Making A TDR Program Work

Prince William County is on the verge of instituting a Transfer of Development Rights (TDR) program is the Rural Area of the County. The first pass of the program was sent back to the Planning Department for reconsideration since the program was based on a “stale” consultant’s study from 2013.

In 2006 the General Assembly adopted enabling legislation for TDRs then amended the TDR law to allow for transfers across county-city lines and to remove a requirement that the transferred or severed rights from the sending area be immediately attached to another property to allow for “banking” of property credits.  In 2010, a model ordinance was created in Virginia, and though many localities explored creating TDR programs, as of 2016, only Frederick, Stafford, and Arlington counties had one.

In 2016 Jessica Lung, J.D and Michael Killius, J.D. of the Virginia Coastal Policy Center at William & Mary Law School did a study on TDR programs. Their report was titled “Tools for a Resilient Virginia Coast:Designing a Successful TDR Program for Virginia’s Middle Peninsula.” The Virginia Coastal Policy Center (VCPC) at the College of William & Mary Law School provides “science based legal and policy analysis of ecological issues affecting the state's coastal resources, providing education and advice to a host of Virginia’s decision-makers, from government officials and legal scholars to non-profit and business leaders.” What follows is a summary of their finding from their research and excerpts from their report.

It was found that many citizens viewed a TDR program as government interference with private property rights and the private market. Even though TDRs are often transacted through the private marketplace, local government serves as a third party to the transaction by enabling the program, determining the sending and receiving areas, and establishing the zoning law framework. Interestingly, a PDR program (already approved in Prince William County) involves more government entanglement with private property rights than TDRs: With TDRs, the government is merely a party enabling the private market transaction while with PDRs the government is the buyer. Moreover, funding for PDRs is often obtained through real estate tax levies on all landowners whereas funding for TDRs is obtained through a transaction involving a willing buyer and seller.

Having a significant portion of residential or any development in rural areas creates challenges for localities because rural areas lack the same level of infrastructure present in more urban and suburban communities. Construction in rural areas places a heavier burden on local governments to provide additional schools, transportation, and public water and sewer, among other services.

The TDR plan is designed to increase growth in specified urban areas of the county, often called the Urban Development Areas (UDAs). When development increases, so does the county's tax base. However, developers of homes or commercial operations in the rural areas of the county do not pay proffers or provide transportation improvements. The county must fund these expenses, making development in rural areas more costly to the county. UDAs can accommodate a higher density and more residential commercial growth than rural areas. When residential and commercial density increases within the UDA, and development shifts from rural areas to urban areas, the additional cost of services decreases, which alleviates financial stress on local government.

The research found that TDR program success depends on the existence of the following factors:

1. Strict sending-area regulations
2. Market incentives
3. Few alternatives to TDR
4. Demand for “bonus” development

They note that customized receiving areas are also a critical factor for success. According to their research, the most successful TDR programs exhibit at least three of these four factors. In other words it is essential that you craft a TDR where there is a demand and significant value to the bonus development rights and you do NOT give away those rights to other projects.

Successful TDR programs customize their receiving areas to their individual communities. Context is key and necessitates a “boots on the ground” approach accordin to the authors. Community stakeholders must buy into the TDR program, so the areas of the community receiving additional density should target the locality’s development goals.

Strict sending-area development regulations inherently increase the supply of TDRs. Several problems arise when a locality fails to strictly regulate its sending areas. Without strict sending area regulations, the development value of the property may exceed the value of the transferable development rights. As a result, the property owner can either charge more for the right (which could deter developers) or simply develop the property (against the goals of the TDR program). In either scenario, demand for TDRs decreases. To make the program work all development in the Rural Area beyond the 10 acre lots already approved and A-1 compliant use must be forbidden with no exceptions.

To combat this type of resultant market failure, Montgomery County, a poster child success story for a TDR program,  downzoned their sending areas from one unit per five acres to one unit per twenty-five acres. By downzoning, Montgomery County increased demand for TDRs amongst the development community. Montgomery County’s TDR program is now among the most successful TDR programs in the nation. However,  downzoning sending areas, much like downzoning receiving areas, can incite political backlash, depending on the political climate of the locality. Many opponents to such a downzoning may assert that it is a form of a government taking under the Takings Clause of the Fifth Amendment.

Demand Optimizing the “demand” side – the receiving areas and those seeking to develop within them was found to be trickier. For the TDR market to thrive and accomplish the locality’s policy goals, demand for development in receiving areas must exceed the supply of “exported” development rights from sending areas and they must be have adequate economic valuable to justify the effort to accumulate and consolidate development rights. The solution for Prince William County is obvious. All TDRs should be banked by the county for convenience of the purchasers. The TDRs must grant the right to develop additional data centers outside the data center overlay district, but outside of the Rural Area. In addition, TDR’s can be used to grant high density development near transportation hubs.