Development Rights Market or Transfer of Developments - They're Still A "Other People's Money" Scheme!

from Michigan Assoc. of Home Builders

Posted 9/17/03

In 1996, with the support of the Michigan Association of Home Builders,the Legislature passed and the governor signed into law PA 570 0f 1996 which allowed local units of government to establish programs to use public money as well as voluntary private donations to purchase development rights (PDR) from active agricultural land.

This was in addition to a second law, the Acquisition of Parks Act (PA 153 of 1996) also strongly supported by the MAHB, which sets up a mechanism for special assessments to be used to acquire parks, open or scenic space or environmental, conservation, nature or wildlife areas. Local units of governments, having been given these valuable tools, have failed to make use of them.

Since 1996 not one local unit of government has established a PDR program in accordance with the law. Nor have any open space or parks been acquired using PA 153. Because local units of government have chosen not to ask taxpayers and voters to allow their local tax dollars to fund these programs, proponents of PDRs are now clamoring for legislation allowing local units of government to establish programs to require developers and builders to buy the development rights from one piece of land and transfer the rights to another piece of property in exchange for being able to develop that property at a higher density. DMR/TDR programs are a way of using other people's money (in this case the developer's) to achieve a public benefit that should be paid for by the general populace.

It is not hard to imagine that financially-challenged local units will readily turn to this method of having someone else, usually a non-resident, pay for their preservation program. If local units will not go to the voters to ask for the funds to pay for the public benefits which would come from the operation of a PDR program, why should they be given the authority to establish a program, the transfer of development rights, which will be funded solely by Michigan's job providers? Consider the case of Old Mission.

Authorities there targeted the development rights from 9,200 acres for purchase. But the $7 million raised by their millage will only pay for the purchase of these rights from 2,000 acres. At the average price of $3,800.00 per acre it will require more than $27 million in additional funds to purchase the remaining rights, rights that will become more costly as a shortage of developable land occurs within the township. Can anyone doubt that, given the ability, the township would chose to make developers pay the $27 million shortfall rather than return to the taxpayers for a 350% increase in the millage?

The Stalking Horse of "Farmland Preservation"

The April 1994 House Republican Policy Committee Task Force Report on Land Use gave the following explanations on how a transfer of development rights program would work:

"This technique permits protection of sensitive resources, renewable resource lands, historic resources or other areas of special community significance (emphasis added) by reducing permitted development density in those areas while still allowing the landowner to capture the economic value of the development rights in the land."

From the beginning, all of the publicity surrounding the need for DMR/TDRs centered on "preserving our vanishing farmland."

But, as shown above, preserving farmland was not the primary focus of these programs when they were first proposed.

Reproduced below is the language from this session's House Bill 4346 which sets forth what DMR/TDR programs in Michigan may be used for:

"(a) The public benefits that the local unit may seek through the DRM program, ... shall be 1 or more of the following:

(i) The voluntary protection of natural, scenic, agricultural, and open space qualities.

(ii) The voluntary enhancement of sites and areas of special character or special historical, cultural, aesthetic, or economic interest or value.

(iii) The voluntary protection and management of land, water, and other natural resources.

(iv) The management of a community's overall intensity of development while allowing landowners to voluntarily purchase additional development rights to increase the intensity of development in designated areas.

(v) The encouragement of development in enterprise zones under the enterprise zone act, 1985 PA 224, MCL 125.2101 to125.2123, in brownfields, and in other redevelopment areas."

So, while DMR/TDR programs are sold as "farmland preservation," tools they are actually intended to be used for many other "public benefits."

Farmers in Michigan may already take advantage of the Lease of Development Rights program through PA 116 of 1974. As the Senate Agricultural Preservation Task Force stated in their 1999 report "This LDR program is far less expensive and more flexible than PDR or TDR programs. Furthermore, since the system is already in place, the administrative and other transaction costs associated with PA 116 are far lower than those associated with a PDR or TDR program."

