the receiving zones. This way, the town collects part of the value they’ve created by increasing the density, instead of just giving it away to the property owners.

  10. #10
    Cyburbian JimPlans's avatar
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    Quote Originally posted by Tipton View post
    If the town grows and wishes to increase receiving areas without corresponding sending areas, then the town creates the TDR’s themselves and sells them at market rates to the receiving zones. This way, the town collects part of the value they’ve created by increasing the density, instead of just giving it away to the property owners.
    The problem I see with this approach is that it smells like contract zoning. You could argue that it isn't, because you're setting a receiving area where all parcels within it are subject to the same rules (including the ability to purchase density through TDRs from the government), but the simple fact that some property owners get to have density because they paid off the government to get it, while other similarly-situated owners who did not pay off the government don't have the same property rights, might not fly.

    In other words, I think there is a difference between (a) one property owner selling a development right to another property owner and (b) the government creating new or enhanced property rights out of thin air that pertain to an individual owner's property and then selling those rights to the only person who could exercise those rights, i.e. that self-same property owner.

  11. #11
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    @ Tipton, I think you misunderstood my question/point.

    I'm saying, let's *assume* the adoption of a TDR program in, let's say, Tipton-town, MD, for all the good reasons you indicate. People use the program happily and effectively, and all goes swimmingly.

    Then one day...

    The zoning commission, for who knows what reason -- could be anything, right?, decides to upzone or downzone an area where TDR is enabled.

    Wouldn't it totally mess up the whole TDR program?

    My sense is that TDR and Zoning cannot coexist without zoning being effectively frozen for TDR areas once they go into effect. In fact they seem mutually toxic...if zoning continues doing what zoning does, it messes up TDRs; if TDRs go into effect, zoning has to give up zoning in those areas, foregoing all future growth for participating properties and constraining the town's overall ability to grow in the long-term.

    Someone care to prove me wrong? I think I'm onto something here, but I have yet to dialogue with a person from a community with a functioning TDR system in place.

  12. #12
    Cyburbian
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    No, the system would still work even if you increased zoning density, TDR's allow you build above the zoning limits. For example, let's say that you own a property that under current zoning laws would allow to build 10 units of housing. At Time-0, the county assigns this area to be a TDR Receiving Zone that would allow you to purchase 5 additional units--and you purchase those rights at that time. Then, in the future at Time-1, the county increases the density in that area by 50%, you would be able to build 15 units by the zoning law, plus still build the additional 5 TDR's that you purchased earlier. The surrounding properties would also still retain their TDR receiving zoning rights even though they may not have purchased them yet. The TDR's that are on the market would still retain most of their value because the rights allow you to build above the existing zoning laws--even if they change in the future.

    However, in the above example, I still maintain that the county would be better served by increasing the TDR receiving zone by 5 units rather than by increasing the zoning density by 5 units. When they increase the TDR receiving zone, it's the county that receives the extra value that they create, and at a fair price because those units are sold on an open market. However, when they increase the density by changing the zoning law, they are giving away free money because it's the property owner that receives all of the extra value that is created by the change.
    Last edited by Tipton; 19 Dec 2009 at 1:47 AM.

  13. #13
    Cyburbian
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    "The problem I see with this approach is that it smells like contract zoning. You could argue that it isn't, because you're setting a receiving area where all parcels within it are subject to the same rules (including the ability to purchase density through TDRs from the government), but the simple fact that some property owners get to have density because they paid off the government to get it, while other similarly-situated owners who did not pay off the government don't have the same property rights, might not fly."

    It's actually the other way around, developers frequently contribute large amounts of money to city officials campaign funds. In exchange, the developers get favorable zoning changes. That is, the developers get free money from the increased value due to the zoning change. Whereas, if they were assigned a TDR Receiving Zone instead, then they would pay the fair market price for the increased density.

  14. #14
    Cyburbian kalimotxo's avatar
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    Quote Originally posted by Tipton View post
    "The problem I see with this approach is that it smells like contract zoning. You could argue that it isn't, because you're setting a receiving area where all parcels within it are subject to the same rules (including the ability to purchase density through TDRs from the government), but the simple fact that some property owners get to have density because they paid off the government to get it, while other similarly-situated owners who did not pay off the government don't have the same property rights, might not fly."

    It's actually the other way around, developers frequently contribute large amounts of money to city officials campaign funds. In exchange, the developers get favorable zoning changes. That is, the developers get free money from the increased value due to the zoning change. Whereas, if they were assigned a TDR Receiving Zone instead, then they would pay the fair market price for the increased density.
    It is still essentially contract zoning. I've never heard of a TDR program where the local government "creates" transferable rights. That essentially defeats the whole concept of using the market to reassign existing development rights. Other than my great Commonwealth of Virginia, where contract zoning is enabled by the state through the proffer system, I don't know of anywhere such a practice would fly.

    My gut feeling is that any increase in receiving areaa would be dependent on enough existing transferable rights and a market for them for the TDR program to be effective.
    Process and dismissal. Shelter and location. Everybody wants somewhere.

  15. #15
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    Tipton, thank you for engaging me on this. However, I'm not convinced. Everything I've read on TDRs says that the whole system really depends upon establishing and protecting the market for the credits. The credits need to have some value, just as currency does. Also like currency, when it becomes unstable, it loses its value, and vice versa.

    It is for that reason, that I question your scenario. Once the upzoning occurred, it wouldn't matter that the TDR credits were still allowed or available. Markets are all about supply and demand, and the demand for 5 TDR credits would dip significantly if the as-of-right density in a receiving area were to increase, thereby affecting price, and thereby compromising the stability/integrity of the market for the credits.

    I actually finally spoke to one of the people involved in the Montgomery County TDR program, and he confirmed that, from a sending area perspective, zoning is effectively frozen at the time TDRs are activated (more accurately, it becomes irrelevant, because the sending properties agree to place restrictions on their land records, freezing their density in perpetuity, regardless of what future zoning might allow). For receiving areas, he said the issue hadn't arisen yet, but agreed that, both economically and from a fairness perspective, the system could not protect the value of TDR credits while charging a 2010 developer for his density and giving it away to a 2020 developer for free.

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