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List of stories about Growth Management Act in San Juan County

TDR Programs "Unproven" in rural counties

posted 2000
Prosecutor Randy Gaylord has advised the County Commissioners that transfer of development rights programs are "unproven" in rural Washington counties. Gaylord has advised the commissioners to proceed cautiously and not to link the "transfer of development rights" (TDR) concept to the map changes that are in the final phases of consideration by the commissioners.

Two other rural Washington counties developed TDR programs: Island and Clallam. "Both of these have turned out to be failures," says Gaylord.

According to Gaylord, there are two ways to think of TDRs. "One way to think of TDRs is as a non-governmental compensation scheme, a way of shifting money from one segment of the community to another."

"This is the kind of thing that sounds good in an ivory tower or a think tank, but when you try to make it work, it falls apart. I have read the literature and challenge others to show me a system that works as a compensation scheme. I have yet to find it."

When used as a compensation scheme, Gaylord notes that the people that would be hurt most by TDR programs are those purchasing new moderate- and low-income housing. The people who would benefit most are property owners of large estates who have no desire to subdivide or have high costs of development.

"If the goal is compensation, it would be more fair and efficient to use the social security model of taxation and redistribution of wealth," says Gaylord.

The second way of thinking of TDRs is as a financial incentive for land use planning. This is the approach King County has taken. But it will take a new department in the County to make this work. "The difficulty is in the details," says Gaylord. In predominately rural counties where most of the growth is in single family homes, finding "receiving areas" for a TDR program is very problematic, and educating the individual home builders is difficult.

Proponents have justified TDRs as an equalizer for fairness and equity. But TDRs simply create another set of problems. Maintaining the market for TDRs is one of them. "People will be angry if we promise compensation in the free market that doesn't meet their expectations." The only way to correct that, says Gaylord, is for the County to become a "market maker" by buying and selling TDR certificates.

Another unfair aspect of TDRs is that the certificate is issued to each landowner based on a lost development right without regard to the cost of development. "That means the landowner that must incur $100,000 to develop a lot is given the same number of certificates as a landowner that must incur just $10,000 to develop a lot." The certificates issued have no bearing on the cost of development. This creates a huge windfall for the person who would never have developed due to the cost of development.

TDR certificates should not be required for moderate and low cost housing, according to Gaylord. "Adding more expenses where land costs are already the highest in the state runs against the goals of the Growth Management Act."

To read the prosecutor's written report on TDRs, please call 378-4101 or visit the prosecutor's web site at www.co.san-juan.wa.us/prosecutor and click on "News Releases."

Report to BOCC from Randall K. Gaylord, Prosecuting Attorney RE: Transfer of Development Rights Program

Introduction

There have been many meetings of the Board of County Commissioners in which the concept of transfer of "development rights" or "development credit" programs have been discussed. As of this date, there has not been a board majority who has asked for the planners to research or our office to provide guidance on this topic. But last week, Commissioner Evans and Commissioner Nielsen separately identified "TDRs" as worthy of further discussion.

I have previously provided to you copies of the 1992 Publication from the State of Washington Department of Community Development entitled Evaluating Innovative Techniques for Resource Lands, Part II, Transfer of Development Rights. Since the 1980s, many communities have considered and adopted programs for the transfer of development rights (TDRs), some successful, some not.

The purpose of this memorandum is to answer questions regarding TDRs and to express caution and guidance for further consideration of TDRs. I hope this will aid your discussions and I welcome the opportunity to discuss this with you in more detail.

FREQUENTLY ASKED QUESTIONS AND RESPONSES

What Are TDRs?

TDR is a government authorized program to use financial incentives to direct land use control and development. In a TDR program, the fee interest of land is divided into parts and a certificate is created for that portion of the fee that allows certain development (usually residential development or "density"). This certificate (like a deed) can then be sold to others. The local government controls who can sell and who can purchase certificates. Sellers are located in "sending areas" which are areas targeted for preservation and loss of development rights. Buyers are located in "receiving areas," and, as a condition to allowing certain development, must obtain a TDR certificate from a seller.

Most TDR programs are an "overlay" to traditional zoning; that is, they augment and provide additional incentives that lead to a development option that is a bonus which is allowed by law.

Sending areas are preservation zones that encompass the quality the local government desires to protect under the police power, which includes agriculture, open space, historic structures and critical areas. The experience has been it is relatively easy to identify sending areas.