The report also identified several possible problems with DMR/TDR programs, pointing to testimony at the Task Force's Leelanau County hearing where they were told "...land is a farmer's 401 (k) retirement program and is a source of lending equity. ...TDRs would reduce the value of the land. When the development rights are separated from a piece of property, the value of that property declines by the amount of the development right. In other words, the net wealth of a farmer is not improved with a PDR or TDR program. These programs may reduce a farmer's ability to borrow in the future and may eventually constrain their ability to finance their farm operations. Farmers may also face capital gains taxes when they sell their development rights."

The Myth of "Voluntary Participation"

DMR/TDR programs allow a local unit of government to set up an ordinance to establish sending and receiving zones for development rights. Builders and developers who wanted to build to a higher density in the receiving zone would have to purchase development rights from the sending zone and transfer them to the receiving zone.

It also allows local unit of government to buy the development rights themselves and resell them to builders and developers.

Prior to 2001 these programs were known as "Transfer of Development Rights" programs or "TDR." In 2001 the name of these proposed programs was changed to "Development Rights Market" or "DRM."

The hope was that by changing the name to include the magic word "market," and liberally sprinkling the enticing but disingenuous word "voluntary" throughout the proposed legislation, opponents will be lulled into accepting this new "developer-friendly" approach.

There's nothing "voluntary" about allowing local units of government to set zoning standards which require the purchase and transfer of development rights from one piece of property to another in order to develop the property at a reasonable density.

And there is no "free market" when the local unit of government not only is allowed to set the density of allowed development, not only is allowed to designate where the development rights will be purchased from and where they will be transferred to, but also is allowed to buy the development rights themselves and bank them for future sale back to a beleaguered builder or developer who needs them to reach a density that makes a project doable.

A truly voluntary free market DMR program would allow anyone to purchase the development rights on any piece of property from any owner who wished to sell them and transfer those rights to the piece of property of their choice, within the restrictions of public health, safety and welfare.

While, in theory, a TDR program would be voluntary on the part of a developer, in practice the developer could easily be forced into participating in such a program. As an example: Developer A wants to build homes in Local Unit B. Local unit B has a TDR program. One of the chief determinants of housing costs (and housing profits) is the cost of land. Local unit B institutes a MINIMUM lot size requirement of 10 acres. But, under their TDR program, they will allow Developer A to build to an increased density of 1 home per acre in a selected receiving area, provided that she or he buys the requisite amount of development rights from the selected sending area.

Under the above example to develop a 30 acre parcel, Developer A would have to buy the development rights to 300 acres. There is no guarantee that there would be a one-to-one transfer of development rights. There is also no restriction on the minimum lot size in a sending area.

Considering this, a local unit could establish a larger minimum lot size in the sending zone than in the receiving zone. Proponents of DMR/TDR programs have said that the developer really doesn't lose because they will "capture the economic value of the development rights in the land."

This raises other questions. Why should a developer have to pay for something that should be hers or his by right, the ability to receive the "reasonable investment-backed expectations" from property they own? Additionally, if as proponents say, development of large lots is inefficient and costly and compact development is to be preferred, why isn't the land already zoned for the most compact development possible? Should a local unit of government be allowed to profit from improper zoning of land which is what could and does happen under a DMR/TDR program? Experience in other states has shown us that DMR/TDR programs can and do lead to abuses of the planning process.

DMR/TDR programs are a classic "other people's money" scheme. Susan Craft, the Land Use Coordinator for Burlington County New Jersey told Michigan legislators: "The best thing about TDR programs is you can preserve open space for the public without spending any public money." Note again that Ms. Craft was focused on using DMR/TDR programs to preserve "open space," not farmland.

DMR/TDR programs can only function if the land is improperly zoned. William Hussmann, Chairman of the Montgomery County, Maryland Planning Board told Michigan legislators: "You have to downzone to make a TDR program work. There's no market if the land is actually zoned to the density you are willing to allow. It's time we stopped giving away zoning for free and started making developers pay for favorable zoning." To make their program "work" Montgomery County downzoned to one dwelling unit per every 25 acres or four houses per 100 acres. DMR/TDR programs offer an incentive to local units of government to profit from abusing their grant of police power (zoning). If compact development and high density is a desirable public goal the land should already be zoned to the highest density possible.

