C. Edward Boyle July 24th, 2008
Observations: There appears to be three general categories of TDRs: first, there are rights transferred within a municipality. For example, the Seattle, Redmond, and Black Diamond programs transfer rights between certain specific areas within their city. The second broad category involves inter-local agreements between cities and their county planning divisions. King County has an inter-local agreement with Issaquah; Thurston County has one with Lacy, Olympia, and Tumwater (at present, there exists no similar agreement regarding TDRs between those cities). Generally, the county will designate a region or class of property as the sending site and the city will designate an area for its receiving site. The third broad category involves private sites as both the sending and receiving sites. One example of this had a developer “sending” 4-units of density from a site near Auburn to a site near Redmond/Kirkland. Both sites were county jurisdiction.
Beyond these general categories, TDR practices can differ greatly. King and Pierce Counties and Seattle operate TDR banks in addition to private credit transactions. Many municipalities, however, require private transactions while maintaining approval rights. The pilot program in Snohomish County sends credits from farmland along the Stillaguamish River to a master planned neighborhood. Landowners seeking approval for new development projects in the Arlington Receiving Area must purchase and use transferred development rights for at least 25% of the proposed single family residential dwellings. And in Redmond, the sending sites include urban recreation sites and critical natural growth areas to receive in a commercial building area. In almost all cases, some level of participation is required for development in the receiving areas; in some cases, participation is only necessary to achieve maximum density. It remains to be seen if the forced acquisition of credits will have an impact on private developer’s attitudes and participation.
The issues associated with allocation rates and exchange rates are likewise varied. For example, in King County 1 urban TDR credit equals additional urban unit for private purchase, while 1 rural TDR equals 2 additional urban units. The unit of exchange in the City of Seattle is the square foot, and the city acknowledges that there is often not a one-to-one correlation. The variety of variables suggests a negotiation process.
Transfer price information is hard to come by and somewhat open to interpretation. During the approximately 12 years that Redmond has offered a TDR program, some 560 TDRs have been transacted generating an estimated $16.5 million. (The number of sending and receiving sites involved is unknown by us.) This averages $29,464 per TDR credit. But the actual purchase price will reflect prevailing market conditions of the time and the needs of the principals. And these are all private transactions as Redmond does not maintain a TDR credit bank.
Of course, the most informative sales data may come from public-to-private transactions. The City of Seattle estimates that their bank of 1.3 million square feet sold in a range from $15-$20 per square foot (it is notable that this figure usually applies to up zoning in a small downtown area and not raw land outside of the urban core). King County ranges private urban prices from $10,000 to $15,000 per credit, and rural to urban prices average $15,000 to $25,000.
Great care must be taken in valuing the allocation and exchange rates to provide the financial incentives necessary to interest buyers and sellers. In 2006, Snohomish County, while never intending to act the role of a TDR credit bank, felt pressured enough to commit $2.1 million for one-to-one exchange to the receiving area, this rate may divert potential development interest elsewhere and serve as a challenge to the program’s success. The county acknowledges its flawed valuation and plans to recover, the but the message is clear: market-based transactions are risky, particularly if the asset may be held for a period of time. Expert impartial guidance helps mitigate the risk.
When all is said, it appears that the range of values demonstrated for TDRs falls into the rather broad range of $10,000 to $42,857 per credit. For the most part, the market appears to be under the control of various governmental jurisdictions, either directly or via their police powers. The sales data is quite thin, given that it has occurred during a time span that has seen the Puget Sound Region going through a record setting period of development.
The market for TDR credits also does not seem to be in any way organized. We cannot find that the values of reported sales were established by any means other than negotiations between the principals to the transactions, be they public or private.
Given these conditions, it is quite speculative to assign a value to a potential transferable development credit. The client who commissioned our study had facilitated the sale of only 2 credits, and these fo an amount of $40,000 each. This may or may not have been a market value, but was the result of negotiations between the city and the buyer/user of the credits. Since the study was caused by the client looking at acquiring land from which more TDR credits could be harvested, and since the client already has some unsold TDR credits banked, does it follow that their modest success at selling already banked credits really define a market? We would caution that the answer is “probably not”. Would it be highly speculative of them to acquire additional TDR credits to add to their bank based on the expectation of selling them at $40,000 each? We would say, “Absolutely.”