Receiving areas are designated as the areas where development is desirable There are two levels of development in the receiving zone. The first is the base use; that which can be achieved without a TDR certificate. The second is the bonus or higher level that is allowed with the certificate. Locating receiving areas is viewed as the most difficult step in setting up a TDR program.

What Is an Example of How a TDR Might Work?

Janet's farm is in an area that has been designated as a "sending area." The current zoning is one dwelling unit for every two acres. As part of the GMA, her property is down zoned to one dwelling unit for every twenty acres, a loss of nine dwelling units. The County issues Janet nine TDR certificates, one for each unit.

Bob owns a five acre undeveloped parcel inside an urban growth area that allows four units per acre (twenty units). The County has designated Bob's property as a "receiving area" that may be developed at up to eight units per acre with a TDR certificate. Bob wants to develop duplexes at eight units per acre.

If Bob acquires Janet's certificates, he can apply them to his land and receive a permit to build housing at twenty-nine units, a bonus of nine units. If Bob acquires an additional eleven certificates, he can develop at the maximum of forty units.

Who Identifies Sending and Receiving Areas?

The Board of County Commissioners. The Board may develop a process for identifying such areas that includes public participation from the Planning Commission, Technical Advisory Committee and others.

The act of identifying sending and receiving areas may create an issue of spot zoning, if the benefits of the action are not spread broadly through the community or if the program is enacted to benefit just a few landowners.

The experience from Seattle is that their program needs about three to five times more potential receiving units than potential sending units to make the program work at a rate of $10,000 per unit.

Must the Receiving Areas Have a Base Development Potential That Is Consistent with the GMA?

Yes. For example, a receiving area located inside an urban growth area must be capable of being divided at urban levels (four units per acre). The TDR development would only be allowed as a bonus to this base amount. A TDR program that allowed bonus density in which rural lands could develop at urban densities would not be compliant with the GMA. Kitsap County Citizens for Rural Preservation v. Kitsap County, CPSGMHB No. 94-3-005, fn.6 (10/25/94) (dicta stating that cluster ordinance which allows urban densities in rural areas is in violation of GMA); OEC v. Jefferson County, WWGMHB, No. 9402-0017 (CO 8/17/95) (holding allowance of TDRs from resource land to rural land without a density cap for a cluster development did not comply with GMA).

Is the Adoption of a TDR Program Required by the Growth Board Order or the Growth Management Act?

No. The Growth Board Order is silent on TDR programs. The Growth Management Act only mandates TDR programs where agriculture lands are located within the exterior boundary of an urban growth area. Planned unit developments, cluster housing, and TDRs are all mentioned by the GMA as optional planning measures. RCW 36.70A.090.

The Board Order requires the County to make its maps consistent with the Comprehensive Plan, which will require down zoning. The Comprehensive Plan states as part of any down zoning, TDRs would be considered, and voluntary means are preferred over legislative means. CP § 2.2.A.10.

Why Would Anyone Develop at a Level Greater than the Base Density Allowed under GMA?

In general, developers would have a financial incentive to negotiate for and purchase TDRs when their profits from the more intense development exceed the cost of the TDR certificate.

How are TDR Certificates Exchanged?

It is expected that TDR certificates would be exchanged, traded and conveyed much like real estate. It is expected that real estate brokers would assist in such conveyance, for a fee. The sale and receipt of TDRs would be recorded with the auditor so that development rights could be "tracked."

How Will the Price for TDR Certificates be Established?

The price will be the amount that a willing buyer will pay and a willing seller will accept. That is the "market price." The price will be established in the market under the principles of supply and demand. Some communities have created a "TDR Bank" that acts as a "market maker" by purchasing and selling TDR certificates when there is no apparent market. In other rural counties, one of the major problems in creating a viable TDR program is that the certificates have had little or no market value. For example, in Clallum County a recent appraisal of a property with TDR rights valued those rights at zero dollars.

Caution: Do not confuse a "TDR Bank" with the San Juan County "Land Bank." It would not be appropriate to use the San Juan County Land Bank for maintaining a market in TDR certificates without adequate evidence of (1) the value of each certificate, (2) that the property protected by the acquisition of the certificate meets the mission of the Land Bank, and (3) the property restricted through the sale of the certificate meets the definition of "conservation area" under the Land Bank charter.

Does the Sale of a TDR Certificate Compensate Landowners for the Full Market Value of the Loss of the Development Right?

