Transfer of Development Rights: A Market Analysis

Abstract

Increasing concern about the quality of life in urbanizing areas and the impact of urbanization both on environmentally sensitive areas and on the land resource base for agriculture has led some state and local governments to consider policies designed to alter market forces affecting private land use decisions in ways that foster retention of open space. Among these policies is a series of related proposals known as the transfer of development rights (TDR), the generic feature of which is the provision for an increase in the density of urban development in some areas in exchange for the permanent retention of open space in other areas. The type of TDR program analyzed here provides for a designated open space or preservation zone in which urban development is prohibited. As compensation for the resultant reduction in the current market value of their land, owners of land in this zone are issued certificates of development rights (DRCs) which can be sold to any willing buyer. A receiving zone in which these DRCs can be utilized is also delineated. Residential development without the utilization of DRCs is permitted in this receiving zone, but only up to the density limit authorized by the basic zoning ordinance; development to a higher bonus density limit requires the utilization of DRCs. Critical to the implementation of such a TDR program is the compensation issue: there must be a reasonable possibility that owners of land in the open space zone can sell their DRCs at a price which represents some acceptable level of compensation. The determination of that level is a normative issue which will not be dealt with here. Rather, this note examines the nature of the demand for