Monday, February 06, 2006

Transfer of Development Rights

The Virginia Senate last month unanimously approved legislation allowing localities to establish 'transfer of development rights' (TDR) programs, and the Virginian-Pilot likes it.
'Cities would designate areas where growth would be discouraged, and areas where it would be encouraged, and landowners would then be free to move the rights to build houses from place to place.
It would give cities far greater control over how much gets built where — allowing them to concentrate houses around light-rail stations, for example — instead of working through the sometimes cumbersome current process. It also allows cities to protect land that needs protection, like between a naval air base and a practice field, without making victims of the landowners or costing taxpayers an arm and a leg to buy property rights.'
Meanwhile, Arlington County this month is looking at creating a TDR program as part of its zoning ordinance, empowered by legislation the General Assembly passed last year. That enabling legislation expires in 2008, though.


At 9:25 AM, Blogger Ray Hyde said...

I'm going to say it again. In 1986 Fauquier county eliminated more than 90% of development "rights". these were rights previously established by the county. Now the county has a program whereby they will buy development rights for the purpose of letting them expire by transferring them to a non government agency. In addition it appears we will soon have another law that recognizes the value of development rights by allowing them to be sold.

What happened to the value of the rights that were eliminated? Doesn't this put the government in an ethical bind?

The remaining development rights are restricted to 15% of the property, but if the county buys them, they will insist on a conservation easement on the entire property. How can that be? If this occurs isn't the county merely trying to perpetuate and solidify the previous theft?

Suppose the government bought police cars and then mothballed them. The populace would scream bloody murder, but that is exactly what the county is doing with the development rights it purchased. For any other unused government property the policy is to auction it off. The county doesn't want to do this with development rights because there is no place in the county where development is desired, and the primary reason is that they don't want to have to provide the school seats, which are independent of location.

Finally, say you have a development right; that could easily translate into a $500,000 home. If the home appreciates only 5% a year that would be $25,000 the first year. True, you would have to invest another $300,000 or so to get that appreciation. But that means the development right is worth $200,000 or $10,000 per year. (OK, this is still a simplification, call it a third of that.) Your development right is still worth $3300 per year, if you think the appreciation will be only 5%.

The county is offering $30,000 for a development right, for eternity. You would have to be nuts to take that deal, especially since the land that is protected would be more than ten times the land associated with the development right.

So, now I'm a builder and I have permits to build a 10 unit development. If I go out and buy, on the open market, development rights, is the government going to guarantee that I can use them? Don't you think there will be a public hearing where a few hundred people will show up to protest this extreme density?

I think transfer of development rights is a great idea, but they need to be retroactive to 1985, in order to clean up the ethical mess the government has created.

At 9:30 AM, Blogger Ray Hyde said...

Suppose I don't want to sell my development rights. Is the county going to take them by eminent domain? After all, the whole idea of this plan is to get the county the authority to decide where to build. If they are going to decide that you can't use your development rights, then what development rights do you have?

At 9:55 PM, Blogger Jim Patrick said...

Ray - Do everyone a favor and learn what TDR's actually are before you post another 500-word rant totally unrelated to the article.

Big Fat Hint: TDR's can't be forced by a government: "Any proposed transfer of development rights shall only be initiated upon application by the property owners of both the sending and receiving properties. A locality may not require property owners to transfer development rights as a condition of the development of any property."

At 12:26 AM, Blogger Ray Hyde said...

I'll agree this sounds like a rant. But there are hundreds of websites out there promoting PDR's and easements as a farmer's best friend. Someone ought to at least look at the other side of the story.

No, you are right. TDRs can't be forced. I don't think I said anywhere here that they can be forced. If there is something here that I did say that's wrong, then I'll be pleased to be corrected.

What I said is that as they are presently used here, they are a lousy deal for the landowner. Montgomery County does have a fair and equitable plan, but it probably isn't a good deal either, for the financial reasons noted.