Another consideration that must be taken under advisement is that it appears that the prospective inventory of Sending sites is much larger than the inventory of Receiving sites. This raises the question as to whether TDR programs may cause the harvesting of credits to create substantial banks of usable TDRs. If this happens, will supply and demand act as it does in a typical market by driving the price down? Perhaps it will, as one of the underlying precepts of market value tells us that if all other things are equal, the lowest price will sell first. Competition may therefore act to drive prices down.
This is of particular interest if both public entities and private parties are holders of TDRs. It seems reasonable to expect that the private parties would react quicker to fulfill the conversion of TDRs to cash, and would therefore lower prices to the point that the governmental jurisdictions would be non-competitive if their price levels were not similarly adjusted. Government jurisdictions would still hold the trump card, though, as they wold have to approve the greater density proposed for the receiving sites.
In those circumstances where the governmental jurisdictions hold a monopoly on TDRs, it still remains that prospective users would buy or not buy based upon the economics of any given transactions. It should be financially feasible before a private party buys TDRs so government’s various asking prices may not find a ready market. Could this lead to developers being forced to add density (which could mean buying TDRs at “asking” prices) in order to attain project approval?
It is tempting to offer an opinion that the value of TDRs would be tied to some degree to the cost of land in any given location. For example, an acre parcel of land in Jollytown, zoned for 6 units/acre, could sell in the market at, say, $240,000, or $40,000 per unit. Would it follow then that if a developer would pay $40,000 per unit for land, he would also pay $40,000 per TDR to expand the density by say, 2 units/acre, to a total of 8. Maybe, but maybe not. Clearly, an acre parcel (assuming no wetland, steep slopes, setbacks from critical areas, or other limitations to cause a loss of effective usable land) would typically yield lots somewhere in the range of 6,000 SF each, on average, after the removal of land for streets, sidewalks, stormwater facilities, utilities and other such uses required to provide infrastructure to the site.
If 2 TDRs were acquired to enhance the yield to 8 units on this acre, the probability is that the lot sizes would then fall to something a bit below 4,500 per SF each. Is it probable that a lot of 4,500 would have a lower market value than a lot of 6,000 SF? Yes.
Would the aggregate of values for the 8 lots, despite a lower per lot value, be greater than the aggregated value of the 6 larger lots? Probably so.
Would development costs rise due to having to accommodate 8 lots with infrastructure as opposed to 6 lots? Yes, but likely at a less than pro-rata basis.
Would development costs on a per lot basis rise, stay the same, or reduce somewhat? Probably reduce somewhat.
There are other similar questions that would need to be asked in doing a pro forma development costing sheet for such a project. Moreover, it is reasonable to expect that such costs will change from one specific site to another in response to the differences in the features of the sites.
When such questions are answered specific to a prospective receiving site, it should then be possible to make a reasonable effort at evaluating TDRs on a comparative basis based upon market values for the land. The value for the TDR should always be less than the unit value for the land for a like use, however, due to the influences addressed above.
Another aspect that is worth being addressed is the condition of supply and demand. There appears to be no way to measure how much demand there is in the actual marketplace. Further, it also is not really ascertainable whether the demand is higher than demonstrated by sales – but sales are curtailed by the price at which TDRs are available.
To further the difficulty of analyzing TDR values, they are personal property – not real estate. There is no device that causes sales of TDRs to become recorded and therefore public information. It may be possible to track every project that is approved for development and/or construction to see if there is a TDR component present, but this would be quite labor intensive and would likely yield relatively little data for the effort. Who wants to become an “expert” in such a limited arena, and therefore spend the necessary time – without any certain compensation for having done so?
Another difficulty derives from the fact that TDRs can be harvested from sending sites by private parties – at least in some jurisdictions. As the governing rules appear from our survey, it would be possible for the governing agencies to track how many of these are currently available, but a constant surveying of those records would be required to maintain an accurate accounting of the inventory.
With all of this being addressed, it becomes obvious that establishing a price for TDRs without specific knowledge of the details for each potential transaction appears to not be feasible at present. On the other hand, given the details of a specific transaction, it should be possible to reasonably establish a value for TDRs associated with that specific transaction by measuring the economic impact for both the sending and receiving sites.
That being said, the data appears to show for residential units can be shown to have enjoyed some market acceptance in the range of $15,000 to $40,000 per TDR unit.
Perhaps more order to the market could occur if the various jurisdictions that are currently utilizing TDRs or considering incorporating them into their land use planning were to establish more uniform methods. This would potentially benefit the understanding of the market and market values. It could also facilitate the development of Interlocal Agreements so that TDRs could be harvested from a sending site in one jurisdiction and transferred to a receiving site in another jurisdiction, which is now possible in only a very limited way.