Zoning Practice — January 2008

Ask the Author

Here are reader questions answered by Tom Daniels, author of the December 2007 Zoning Practice article "Zoning for Successful Transferable Development Rights Programs."

Question from Michael Wozniak, Goodhue County, Minnesota:

I was wondering if you have any knowledge or insight on how property taxes have been handled in jurisdictions where TDR has been implemented. Have any conflicts or issues arisen in establishing appropriate property tax classifications for properties involved with a TDR Program? I work for a largely rural county located just outside the Minneapolis/St. Paul Metro Area. We are just beginning to explore the merits of establishing a TDR Program. I am currently discussing the property tax issue with my county's assessor's office. Any thoughts you may have would be welcome.

Answer from author Tom Daniels:

Thanks for your question. In sending areas, the property tax issue has been handled on a jurisdiction by jurisdiction basis. In Pennsylvania, for example, there is no additional reduction in property tax assessment if a property has sold off TDRs. The state has a "clean and green" use-value assessment program for farmland.

In New York, a local assessor may reduce the property tax assessment for a property (farm) where the TDRs have been sold off. This has been case by case, depending on the local assessor.

I hope this helps.

Questions from Pat Hare, Hare Planning, and Vice-Chair, Cornwall, Connecticut, Planning and Zoning Commission:

(There is a description of our town below for context.)

1. Background: The TDR program we are developing would disconnect sending and receiving areas. It would have builders buy development rights by paying into a TDR bank like the King County program you mentioned. That fund would then negotiate purchase of development rights from landowners.

Question: Do you know of any small communities that have used this approach?

2. Background: To try to defuse objections of local residents in receiving areas, we are planning to give strong preference in the bank’s purchase of development rights to creating greenbelts surrounding the small existing villages where we plan to add density. This would mean the benefit of landscape protection around the village was directly linked to acceptance of added density.

Question: Do you have any comments on this approach, and do you know of any communities that have tried it?

3. Question: Can you suggest any other major incentives to make added density attractive to existing owners in a market in which relatively few existing owners or buyers want the practical advantages of villages and density? (We are discussing things like swimming pools and tennis courts and general stores but do not expect them to be seen as major benefits.)

4. Background: In adding density, we are considering expanding receiving villages into shapes like fat starfish. We think this has two benefits. First, it provides a maximum number of premium house lots with views over the protected land between the arms of the starfish, land that will be part of the greenbelts mentioned in the previous question. Second, it will allow much of the added density to be relatively hidden on wooded slopes (Our town is a series of folded ridges) and limit impact on traditional open views.

Question: Do you know of any communities that have tried this approach? Do you have any comments or concerns about it?

5. Background: In addition to TDRs, we are intending to use other methods to encourage land protection by landowners in the sending areas. These including systematic promotion to land owners of tax deductions for easements, allowing long term farmers to sell a few minimum visual impact lots of say one acre each in a five -cre zone if they put other acreage under easement, and doing the same for landowners who protect the rest of their land in conjunction with a tax deduction easement. So we are generally developing a wide range of other options for landowners to legally protect land in the sending areas in addition to TDRs.

Question: Do you know of other communities who have used this approach, or any other options we should consider?

Background on Cornwall, Conn.: It is a small town of about 35 square miles that is in the path of sprawl spreading north from New York City and east from Hartford. Right now we only get about 10 or 15 new homes a year, and about 90% of them, and most resales, go to "splitters" who split their jobs and lives between Cornwall and New York (2 hours away) on some other typically high end place to live or work. We expect that to start changing to sprawl as it has to the south and east. The rural pattern, right down to the old one-room schoolhouses, is still physically evident, but most demand is for homes on "brag patches" so land is being cut up into 25 acre lots, often for homes with large visual imprints and new stone walls so carefully build the walls look like they have hospital corners. One implication of that market pattern is that there is a strong desire to own open land, which helps with preservation, although big houses every 25 acres would, and in fact are, changing our landscape. We have three small villages, all too small to support much local retail, and increasing dominated by boutique style businesses. Right now, they are the favored location for receiving areas.

Answer from author Tom Daniels:

Thanks for your questions.

1. Warwick Township in Lancaster County, Pennsylvania, has set up a TDR bank to buy TDRs from landowners and sell TDRs to developers.

2. Creating a greenbelt as part of the softening of higher density is what St. Lucie County, Florida is proposing to do with its TDR program. But St. Lucie County is looking at a New Town approach. I think what you are trying to do makes good sense and will minimize sprawl.

3. Allowing a mix of land uses or just commercial uses in receiving areas can make TDR transfers more attractive because the new development will tend to increase the local property tax base as well as improve the land-use mix in or next to villages.

4. The starfish growth model is similar to the corridors and wedges plan that guided Montgomery County, Maryland — both for development (along corridors) and the preservation of the green wedges. Montgomery County also has the leading TDR program in the nation. Sounds good to me. The preserved land should act as a growth boundary.

5. The limited development with easement approach could work, depending on the value of lots. But landowner participation will be key.

Questions from Pat Hare, Hare Planning, and Vice-Chair, Cornwall, Connecticut, Planning and Zoning Commission:

Tom — I hope a few more questions are not too much.

  1. Background: Background: Cornwall’s three villages have no sewers. The Town would like to postpone or avoid sewage system costs and responsibilities as long as possible. Developers still build only 3 or4 units at a time. Initially we may be able to handle higher density under a Health District provision that would allow 3 or 4 houses on one large septic system. However, the higher density in receiving areas will almost certainly require sewers at some point. The Town will want developers to pick up a big share of the costs or all of them. Those costs may make developers lose interest in buying TDRs.

Question: Is there a good example of how a small town can postpone and/or stage sewer costs and/or use new technology to lower them so that when added to house costs they do not derail the TDR market?

