What Is a Transfer of Development Rights (TDR) Program?

The folks at New Jersey Future, a SmartGrowth advovacy organization, have a similar explanation (PDF).

What is a TDR program?

1. A TDR program seeks to preserve landowners' asset value by moving the right to build a house from a location where development is prohibited (e.g., for environmental reasons) to a location where development is encouraged.
2. Because the total number of houses ultimately built in the larger region does not go down as a result of simply moving the geographic location of the new homes, there should be enough money available overall to compensate landowners in the restricted area for any decline in their land value, without sacrificing the profits of landowners elsewhere.
3. The trick is to transfer part of the purchase price for land in a location where development is encouraged to a landowner in a place where development is prohibited.

Hey wait--how can somebody get a portion of the purchase price from the sale of a piece of land they do not own, in a location far from where they do own land? And why should they deserve this?

1. In the place where development is encouraged under TDR, zoning is changed to permit more units to be built. This generates the opportunity to earn more money from development than landowners would have received in the absence of the TDR program.
2. Because the money from this change in zoning is a windfall to current landowners in the development zone, the state is justified in laying claim to this money and turning it over to people whose development rights were taken away as a result of the environmental regulation.
3. If it works properly, nobody is any worse off financially than they would have been in the absence of the combined environmental/TDR program. But the new houses will be built in a less environmentally sensitive location, which is the government's main objective.

Sounds complicated. How does it work in practice?

1. Legally, the existing right to build a single house (for example) on one acre in the environmentally-sensitive area is "separated" from the land, meaning that the right to build no longer exists in that location, but can be purchased for use in another location. This involves placing a "deed restriction"* on the property, but also keeping track of the development right, its appraised value, and its original owner so that it can be sold for use elsewhere.
2. When a developer wishes to use the right in a town that has agreed to accept additional units, he/she buys the right and the original owner of the right is compensated. It is not necessarily a problem that landowners in the environmental (restricted) area must wait for their money, since they probably would not have sold their land immediately anyway. Because the development right is priced at the time of separation, however, it should presumably earn interest for the seller.
3. Often, a bank is set up to keep track of the development rights and accumulated interest, to manage transactions, and possibly to buy rights for sale later. The state has already established a State Transfer of Development Rights Bank; a Pinelands Development Credit Bank exists for that region.

What guarantee does the landowner in the restricted area have that he/she will eventually be compensated?

1. Most TDR programs do not include such a guarantee. Under the typical program, the landowner in the environmental zone faces two risks: (1) municipalities in the development zone might be unwilling to permit developers to build at a higher density, meaning that no new rights will be created for developers to buy; (2) even if municipalities are willing to increase densities, developer demand for these rights might not be strong enough to fully compensate landowners in the environmental zone.
2. These risks are present in the Highlands bill as well, although recent trends suggest that developer demand will be reasonably strong on the fringes of the Highlands preservation area. Managing these risks effectively in the Highlands will depend on TDR program design and local government decisions that have yet to be finalized.
3. Here are two ways that TDR risk might be managed:
   1. The TDR bank could divide the proceeds from any individual sale among all of the landowners who severed their rights. That way, all sellers would share the risks equally, getting a small piece of whatever money comes in from developers. In the absence of such a plan, sellers would be compensated in the order in which they entered the program. This order could be regarded as arbitrary, especially if development was prohibited across a large area all at once.
   2. Alternatively, the State may simply decide to purchase all of the development rights at their appraised value and hold them in the bank until buyers can be found. Under this plan, the State bears all of the risk arising from a weak market for the rights. Obviously the State would need to dedicate funding for this purpose. Nonprofit conservation organizations may also wish to buy rights to retire or resell. Having a bank makes these schemes easier.

Two important definitions

1. Sending zone: The environmental protection zone where development rights are separated. It is called a sending zone because the development rights are "sent" out of it. In the case of the Highlands bill, the sending zones are likely to be in the preservation area.
2. Receiving zone: A zone where a developer buys a right to build more units than currently permitted in the local zoning ordinance. These zones "receive" development rights. In the case of the Highlands bill, the receiving zones are likely to be in the planning area, with a few receiving zones outside the Highlands Region.

New Jersey Future provides two diagrams that show graphically how all this works (PDF).

*The legal deed to the property is revised so that the right to build a house is removed in perpetuity, even if the entire property is sold.