No. The price that will be paid for a TDR certificate has no relationship to the cost of land or market value of the loss of the development right. A TDR certificate is issued regardless of the cost of land, cost of development, the market value of the development right, or the intent of the owner to actually develop the property.

The price paid for the certificate is based on the number of certificates on the market, and the price purchasers are willing to pay. This leads to great inequities as the same number of certificates is issued to the person who would incur $10,000 to install roads and utilities as it would to a person who would have to incur $1,000.

Is a TDR Program a Compensation Plan or a Land Use Planning Tool?

It depends on your perspective. The first and foremost objective of the program should be good land use planning. The program should be viewed as a means to provide financial incentives for land use planning. Although protecting "equity" has been mentioned by proponents of TDR programs, the experience of existing programs is that they do not come close to compensating for changes to value or "equity" when government imposes regulation on the use of property. A planner for the Seattle program strongly advises against using a TDR program with a goal of providing "equity" or compensation.

Do TDRS Result in Takings of Private Property?

Probably not. The Pinelands, New Jersey, TDR program has survived court challenges to the implementation of a TDR program under the takings clause and the National Environmental Policy Act. See, e.g. Hovson's, Inc. v. Secretary of Interior, 519 F. Supp. 434 (D.N.J. 1981), aff'd 711 F.2d 1208 (3rd Cir. 1983). Cf., Suitam v. Tahoe Regional Planning Agency, ____ U.S. ____, 137 L. Ed. 2d 980 (1997).

Will the Cost of a TDR Certificate Increase the Price of "Affordable Housing?"

Yes, if the TDR certificate is a precondition to a permit to construct affordable housing at higher densities or if affordable housing projects are located in "receiving areas." In response to comments from affordable housing advocates in the Seattle area, affordable housing builders were not required to purchase certificates before their development would be approved.

How Is a TDR Program Administered?

To be successful, a TDR program must be rigorously enforced and administered in a methodical fashion. The agency charged with implementing and operating the TDR program must have the technical ability to design and operate it. When implemented, the agency will also be relied upon to handled the program's operation and enforcement of the development restrictions. I would envision that it would take a two or three person staff similar to the Land Bank to operate the program. Based on our experience with the Buck Mountain Development Agreement, the program should not be administered through existing departments without the commensurate increase in staff.

Can a TDR Program be Terminated Once it is Initiated?

Once a TDR certificate is created, it represents fixed interest in property. If through government action the use of that certificate was canceled or terminated by action of the County, the County would risk having to compensate the holder of the certificate. That action could be construed as taking all economic value of the certificate and require just compensation as a takings. The actions of the County that might arguably lead to a taking would be termination of the program administration, failure to enforce the program (leading to loss of value in certificates), elimination of the receiving areas, and authorizing other methods for property owners to obtain the bonus development otherwise allowed only by a TDR certificate. See, Fred F. French Investing Co. v. City of New York, 350 N.E.2d 381 (N.Y.1976).

What Are Some of the Advantages of a TDR Program?

TDR programs offer an alternative means to protecting land beyond the zoning required under the GMA. TDR programs can protect resource lands without incurring public money to purchase such lands or the development rights. TDRs may spread the cost of resource conservation to others. TDRs add flexibility.

What Are Some of the Limitations of TDR Program?

A TDR program has high startup and administrative costs. The program may not generate transactions (for example, Island County generated two transactions in the first seven years of operation). Designing an effective program requires an in-depth understanding of local housing markets that may exceed the capability of many small communities. As with any voluntary program, the results will likely be a patchwork of preserved and developed land. Residents and elected officials in receiving areas may object to higher development levels in their communities.

What Are Some Basic Guidelines for How a TDR Program Might Be Implemented?

A TDR program must be simple to understand and simple to administer, especially at the outset. It is best to start simple and add more complex components later. Starting with a complex program invites failure.

A TDR program should complement other land use conservation techniques such as cluster housing, planned unit development, open space tax programs, and acquisition of conservation land through a land bank or with conservation futures.

An active housing market and demand must exist. Transfers should not occur only in rural and resource lands where bonus development is discouraged.

Landowners must have an incentive to sell TDR certificates.

Housing builders must have an incentive to buy TDR certificates.

A TDR program must recognize limitations in receiving areas created by concurrency requirement. Lack of concurrency will effectively dampen the market for TDR certificates as there is no value to a certificate if the public facilities to serve the development do not exist.

