Transferable Development Rights
In addition to municipal land, municipalities can also dispose of rights to engage in more intensive land development—a higher floor space index (FSI) or higher FAR—as a way to “finance” and incentivize urban regeneration. Development rights generally refer to the maximum amount of floor area permissible on a zoning lot. When the actual built floor area is less than the maximum permitted floor area, the difference is referred to as “unused development rights,” “air rights,” or “excess density rights.” These excess density rights represent the publicly controlled share of privately owned land. These rights have economic value that can be sold by public authorities, which happened in São Paulo and New York City.
Among the benefits of this financing approach is that the disposition of development rights does not cause a negative fiscal impact. On the contrary, the public sector sale of development rights can generate a positive fiscal impact because cities typically do not include the future possible value of those rights on their balance sheets. If a municipality owns land (for instance, a downtown public parking garage or government buildings below allowable density), it could also sell or transfer its development rights. The sale or transfer of development rights requires a well-designed regulatory framework, for example, for “sending” and “receiving” zones, and for enforcement capacity.
A transferable development rights (TDR) system is a type of local zoning ordinance that allows legal manipulation of the zoning envelope. It is an imaginary 3-dimensional mold that otherwise defines a site’s maximum development potential and permits owners of land zoned for low-density development to sell and send their development rights to other property owners. “Transferred” development rights permit purchasing landowners to develop their “receiving” parcel at a higher density than would be legally possible otherwise.
Metropolitan areas have used TDR systems to achieve various policy goals. The city of São Paulo, for example, has used an instrument called Certificados de Potencial Adicional de Construção, or CEPACs (translated as certificates of additional construction potential bonds) as a tool to create development rights for up-zoning. The city then sold these rights to developers to raise funds to finance infrastructure construction. The total number of CEPACs, which is capped by law, is determined by the municipality. CEPACs can be used only in certain designated areas that the city government has targeted for public investments. One attractive feature of CEPACs from the developers’ perspective has been that they are not required to undertake their development projects immediately after the acquisition of building rights. Instead, they can decide on the timing of their investments according to market conditions.
A different model of development rights management has been deployed in King County, Washington (the metropolitan area around the city of Seattle, Washington). It has a TDR program that uses market conditions to incentivize preservation of rural land and steer development growth toward urban areas. The program is based on free-market principles and has benefited from robust market prices that have in turn motivated landowner and developer participation. In this example, rural landowners realize an economic return through the sale of development rights to private developers who, in turn, have an interest in building increased density in urban areas where there is strong market demand.
As another example, New York City has a TDR system that allows for the transfer of unused development rights from one zoning lot to another in limited circumstances. This is usually done to promote the preservation of buildings officially designated as historic landmarks, open spaces, or unique cultural resources (for example, the midtown Manhattan theater district). The market for TDRs in New York is market-driven in contrast to São Paulo, which is administered by a public entity. Transactions are “arm’s length” commercial transactions between unaffiliated owners. Recently, New York City proposed a special zoning district for Hudson Yards, a mega mixed-use urban redevelopment district under construction on the west side of Manhattan. It would enable owners of lots that meet specific criteria to purchase additional permitted FAR (depending on the lot’s location) by making a contribution to a district improvement fund (DIF). The DIF would then be used to finance improvements to the area’s transit and pedestrian infrastructure.