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Development Exactions and Incentives - Transfer of Development Rights (TDR)

Transfer of Development Rights (TDR)

What is a Transfer of Development Rights program?

A Transfer of Development Rights (TDR) program is a powerful density allocation tool that supports the conservation of rural lands and works to contain development. Owners of open, undeveloped land in "sending" areas can package and sell the development potential of their land as a commodity to someone else who might want to build a denser development in a designated "receiving" area (near transit, in an old town center, or elsewhere).

The ultimate purpose of a TDR program is to create more efficient growth patterns. Density bonuses and TDRs are both tools that can encourage denser development with better links to existing street networks. This system rewards the owner of the undeveloped land for choosing to preserve open space, and allows the urban developer to build a more profitable project with a greater return on investment. The costs of purchasing the easements are recovered from the developers who receive the building bonus.

Who can implement it?

TDR programs are typically implemented through state, regional, or local planning agencies or legislative bodies. They most often are implemented through the growth policy planning and zoning process, and in many cases are first preceded by legislative action. TDRs must be codified by all communities involved in the program. Regardless of their geographic scale, the rules of TDR exchange must be written into zoning law. The sending and receiving areas should be defined by policy and regulation in each affected community.

Developers interested in applying for a TDR or density bonus should meet with the appropriate municipal staff to determine if their proposal will qualify for the bonus program. Staff will review the site plan before approving the project to ensure that the granting of the bonus does not have an adverse effect on adjacent properties in the zoning district and those utilities are available to serve the additional units.

TDR programs in Montana are not expressly authorized by state statutes, but communities have enacted them under the zoning or development regulations contained in the MCA Zoning Act Title 76, Chapter 2, Parts 1, 2, and 3. They are more common in urban and fast growing counties than in rural areas. For example, Gallatin County has TDRs on the books for three of its planning and zoning districts.

What are the keys to success and potential pitfalls?

Staff Resources: In Montana, TDR tools are not widely used because of the level of sophistication that is required to administer them, as well as the challenges associated with multijurisdictional coordination. A TDR program will likely require dedicated staff to set up and manage the program. Start-up money will be needed if a TDR Bank is created. Money to purchase development rights comes from developers rather than tax dollars. Depending on the preferences of the community, a TDR program can be organized wherein the community creates a development right "bank" and buys and sells potential development rights with landowners. Two advantages of this version are that neither preservation nor development has to wait for the other side to buy into the program, and the supply of credits never runs out. But trading in this manner requires government funding whenever the bank goes into credit "debt", and doesn't allow the development rights market to set its own price.

Technical Expertise: The design and administration of TDR programs is complex and costly and maintaining a market for density bonuses may be difficult. Land set aside for environmental protection, buffers, green space or trails must have restrictions or easements recorded on the deed before construction begins to make sure that they are not developed in the future. There are significant technical requirements for designing an effective TDR program. Sufficient research must be conducted to ensure the community is able to develop a proper program, and that it would benefit from this tool.

Market Conditions: TDRs only work when a demand exists for development rights. The feasibility of development incentives depends on buy-in from developers. This tool is intended to build development that is more in line with smart transportation and land use guidelines. Long-term growth expectations should assure landowners in the sending area that their development rights have lasting value. TDRs will not work in very rural areas where there is little or no development pressure on the area to be preserved.

Geographic Coverage: A TDR program can be run on any scale but works best over an area that includes both rural and urban areas. The scale will also be dependent on the ability of the managing agency or organization to create a successful program with enough credits to buy and corresponding need for development. For density bonuses and trip credits, the tool is generally used at the municipal level but could be used at a larger scale if issues of tax base and service delivery can be solved.

Public Education: Communicating the intent and function of TDRs to the public is very important, and may best be facilitated by outside technical experts such as state agency staff, nonprofit organizations, or private consultants. The cost of a good public education campaign will be well repaid when this tool needs to codified. Developers, landowners, and local agencies should be well aware of the technical details of any development incentive program. Potential participants should understand how they can earn approval for their development and to make sure potential buyers and sellers in the TDR program understand what they stand to gain and lose. In addition, adequate incentives must be provided to landowners before they will sell development rights.

Where has this strategy been applied?

Examples in Montana

  • Gallatin County Springhill Community: Enacted in 1992, the ranching community of Springhill in Gallatin County runs a mandatory town-wide TDR program designed to preserve its rural character. The program does not designate specific sending or receiving areas. Instead, the town is zoned for one house per 160-acre parcel and allows landowners to sell their development rights. When an owner purchases an additional right, construction is limited to 15 percent of the receiving parcel, and the remaining 85 percent are placed in permanent easement.

Examples outside of Montana

  • Montgomery County, MD TDR Program: In the 1970's, 110,000 acres of agricultural land in this rural Maryland county were downzoned. Ninety thousand of these acres are designated as a TDR sending zone. To date, more than 40,000 acres of TDRs have been purchased by the state, which are sold to developers who want to increase the density of projects in designated receiving areas.
  • New Jersey Pinelands Development Credit ("PDC") Program: The Pinelands program is known as one of the most ambitious, innovative and geographically extensive TDR programs in the country. Since its inception in 1981, the PDC Program has preserved 50,000 acres of the Pinelands region through the transfer of development rights.

How can I get started?

A first step in determining whether the local community should establish a TDR program is to convene leaders in the local business community and obtain input from them on the possible effectiveness and desirability of TDRs and related tools. Potential developers, current real estate managers, and representatives from the business community would be able to give insight into the appropriate incentives for encouraging their involvement in the program. If the reception towards this tool is weak or minimal, the time is not ripe to pursue this tool. If they are interested in the concept, they can offer valuable ideas for structuring a workable program.

Development incentives are most applicable in developing or redeveloping areas, but would serve any community poised for future development. Having certain tools in place before a density boom would allow a local community to coordinate land use and transportation before growth occurs. For instance, TDR sending and receiving areas must be designated in local plans and regulatory documents before the first deal can be made.

Where can I get more information?