Can the Market Be Used to Preserve Land? The Case for Transfer of Development Rights

This paper discusses the use of a market-driven technique ? transfer of development rights ? to preserve land from development while guaranteeing the rights of property owners. While the technique is often used in the United States, Europe has a lot more urgency in land preservation but it is still lagging in the use of market based instruments such as transfer of development rights. Property ownership can be described as a bundle of rights, including the right to use, the right to exchange, and the right to convert. The transfer of development rights (TDR) technique assumes that the development rights of a parcel, as part of the right to convert, can be sold and used in another parcel. The motivation for the creation of a TDR program is the preservation of environmentally sensitive areas, agricultural land, open space, and historic landmarks. In the task of preserving these areas, TDR is thought to be the best technique since it is a market-type transaction involving low costs for the public, it is more effective than zoning in the protection of land and landmarks, and it provides compensation to landowners that alienate the development rights. The typical TDR program involves the landowner of a preservation or sending zone (or parcel) selling the development rights to a developer who will use these rights in an area designated as development or receiving zone (or parcel). In general, the receiving area allows higher density of construction, which becomes the incentive for developers to buy the development rights. A variation of this program occurs when government creates a TDR bank from which developers acquire rights to develop at higher densities and the government uses the money to purchase development rights in areas it wishes to protect. TDR banks can also help during economic recessions to sustain the price of certificates. The economic analysis argues that TDR programs should be preferred to zoning for four reasons. First, TDR programs are market-based alternatives and, therefore, entail less administrative costs then command-and-control regulation. Second, rezoning decisions frequently involve large rent-seeking costs, whereas TDR overcomes the market failure and increases the net benefits of regulation. Third, the certificates of development rights can be exchanged in the market and provide a compensation to the landowner for the loss of the right to develop. Fourth, in communities facing urban sprawl and suffering pressures to develop, the outcome of a TDR program is an efficient market allocation of land to its most valued use: the market maximizes the aggregate value of the land. The paper summarizes the economic arguments favoring the use of TDR programs and discusses the difficulties in implementing these programs in Europe where command-and-control regulation has been preferred over market-based solutions.