Furthermore their mere existence puts the county in a bad ehtical bind, becuase they are now buying things they previously took without compensation. If the county wants to fix their previous error, I might feel differently.

They cannot force you to sell a TDR or a PDR, however, in Fauquier county, as a condition of using the development rights that they graciously let you have on 15% of your land, the county will REQUIRE that you grant a permanent conservation easement on the other 85% of the property. So if you don't use your development rights and sell them you get an easement rammed down your throat, and if you use your rights you get and easement rammed down your throat.

Either way you take a permanent pass on the possibility that the rules might someday change in exchange for exercising your current rights. If you have to pay for it with an easement, it is not a right, it is a permit.

Maybe there is something about force that I don't understand, but I don't see much choice in a choice between giving away an easement and giving away an easement. If it sounds like force and feels like force and you don't have any other choice, then I'd call it force.

By the way, if you are thinking about doing this, go ask you banker what he will loan you on your property, and then ask him what he will loan you with an easement on it.

Selling development rights is a capital gains event. Theoretically selling development rights lowers the value of your property, and it probably will for tax assessment purposes. But there are two problems here. First, you give up an irrevocable right to develop, but the county mkes no permanent promise that the present land use tax structure will remain in place indefinitely. Such a deal. Second, your assessed value may not turn out to affect your eventual sale value, but you will have reduced your basis by the amount of the sale price for the developmet rights. You will now pay capital gains on what is essentially the same money, again. you could wind up paying 30% of your sale price for the rights in tax.

There are dozens of TDR programs across the country, but most of them have serious problems. One major problem is that the market is not well developed enough to figure out what the price should be. Another problem is finding someone to buy them when you need to sell, usually the government acts as an intermediary and offers some fixed price.

You would be better off to find a wealthy buyer and sell it to him at an inflated price with the development rights intact. He can then afford to give the rights away, based on the inflated price, and take an enormous tax write off. He will then have a private park largely at public expense. You will be shut of the property, maintenance, and taxes, instead of stuck with them with no prospect of profit from their use. Put the money in Virginia triple tax free bond fund and the state will be working for you instead of you working for the state.

That last bit of advice comes straight from the South Carolina Dept. of Agriculture.

And if I'm not mistaken at least five states have outlawed permanent easements. A number of Farm Bureaus have come out against them as well. I think there is some doctrine that you cannot control your property from the grave.

Please correct me if I'm wrong.

At 12:56 AM, Blogger Ray Hyde said...

I forgot, there is more.

Suppose I'm a builder with ten development rights for a project and I go out and buy rights to double the density. Now it's 20 years later and there is a big housing shortage, so I go back to the county with a plan to raze the project and double the density again, a la Tyson's corner. I might get permision to do that.

But the poor slob I bought the first round of development rights from gets nothing - he's got a permanent easement and his rules will never be changed, even though the economic conditions and housing conditions have changed.

In the case of PDR's the county buys the rights and then gives them away to a non government agency. In effect the government has made a zoning law that cannot be changed. The present board has abdicated their responsibility for land use regulation to the non-government agency and thereby eliminated the right to vote for their successors, and by extension for those that will elect their successors. They have created a law that cannot be changed. I think there is some doctrine against this kind of thing as well, after all, even the Constitution can be changed.

At least one town that I know of did this and later needed the land. They had to petition the legislature at great expense to strip the easement from the holder. They used the land for an affordable housing complex.

Are TDR's a good idea? Yeah. Have they got problems? A bunch.

At 7:30 AM, Blogger Jim Patrick said...

If your point was "lots of non-ag websites having generally inaccurate information about what's good for farmers", OK. Development rights is the least of all worries.

But that's not what's presented. Are they a good deal? PDRs or TDRs? Very different mechanisms, which are you talking about?

Permanent or long term, cash in exchange for the right to develop is the only way that some farmers have to obtain land to farm.

When you've been farming your parents' property for 20 years, they die, leaving the property to you and three sibling (who want to sell at $20k/acre) it's the best deal in the world.