DMR/TDR programs raise the cost of housing. Development rights on the Old Mission Peninsula in Michigan are averaging $3,800 an acre. Using the Montgomery County density of one home per every 25 acres, a developer wishing to develop a 25 acre site at a density of one home per acre would have to buy the development rights from 600 additional acres. This would cost $2,280,000 or an additional $91,200 per house. Even "upzoning" to one home every five acres would require the purchase of an additional 120 acres at $456,000 or an additional $18,240 per home. To overcome the effect of the government's DMR/TDR programs on affordable housing some jurisdictions mandate the builder/developer include a certain percentage of "affordable" homes within the project. The cost of this "affordable housing" is then built into the price of the remaining homes. In some jurisdictions "profit controls" are then put on these "affordable" housing units with the owners receiving only a percentage or, in some cases none, of the increased value of the dwelling when it is sold. Instead the increase in the value of the home goes back to the local governmental unit.

DMR/TDR programs can violate property owners' rights. Montgomery County Executive Douglas M. Duncan (D) has publicly warned that Montgomery County's open space/TDR program may violate the constitutional rights of county residents. A March 7, 2001 article in The Washington Post quoted Douglas as having "cautioned that the county's ambitious Legacy Open Space program needs revisions to protect the rights of property owners and that the overall cost for the program could be much higher than the estimated $100 million. ... In particular, Duncan (D) cited the possible placement of properties 'in reservation,' which would forbid development for an unspecified time. That feature, he said, adds 'additional time, expense and uncertainty to our already complex development approval process." According to the Post article, dozens of properties totaling thousands of acres have been deemed environmentally or "culturally" sensitive by the county planning board. The total cost for purchasing these properties could, as reported in the Post, run as high as $370 million. Montgomery County allotted $33 million in county funds for the program over the next six years, with $9 million more expected from other sources. Brenda Sandberg, the Legacy Open Space program manager for the Planning Board said the cost is beside the point. "There is no assumption on our part that we are expecting the County Council to go out and buy every property on this list," Sandberg is quoted as saying in the Post.

TANSTAAFL
(There ain't no such thing as a free lunch!)

Almost universally, proponents of DMR/TDR programs tout their almost magical ability to achieve the "public benefit" of stopping development in selected areas (because DMR/TDR programs have only one purpose, to stop development in favored areas) without the need to spend a single dime of the taxpayer's dollar. As readers of Robert Heinlein well know "There ain't no such thing as a free lunch." Someone has to pay for the purchase of these development rights, and that takes real money.

The Senate Agricultural Preservation Task Force estimated that, at $3,160 an acre, purchasing the development rights from 10 million acres of farmland would cost in excess of $31 billion. (They also noted the total value of all agricultural land and buildings in Michigan is somewhere between $17 billion and $18 billion.) DMR/TDR proponents believe that rather than the public paying for this public benefit, newcomers to the community should be stuck with the bill.

Communities have, in the PDR and park acquisition laws, been given powerful tools for preserving farmland and open space they are not using. Just because they have failed to help themselves, it is not prudent to give them a gun (DMR/TDR) to hold to the heads of private sector entrepreneurs and businesspeople to force these job providers to do for the community what the community refuses to do for itself.

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This sounds remarkably similar to the Montgomery County, Maryland TDR program. Note also that in theory, TDRs sound great, since the owner of the parcel(s) area that send(s) the TDRs is compensated.

But the receiving community is the one that gets the short end of the stick, IMO. Some tough questions:

(1) Who decides what neighborhoods will receive those TDRs in the form of higher residential densities? What is the process? Can residents in and around the proposed TDR receiving areas object?

(2) What is the iimpact of the additional density on the public schools?

(3) What abot the crime rate of the receiving area?