Transfer of Development Rights

Introduction to TDR Programs

Transfer of Development Rights (TDR) programs create market incentives to shift development away from areas where it is discouraged (called “sending areas”) to areas where development is preferred (called “receiving areas”).^{See footnote 1} Sending areas typically include undeveloped areas with natural resource or agricultural value, and receiving areas are typically urban and suburban areas with existing services and infrastructure where additional growth and development can be accommodated. Local governments, like counties and towns, generally designate sending and receiving areas using zoning ordinances and maps. Under a TDR program, landowners in a sending area can choose to sever and sell some or all of their unused development rights from their property as “TDR credits.” In selling TDR credits, landowners agree to forgo development and preserve their property through a conservation easement. TDR credits can be bought and sold as a tradable commodity separate from the land itself. Separated TDR credits are typically sold to developers in receiving sites, who can then use the TDR credits to increase the density of proposed development above base zoning standards in the receiving area. 

Property owners in sending areas are encouraged to participate in TDR programs because they can often receive two types of financial incentives: a payment (at the prevailing market price) for their extinguished development rights; and tax cuts or exemptions by dedicating parts or all of their land to conservation uses. Property owners in sending areas may also be motivated to participate due to the knowledge that they are contributing to conservation efforts in their communities. Developers in receiving areas can benefit from the purchase of TDR credits to maximize project outcomes and returns on investment. For example, by acquiring a requisite number of TDR credits, developers can increase the number of dwelling units or parking spaces in a housing development to provide more homes for people and increase their own profits. As envisioned, developers will ideally recoup the initial costs allocated to purchase TDR credits by enhancing the density or other features of their projects. 

All TDR programs can require short-term start-up investments and long-term administration costs. Although most TDR programs share these common components, each program is different and tailored to meet local context. In addition, four programmatic differences are noted here for their application to thinking about managed retreat (see below). First, TDR programs can be managed by governments — typically at the county or municipal level — or third-party entities, like nonprofits or consultants. Second, TDR programs can operate on different scales, for example, within a single municipality or county jurisdiction, or across multiple jurisdictions. Third, TDR programs can be mandatory or voluntary; however, for purposes of this toolkit section on market-based — compared to regulatory — tools, only the latter will be discussed. Fourth, programs can be structured as “TDR banks” or through sales directly between property owners and developers seeking credits on a project-by-project basis. With a TDR bank, developers purchase TDR credits from a government or third-party entity instead of directly from landowners. A TDR bank can make programs more predictable and manageable for both landowners and developers. Government staff, however, are needed to administer both types of program structures. 

TDR Programs in a Managed Retreat Context and Legal Considerations 

In a managed retreat context, TDR programs could be used in two primary ways. First, governments could use TDR programs to transition or create disincentives for new development in vulnerable coastal sending areas by transferring TDR credits to increase density in more inland or higher ground receiving areas. The sale of TDR credits could also encourage property owners with already developed lots to remove or relocate structures that could act as barriers to the inland migration of coastal habitats being inundated by rising seas and unable to adapt in their current location. At present, however, there are few examples of TDR programs in the U.S. that were or are being created for the explicit purpose of managed retreat. 

While there are some TDR programs that exist to protect coastal ecosystems, sea-level rise will present novel legal and policy questions that decisionmakers, particularly at the local level, will have to factor into the design of these programs to implement managed retreat. Importantly, local governments will have to evaluate whether they have the legal authority to create TDR programs for managed retreat. Most TDR enabling statutes were likely written before policymakers and communities started thinking about using them in a managed retreat context. Depending on how each statute is written, governments will have to determine whether current statutory language is broad enough to cover these types of programs; if not, statutory amendments may be needed. In addition to specific statutory authorizations in land-use and zoning enabling statutes, local governments, particularly in home rule compared to Dillon Rule states, may be able to rely on their plenary police powers to establish a TDR program. In Dillon Rule states, state legislatures must delegate specific powers to local governments compared to home rule states, where local governments may have broader powers. 

Similarly, the coastal impacts of climate change will often extend across jurisdictional boundaries at the local level and may necessitate regional or cross-jurisdictional adaptation strategies, especially for managed retreat. Many existing examples of TDR programs only operate within a singular jurisdiction. Accordingly, state and local governments may have to evaluate how they can create programs that can operate at a regional or cross-jurisdictional level. State and local decisionmakers should first determine whether local governments have the authority to transfer TDR credits across jurisdictions; if not, potential statutory amendments may be needed. 