  1. Background: Convincing receiving area villages to accept higher densities will be much easier if landowners in the receiving areas benefit financially from having their land zoned for higher density. I assume developers pay more for land in receiving areas in addition to what they pay for the development rights.

Question: Is this a good assumption, and is there any good information on how much owners in receiving areas benefit financially from being a receiving area?

  1. Background: Under the program we are thinking about which would be similar to the one in Warwick, it seems that developers would pay into a bank for development rights, and not negotiate directly with sending owners.

Question: Would this mean that the town might set separate prices for both buying and selling development rights based on market conditions?

Answer from author Tom Daniels:

Hi, Patrick,

1. The problem with on-site septics is they require large lots for individual homes or businesses. The alternative is a community on-lot system. But communities throughout New England (think Cape Cod) have been avoiding installing central sewers because of the cost. In most cases, developers are reluctant to pay for the sewers, and besides, with plenty of rural residential zoning, the developers build in the countryside with relatively little resistance.

2. I don't know of data that show how much landowners in receiving areas benefit from that designation, but it stands to reason that they should — if there is an active real estate market. Greater density allowed = higher price per acre.

3. Yes, the town can negotiate TDR prices with landowners or else offer a flat rate per TDR, based on one TDR for X many acres; the town can negotiate TDR sale prices with developers. In many cases — and you should check Connecticut law — a town has to put up TDRs it wants to sell, out to bid.

Question from Michael Kokosky, Marion County, Florida:

Did you research or find successful TDR Programs? By successful, I mean ones where the TDRs are being used for actual development projects.

My experience in implementing this type of program is that the county commissioners and the general public support the idea, however the development community does not feel that it provides sufficient incentives (not enough density allowed to persuade the developers to use it); the issue of compatibility always arises when the program is attempted to be used.

Answer from author Tom Daniels:

There are a number of TDR programs that I consider successful:

1. Montgomery County, Maryland, where over 7,000 TDR transactions have occurred, resulting in the preservation of more than 40,000 acres, and over $110 million paid by developers to rural landowners. In addition, Montogomery County gives a density bonus for the projects using TDRs that include the construction of affordable housing.

2. Warwick Township, Lancaster County, Pennsylvania. The township has a rather unique TDR program, which is based on preserving farmland in the TDR sending area and commercial/industrial development in the TDR receiving area. The township allows an additional 4,000 square feet of impervious coverage (buildings or parking lot) for each TDR purchased. To date, the township has preserved over 1,000 acres of farmland with TDRs and gained a new hospital located in the TDR receiving area.

3. New Jersey Pinelands, which has preserved more than 50,000 acres.

I agree the incentives for developers to use TDRs have to be attractive compared with by-right uses and densities. Increasing residential density alone, which is the typical TDR program, often runs into opposition from neighbors in TDR receving areas. Also, as some New Jersey communities have experienced, increasing density can mean more children to educate and high property taxes.

Question from Dan Staley, Town of Castle Rock, Colorado:

What are the most common successful ways you have found to overcome the typical problem of too much supply relative to demand?

Answer from author Tom Daniels:

There are three best ways to overcome the typical problem of too many TDRs relative to demand:

1. Identify a limited sending area. This will keep down the number of TDRs available. This will also tend to increase the price of TDRs. Assigning TDRs to every rural landowner doesn't make much sense, especially further away from development.

2. Change the TDR sending/receiving ratio. Require developers to purchase more TDRs per additional dwelling unit per acre or per extra amount of impervious surface for commerical or industrial space. For instance, require two TDRs (rather than one TDR) for each additional single-family dwelling unit per acre. This will increase demand relative to supply and tend to increase TDR prices.

3. Increase the development multipliers. Reward developers for good design or putting in special uses (research park, protecting environmentally sensitive land, additional civic building). Allow developers to obtain additional density or certain special uses for each TDR. This will tend to increase the demand for TDRs relative to supply. This is what St. Lucie County, Florida, has done.

Question from David Fisher, Matzel & Mumford Org., Inc.:

What would you consider as the top five "key ingredients" to a successful TDR program?

Answer from author Tom Daniels:

Thanks for your question.

For a rural to urban TDR program, I think the five most important features are:

1. A sending area with plenty of open space and rather little development nearby; if there is already plenty of development nearby, landowners will look to sell their land rather than sell TDRs. Tight rural zoning of one house per 20 acres or tighter can be helpful to discourage development in sending areas and make the sale of TDRs more attractive.

2.  receiving area where development is desired, and where the residents are open to a mix of commercial and residential development. (A common practice is moving only residential development into receiving areas; for example, a number of New Jersey communities are seeing rising school costs as more children are moving with their parents into receiving areas — without any commercial development to produce an offsetting tax revenue.)

3. Incentives for developers. TDR programs are developer-driven. These incentives must be attractive compared to what the base zoning already allows. The incentives can be greater density, or a mix or uses, or certain uses that are not allowed under the base zoning. The key rule here for local governments is: Don't just give away density — draft your TDR ordinance and base zoning ordinance to make it attractive for developers to use TDRs to increase density. A further incentive can be granted for good design. Too often the focus of TDR programs is on land preservation, not on what is built using TDRs.

4. Getting the TDR ratios right. A rule of thumb is to have twice as many places to put TDRs in receiving areas. Also, the number of TDRs a developer needs to obtain permission to build an additional dwelling unit or 1,000 feet of commercial space is key. If TDRs have a high price, most developers won't be interested. On the other hand, if TDR prices are low, landowners in the sending areas won't be interested. It's a balancing act. But TDRs work best in medium to strong real estate markets. They don't work well in strictly rural areas.

5. The support of the elected officials. There are dozens of TDR programs on the books that have little or no activity. A big reason is the lack of support from the elected officials.