The Market for TDRs in New York City
Vicki Been, John Infranca, and Josiah Madar
Furman Center for Real Estate and Urban Policy
New York University
November 1, 2012 Draft
Introduction
New York City’s zoning code, like most traditional codes, limits the square footage of the building that a developer can construct on any particular land parcel in the city. In certain circumstances, the zoning code permits a landowner to transfer unused development capacity from its parcel to other parcels of land, effectively increasing the buildable area at the receiving site. A number of different transfer methods exist. Zoning lot mergers permit transfers as-of-right (without the requirement of any review or approval process), but only between adjacent properties. Landmark transfers allow transfers from landmarked buildings across a street or intersection, subject to certain restrictions and approvals. A number of special transfer programs allow transfers from specified granting zones or sites to specified receiving zones, usually within the same neighborhood. These transferable development rights (TDR) programs are used to advance a variety of planning and development goals, including directing the location and intensity of development, alleviating the hardships imposed on property owners by landmark or other restrictions, and encouraging the development of affordable housing.
In this paper we explore the market for TDRs in New York City by studying a unique data set assembled by the Furman Center for Real Estate and Urban Policy. By examining legal documents filed with New York’s City Register, the Furman Center identified over 400 transactions involving the transfer of development rights that took place between January 2003 to June 2011. While the transactions are publicly recorded, lawyers register them in many different ways, and New York City has no centralized system to easily identify and track the transfers, many of which can be executed without any public approval process. The Furman Center’s database provides the most comprehensive information available on these transfers.
The database allows us examine how developers have used development rights transfers in lieu of, or in conjunction with, other methods for increasing allowable development size, including developer-initiated rezonings, incentive zoning bonuses, and lot assembly.[1] The database also allowsus to analyze the determinants of TDR prices, including the relative supply of development rights available to a buyer, the complexity of the transfer process, a development site’s location within a block, and the project’s final size.
This paper offers the first comprehensive empirical analysis of development rights transfers in New York City.[2] A number of legal scholars in the 1970s and 1980s -- including John Costonis,[3] Norman Marcus,[4] and David Alan Richards,[5] among others[6] -- analyzed the legal issues affecting development rights transfers in New York and elsewhere, and proposed new conceptual frameworks for thinking about TDRs. This early literature helped shape the development and regulatory structure of New York City’s TDR programs. While later legal scholars have described and analyzed various aspects of TDR programs, none explore how developers actually use TDRs or assess the market for TDRs.[7]
This paper advances the literature, not only by presenting findings from the first broad empirical study of development rights transactions in New York City, but also by evaluating what these transactions reveal about the decision-making processes of developers. Further, the findings we report provide valuable insights for municipal officials seeking to harness the private market for development rights to serve particular public purposes.
Our initial analysis confirms that, as one would predict, developers prefer methods for obtaining additional capacity at a development site that involve less uncertainty and less expense. Zoning lot mergers, district-wide development rights transfer programs that do not require the grant of a special permit, and lot assemblies accordingly prove more popular than petitioning for an upzoning or seeking a development bonus through the City’s Inclusionary Housing Program.[8] In addition, transfers that involve fewer transaction costs and greater certainty command higher prices than those that require regulatory approval. To the extent that a local government wishes to encourage development, our results accordingly suggest that it should introduce programs that do not require individualized review and approval of each transfer.
In Part I of this paper we review the concept of transferable development rights and describe the history and regulations governing the transfer programs that New York City has adopted. We describe the Furman Center’s database in Part II, and provide an overview of what it reveals about the market for transferable development rights in New York City. Part III considers the factors that might affect developer preferences for certain forms of TDRs and for other mechanisms for increasing project size. We then examine how TDRs have been used in conjunction with other mechanisms for increasing the size of a development project. Part IV [to be added] explores the determinants of the prices paid for development rights. Part V concludes with recommendations for policymakers about how to make TDR programs more effective.
- General Background on Transferable Development Rights
- The Concept of Transferable Development Rights
Transferable development rights programs permit owners of land that is not developed to its full zoning capacity to transfer all or some portion of the right to develop that land to another parcel of land.[9] The owner of the receiving parcel is then allowed to develop her property at a higher capacity than permitted under the existing zoning regulations. The granting parcel may be developed below the allowable capacity because of a separate regulatory restriction, such as a historic preservation ordinance or environmental regulation, or because the owner has simply chosen not to develop to the full permitted capacity. TDR programs allow such owners to recoup some of the value of this unused capacity through a sale of the development rights on the private market.[10]
Several hundred TDR programs, with a range of structures and purposes, exist throughout the United States and internationally.[11] Among the best known are Montgomery County, Maryland’s farmland preservation program and New Jersey’s Pinelands program.[12] In addition to preservation of farmland and environmentally sensitive lands, program purposes include the preservation of historic sites and the historic or rural character of particular neighborhoods, as well as the development of affordable housing and broader urban design and revitalization goals.[13] A number of TDR programs serve multiple goals.
New York’s TDR programs also serve a range of purposes.[14] Writing in 1986, David Alan Richards distilled four goals that had been reflected in New York’s TDR programs up to that time: (1) “promot[ing] growth in the municipal tax base through new construction;” (2) preserving resources, including landmarks; (3) obtaining public amenities without municipal expenditure; and (4) preserving an industry, such as the theater district.”[15] In recent years, New York City has enlisted TDRs as a substitute for upzoning an area, to “carefully direct the form and intensity of permissible development in a way that reflects the goals (and structure) of more traditional zoning.”[16]
Nationally, TDR programs also differ in how they permit unused capacity at a granting site to be converted into more intense development at a receiving site. Some programs convert the preservation of, for example, a certain number of acres of farmland into a defined number of development credits.[17] These credits allow for a specified amount of additional density at the receiving site -- one additional residential unit for ten acres of preserved farmland, for instance. In New York City, the transfer of development rights occurs on a one-to-one basis, with transfers taking the form of a specific number of square feet of floor area.