A public education program for all those affected is critical. It should be undertaken from the outset of the program formation and must continue if certificates are to have any value.

What Has Been the Experience of TDRs in Other Communities?

TDRs were first proposed in 1961, but the concept was not seriously considered until the 1970s. By 1987, approximately fifty jurisdictions throughout the fifty states had TDR programs, but perhaps only a dozen actually had a transfer take place.

The programs viewed as most successful are located in Montgomery County, Maryland, the New Jersey Pinelands program, and the Boulder County, Colorado, program.

Because of the limitations created by the GMA, programs in Washington State are of greater interest. In Washington, TDR programs have been implemented in Island County, Clallam County (Ord. 643-1998), King County, Seattle and Redmond (Ord. 18-73). The Island County and Clallam County programs have had little success. In Island County, between 1984 and 1992, sixty-one certificates were issued of which only two were applied to receiving areas protecting sixty-one acres through a conservation easement.

The King County program was authorized in 1994, and it took five staff planners about eighteen months to work with technical advisory committees to develop the regulations, start a public information campaign and implement a pilot program. The program has been operating since 1998.

The City of Seattle and City of Redmond also have a program. The City of Seattle program has just one receiving area: the Denny Triangle.

For details of the Island County, Clallam County and King County programs, I strongly urge that you invite the persons responsible for these programs to describe the programs and the issues that they have faced in implementing the programs at a public workshop.

What Reasons Against a TDR Program Did the Prosecuting Attorney Discuss with the Planning Commission?

While the TDR program is attractive, even elegant, in theory, the implementation of the program has proved difficult and cumbersome, and in Washington State is unproven. Good land use planning relies on established programs that work, such as large lot size, planned unit developments and cluster programs.

Depending on the design of the program, it has the potential to shift wealth from those least able to pay – first time home buyers – to large, wealthy property owners. This would have the undesirable effect of increasing housing costs for those least able to pay.

I foresee great potential for the program to create as many inequities as it is designed to counter because there is no connection between development costs and property values and the price of certificates. Why should a person with high cost of development receive a certificate of equal value to a person who has low development costs? Why should a landowner whose property is valuable as a large lot estate and would likely never be subdivided obtain a certificate when there is no loss to the value of their property as a consequence of down zoning? Why should a person be able to obtain and sell a certificate when they cannot show that they have lost value from the County's action?

To date, nearly all the discussion has been toward identifying sending areas – that's the easy part. Identifying receiving areas is more difficult because the overwhelming residential development in San Juan County is single family residences, not multi-family. It is not appropriate to identify receiving areas as existing single family zones, including rural lands, as it is not appropriate to establish a "bonus density" on rural lands (unless they are located in AMIRDs) because they do not have sewer and water systems. If receiving areas become only the few multi-family zones of the county UGAs, it will increase the cost of housing in the affordable and middle income categories, contrary to GMA goals.

There has been no discussion of the costs of administering and enforcing such a program, including startup costs or ongoing expenses of education and program administration. This should be evaluated, as a TDR program cannot be simply assumed by existing departments.

Although a TDR program sounds like a "free market" alternative to compensate landowners, it is a highly regulated market. The County indirectly controls the market by the decisions it makes with respect to sending and receiving areas, and as such it creates a regulated market in TDR certificates. This substantially increases the complexity of the program and understanding of the factors that make it work or not work.

If the County chose to discontinue or modify the program in the future, it may be liable to pay for takings and acquiring all certificates that are issued and outstanding.

Finally, if preserving open space is the goal, this goal can be accomplished through a clustering bonus program using base densities that are consistent with the minimum densities approved by our Comprehensive Plan and the Growth Board decisions.

What Is the Next Step If the Board of County Commissioners Wants to Consider a TDR Program in Connection with its Response to the Growth Board Order?

I would recommend that the commissioners proceed in a deliberate step-wise fashion. The first step, to occur at the time of adoption of the response to the Growth Board Order, would be to direct that TDR implementation be placed on the work plan, and prioritize this for the Planning Department. I strongly recommend against attempting to draft a program in the time that remains to comply with the Growth Board Order. The City of Seattle had five people working about eighteen months to develop the materials to implement their program. A successful program requires a great deal of public participation in drafting the program and educating the public, developers and others about how the program will work. Every community that has adopted such an ordinance in Washington has made it part of an ordinance enacted after the response to the Growth Board orders, which is consistent with our recommendation.