The intermunicipal transfer of TDR credits may also implicate other legal and policy considerations regarding potential revenue shifts across sending and receiving areas. Specifically, sending areas may experience a loss in property tax rateables (i.e., for properties protected by conservation easements), and receiving areas with increasing populations may need to fund investments in supporting infrastructure and community services. For receiving areas in particular, the price of TDR credits may not be sufficient to support these additional costs. State and local governments should consider ways to mitigate these potential impacts on both sending and receiving areas in order to encourage and facilitate their participation in TDR programs. Local governments — with either or both sending and receiving areas — will also have to assess whether TDR programs are compatible with their existing local plans (e.g., comprehensive plans, longer-term visioning or strategic plans) and land-use and zoning ordinances, or whether they can and should be amended to accommodate new zoning designations (e.g., for open space) and density requirements (e.g., upzoning receiving areas). 

In addition to questions about legal authority and the intermunicipal transfer of TDR credits and revenue sharing, local decisionmakers should consider how they can structure effective financial incentives in this unique context. Most existing TDR programs have financial incentives that direct development away from more sparsely populated, presumably more affordable rural areas to denser, more expensive urban areas. This difference in property valuation and densities can create a demand for increased density that drives the sale of TDR credits. In contrast, coastal sending areas, while vulnerable to climate change, are likely highly desirable areas supported by strong real estate markets. It could be more challenging for governments to create the right types of and price for market incentives to encourage people to phase out development in more expensive areas with a greater demand for development and increase development in an area with a lesser demand for increased density. Moreover, many coastal properties, particularly in urban areas, are likely to have smaller lot sizes with less acreage to sever development rights from sending areas, unless TDR allocation ratios are adjusted to establish a meaningful incentive even for small lots with less development potential. For example, governments can choose to incentivize conservation by awarding more TDR credits than the number of development units a parcel would allow. In the absence of effective TDR ratios though, there could be potentially less of a supply for TDR credits in these sending areas. 

Policy Tradeoffs of TDR Programs

Practice Tips

When implementing TDR programs in a managed retreat context, decisionmakers may consider the following practice tips to address and balance different policy tradeoffs:

• Innovate and be flexible at the local level: Local governments interested in coastal TDR programs for managed retreat should consider opportunities to pilot the design of programs and engage communities to inform their development and implementation. For example, Miami-Dade County conducted a TDR program study and the City of Norfolk, Virginia is piloting a new type of TDR program through its land-use permitting regulations. While local governments can look to existing TDR programs, like in King County, Washington, for transferable takeaways and lessons learned, TDR programs in this context may require some innovation, in addition to the flexibility to adapt to changing local needs, physical impacts, and market conditions. In particular, regional or cross-jurisdictional programs may require creative brainstorming to minimize administrative and economic costs. 

• Work with state legislatures: Given the unique and somewhat novel context of coastal TDR programs for managed retreat, local governments should work with their state legislatures to consider updating or amending TDR program enabling statutes to give them the explicit power to create TDR programs to adapt to sea-level rise and other coastal and climate impacts. For many local governments, particularly in home rule states, police powers for actions that protect the public health, welfare, and safety of residents may be broad enough to cover this type of program; however, clear statutory authorizations can encourage governments to consider this type of market-based tool by eliminating uncertainty about a local government’s legal authority. New York State’s TDR program statute can serve as one example for other states. Local governments interested in designing regional or cross-jurisdictional TDR programs for managed retreat can also work with their state legislatures to evaluate potential legal options to transfer TDR credits across jurisdictions. Statutory solutions can possibly minimize the administrative and economic costs of TDR programs — particularly for property tax losses in sending jurisdictions and funding to support infrastructure investments in receiving communities — and maximize the economic and environmental benefits by enabling these programs to be implemented on a governmental scale that corresponds with an appropriate scale of physical risk. 

• Plan for and make investments in receiving areas: Municipalities serving as receiving areas with increasing density and housing will necessitate long-term planning and investments in infrastructure and community services. Proactive planning efforts and dedicated funding to support these investments, like in Washington State, can help to minimize the administrative, economic, and social costs of TDR programs. For example, local governments can engage residents in planning and visioning exercises to allocate new growth in a way that is consistent with maintaining community character and enhancing community priorities. Since the money generated by the sale of TDR credits typically does not account for these costs, state and local governments should evaluate potential opportunities for additional revenue to advance these purposes, particularly on a regional level.

• Build public-private partnerships: Local governments can build various types of partnerships to offset some of the administrative, economic, and social costs of TDR programs for managed retreat. For example, regional partnerships with other municipalities or county or state governments to set up a TDR bank can lower costs by distributing them across more entities and creating larger-scale, more sustainable markets for TDR credits. In addition, public-private partnerships with universities or nonprofits could be used to collect localized data to identify and designate sending and receiving areas and engage communities in these discussions.