When you're an non-ag inheritor to property with development rights already stripped, it could be a nightmare. The world's a 'buyer beware' place. Whether selling or buying development rights, anyone should be prudent and think out the long-term implications.

Then you say --again-- about counties buying them. Transfer of Development Rights is a transaction between a willing buyer (developer) and a willing seller (landowner).

PS - You've got to provide the link for the South Carolina Dept. of Agriculture advising folks to put their money in Virginia triple tax free bond funds! LOL

At 8:34 AM, Blogger Ray Hyde said...

I think we agree after all. It is a buyer beware world, and that is the point I was trying to make, in my loquacious way.

PDR's and TDR are different but they have many issues in common. We don't know how the TDR process will work here yet because the regs are not complete.

I don't think anyone is smart enough to think out the long term implications of eternity, nor do I think you can make a net present value calculation that makes sense on that basis. Maybe these things should be a 20 year lease, as they are in some states.

The people who promote these things are not realtors and they have no obligtion to point out the issues I raised here. My only intention is to give people something to think about.

If the government wants to encourage growth in some areas and discourage it in others, that is done for the government's benefit. The argument is that they can save money by keeping infrastructure localized. As a side benefit they keep the non-market externalities value of the open space. The government gets continuing benefits and the farmer gets a one time benefit.

I argue that what is really going on is that the government is saving money by renting the land from the farmer to reserve for future development use if it becomes necessary, and non market use in the meantime.

You are right, TDR's are the least of the farmers problems. What the farmer really needs is profits, that is what keeps him from selling out. A one time cash infusion doesn't help, especially if it is divided by eternity.

If the government really wants to offer a fair deal, not screw the farmers, and save the open space, they should pay the farmer what amounts to interest on the money saved by concentrating infrastructure at his expense, and they should pay for maintaining the externalities that everyone claims to value so highly.

This last is already done in New Zealand and other places. If you believe EMR's arguments, the savings from concentrating infrastructure are immense, a factor of 10X.

TDR's may be fine as far as they go, but if they don't get us what we want, we may have to think outside the box.

The South Carolina recommendation was for government bonds, the Virginia triple tax free was my recommendation. I didn't make that clear. But their statement was that if the land is valued at over $7000 per acre, it cannot be farmed economically: you would be better off with the government bonds. So, if the land is worth $20,000 an acre a PDR or TDR probably isn't worth it. The best deal in the world may be to sell out and move, as many farmers have done.

But if the government removes your only available exit strategy.....who are you going to sell to? Your only choice is a developer who has the money and resources to go for a zoning change or to create a new urban enclave.

I don't think that is the desired goal.

At 4:24 PM, Anonymous Anonymous said...

TDR's are an option for rural land owners. They do not preserve farming or the farmer. They give the land owner an alternative to development and still receive money from their land. Selling TDRs for market value in Maryland tyically provides on the average, about 65% of the fairmarket value. If you are going to stay on the land that is not a bad deal. If the land owner is selling and moving to Florida which so many of our farmers are doing, the TDR price, combined with selling the deed restricted land (typically with one home on it or more)provides a very competitive income and most importantly, the land remains protected from development. To take this one step further, the landowner sells his development rights, subdivides typically into one or two acre lots and sells the one or two homes on site and then sells the remaining agricultural land for agricultural purposes. That combined more often than not adds up to more than a developer will pay for raw land in maryland. Not always, but in many cases.

If you are a developer, you are not interested in this approach but if you are a landowner or farmer that wants to preserve their land for future generations and get a fair value for their land, this can be a good approach. As for the banking and loan industry, call Maryland's Farm Credit and ask how many deed restricted farms with few or no development rights have they extended to loans to. You might be surprised.

If all someone cares about is obtaining the highest value for their land, in some cases it might not be the right program, but for many farmers (I have partcipated in settlements for thousands of preserved acres in Maryland and TDR's have provided an outstanding opportunities for agricultural land owners that want to see their land protected.


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