Transferable Development Rights

Many communities on the urban fringe are implementing a range of policies to preserve farmland and open space, cluster residential development, and guide development to areas with existing infrastructure. These efforts are an attempt to control overall growth and the concomitant loss in open space and also to counter a trend toward the so-called large lot development that often takes place in these areas. Planners have argued that policies to manage density are the most important local policy focus for urban areas in the coming years. It is possible that large lot development and sprawl are themselves the result of government policy. Most local governments use zoning to establish minimum acreage requirements for each residential dwelling unit; in ex-urban localities, these limits are often quite high. Developers might build a subdivision with average lot sizes greater than the minimum but they cannot by law go below it. Some researchers have argued, however, that the spatial patterns of development are simply the natural result of household preferences and market forces. In this paper, we address the question of whether zoning limits are the primary cause of lowdensity, sprawling development or whether market forces tend to dictate this outcome. If zoning limits account for low-density development in at least some cases, how would development patterns be different if there had been no such rules? We begin by constructing a simple model of the developer decision about the density of new development. The subdivision is the unit of observation, and developers must weigh both demand and cost considerations in choosing density, in addition to complying with zoning restrictions that vary across parcels. We apply the model using parcel-level data from a region where zoning rules vary but are exogenous to the period under study. Calvert County, Maryland, near Washington, DC, is an historically rural county that has experienced rapid growth in recent years. The county has a transferable development rights (TDRs) program that has led to a great deal of variability in the intensity of development across properties. We are able to not only examine the extent to which zoning has contributed to large lot development but also to determine the economic forces that underlie density decisions. Finally, we are able to forecast how density would have been different in the absence of zoning rules by estimating a Tobit equation that is censored for the observations constrained by zoning.

See id. at 64 ("[T]he attractiveness of TDR is held to be the equitable treatment it affords landowners. Specifically, it avoids arbitrary rationing of gains from development associated with direct controls. [T]DRs are assigned on some equitable basis and the land market (working within the constraint of whatever direct controls may remain) determines the most efficient use for every parcel."). 7 See infra Part I (discussing history and regulatory structure of New York City's TDR programs).

Local jurisdictions in 36 US states have implemented Transferable Development Rights (TDR) programs to provide a market-based approach to preserving farmlands and open space while redirecting future development to targeted areas. Participation in TDR programs involves transaction costs which are costs over and above paying for TDR credits. Planners know little about the magnitude of transaction costs, who, if anyone, incurs a disproportionate share of these costs, or how transaction costs impact TDR participation. We estimated the magnitude and distribution of transaction costs incurred by participants in four county-wide TDR programs in Maryland, a TDR pioneer, by interviewing multiple participants in these programs. We found that total transaction costs were high and borne largely by private sector participants, although we excluded initial public-sector costs of establishing the programs. Total transaction costs ranged from 13% to 21% of total TDR costs per transaction. Our findings were based on data reported by participants and may not be scalable; transaction costs, however, might deter landowners from participating in TDR programs, thus thwarting the land-use goals of planners. Takeaway for practice: Planners should work to reduce transaction costs by better constructing TDR programs and providing greater information on TDR sale prices and potential buyers and sellers. Lowering, and more fairly, distributing transaction costs will make the TDR program a more successful approach to achieving land-use goals and addressing the externalities arising from land-use markets.

Many communities on the urban fringe are implementing a range of policies to preserve farmland and open space, cluster residential development, and guide development to areas with existing infrastructure. These efforts are an attempt to control overall growth and the concomitant loss in open space and also to counter a trend toward the so-called large lot development that often takes place in these areas. Planners have argued that policies to manage density are the most important local policy focus for urban areas in the coming years. It is possible that large lot development and sprawl are themselves the result of government policy. Most local governments use zoning to establish minimum acreage requirements for each residential dwelling unit; in ex-urban localities, these limits are often quite high. Developers might build a subdivision with average lot sizes greater than the minimum but they cannot by law go below it. Some researchers have argued, however, that the spatial patterns of development are simply the natural result of household preferences and market forces. In this paper, we address the question of whether zoning limits are the primary cause of lowdensity, sprawling development or whether market forces tend to dictate this outcome. If zoning limits account for low-density development in at least some cases, how would development patterns be different if there had been no such rules? We begin by constructing a simple model of the developer decision about the density of new development. The subdivision is the unit of observation, and developers must weigh both demand and cost considerations in choosing density, in addition to complying with zoning restrictions that vary across parcels. We apply the model using parcel-level data from a region where zoning rules vary but are exogenous to the period under study. Calvert County, Maryland, near Washington, DC, is an historically rural county that has experienced rapid growth in recent years. The county has a transferable development rights (TDRs) program that has led to a great deal of variability in the intensity of development across properties. We are able to not only examine the extent to which zoning has contributed to large lot development but also to determine the economic forces that underlie density decisions. Finally, we are able to forecast how density would have been different in the absence of zoning rules by estimating a Tobit equation that is censored for the observations constrained by zoning.

Economists have long argued that systems of marketable permits are a cost-effective means of regulating externalities. Though these ideas have only recently been implemented in the field of pollution control, transferable development rights (TDRs) have been used for decades by city planners in many locales. Most opponents of permit trading contest the granting of property rights to the originators of harmful effects on ethical grounds, and rarely argue that such schemes increase the total external harm. This paper formalizes the second argument by showing that in a partial equilibrium model of urban zoning, replacing a uniform height zoning rule with a TDR system can lead to greater overall development.

Economists have long argued that systems of marketable permits are a cost-effective means of regulating externalities. Though these ideas have only recently been implemented in the field of pollution control, transferable development rights (TDRs) have been used for decades by city planners in many locales. Most opponents of permit trading contest the granting of property rights to the originators of harmful effects on ethical grounds, and rarely argue that such schemes increase the total external harm. This paper formalizes the second argument by showing that in a partial equilibrium model of urban zoning, replacing a uniform height zoning rule with a TDR system can lead to greater overall development.

Local jurisdictions in 36 US states have implemented Transferable Development Rights (TDR) programs to provide a market-based approach to preserving farmlands and open space while redirecting future development to targeted areas. Participation in TDR programs involves transaction costs which are costs over and above paying for TDR credits. Planners know little about the magnitude of transaction costs, who, if anyone, incurs a disproportionate share of these costs, or how transaction costs impact TDR participation. We estimated the magnitude and distribution of transaction costs incurred by participants in four county-wide TDR programs in Maryland, a TDR pioneer, by interviewing multiple participants in these programs. We found that total transaction costs were high and borne largely by private sector participants, although we excluded initial public-sector costs of establishing the programs. Total transaction costs ranged from 13% to 21% of total TDR costs per transaction. Our findings were based on data reported by participants and may not be scalable; transaction costs, however, might deter landowners from participating in TDR programs, thus thwarting the land-use goals of planners. Takeaway for practice: Planners should work to reduce transaction costs by better constructing TDR programs and providing greater information on TDR sale prices and potential buyers and sellers. Lowering, and more fairly, distributing transaction costs will make the TDR program a more successful approach to achieving land-use goals and addressing the externalities arising from land-use markets.