Another critical difference in the design of TDR programs is in the rules they use to govern the transfer of the rights. Some programs specify the geographic boundaries of the sites that can receive transfers (with significant variation in the rationale for, and breadth of, those boundaries), while others use the continguity of properties to limit transfers. In New York City, the most basic TDR transactions -- zoning lot mergers -- can occur only between lots that are contiguous for a minimum of ten feet or are connected by a chain of contiguous lots, all of which must agree to be considered part of the same lot for zoning compliance purposes. As such, the potential receiving sites for a given lot’s undeveloped capacity are limited to, at most, lots on the same block. The number of potential receiving sites will depend, of course, not only on the regulations governing transfer, but also on how many of sites that legally could receive the rights are likely to be redeveloped in a manner that would make the rights useful the them. Further, under contiguity rules, the number of potential receiving sites will depend upon whether a seller and buyer whose lots are not contiguous with one another are able to convince the owners of intervening lots to assist with the transfer by forming a chain of contiguity.
In short, then, transferable development rights programs differ along a variety of dimensions: – the purposes they are intended to serve; the relationship between the scope of the rights the sending site has foregone and the rights the receiving site can take; the nature of the regulatory review (if any) of proposed transfers; the rationale behind, and restrictiveness of, rules governing which sites can receive TDRs from a sending site; and the use of intermediaries such as TDR banks to facilitate transfers.
B.Transferable Development Rights Programs in New York City
1.The Zoning Lot Merger
New York City permits property owners to transfer the unused development capacity of one parcel of property to another parcel through a number of different mechanisms. The “simplest example of transferable development rights,”[18] the zoning lot merger, can be traced to the city’s original zoning code. The 1916 New York City Zoning Resolution restricted the size of buildings primarily through height limits and setback requirements.[19] However, these limits applied only when a building occupied more than one quarter of its total lot – which was interpreted to include any contiguous lots if the owners of those lots leased or sold their air rights to the building’s developer.[20] This created an incentive for property owners to enlarge their lots by leasing or purchasing air rights, in order to avoid height and setback restrictions.[21]
New York City’s 1961 Zoning Resolution applied the concept of floor air ratio (FAR) to the entire city. FAR, which became the central determinant of building bulk, “is the ratio of total building floor area to the area of its zoning lot.”[22] For example, a building on a 10,000 square foot lot, in a zoning district with an FAR of five, cannot exceed 50,000 square feet. If the building covered the entire zoning lot, it could rise to five stories. If it covered only half the lot on which it was built, the building could rise to ten stories. See Figure 1 below. However, buildings still remain subject to height and setback restrictions in zoning districts where those apply.
Figure 1
The 1961 Zoning Resolution did not introduce a specific development rights transfer mechanism, but its definition of “zoning lot” permitted a developer to enter into a long-term lease of contiguous lots on the same city block – and then purchase and shift unused development rights from one lot to another.[23] A long-term lease was required to be at least fifty years in duration, with an option to renew that provided a total lease of at least seventy-five years.[24] The seventy-five year lease posed potential problems if, for example, a lessee stopped paying rent under the lease or the lessor was foreclosed upon and the lease terminated.[25] Those uncertainties hampered the use of development rights.
To alleviate these concerns, the Zoning Resolution was amended in 1977 to eliminate the lease requirement. The definition of “zoning lot” now includes a tract of land consisting of two or more contiguous tax lots, located on a single block, which at the time of filing for a building permit or certificate of occupancy “is declared to be a tract of land to be treated as one zoning lot for the purpose of this Resolution.”[26] The Zoning Resolution requires that Declarations of Restriction be executed by all parties in interest to any portion of the zoning lot. These Declarations must be recorded with the Office of the City Register against each relevant tax lot.[27] In addition, a licensed New York State title insurance company must provide certification that all “parties in interest” have either joined the declaration or waived the right to do so.[28] In certain zoning districts, the ability to use a zoning lot merger to increase building height is restricted by the requirement that a tower occupy some minimum percentage of the merged zoning lot.[29] These restrictions are intended in part to avoid the construction of buildings like the Trump World Tower, which obtained development rights from a large number of merged zoning lots to build a tower that occupied “only 13 percent of the merged lot.”[30]
2.Landmark Transfers
New York City introduced a development rights transfer program specifically for designated landmarks in 1968.[31] The program sought to compensate owners of landmarks for the potential financial loss resulting from the restrictions imposed by the City’s Landmark Preservation Law.[32] According to Marcus, the landmark TDR program provided a practical means through which the city was able to protect landmarks and restrict redevelopment without being required to pay compensation, a particular concern given Manhattan land values.[33] Under the program, landmarks are permitted to transfer unused development rights not only to other lots on the same block (which they could do through zoning lot mergers), but also to lots directly across a street or, if the landmark is at a corner, to any of the other corner lots at the same intersection.[34] This ability to transfer development rights beyond the same block came with the restriction that the rights could only increase a receiving site’s FAR by twenty percent above the site’s maximum FAR prior to the transfer.[35]
The Landmark Preservation Law was challenged by the owner of Grand Central Terminal in a case that eventually reached the United States Supreme Court, Penn Central Transportation Company v. New York City.[36] Penn Central, the owner of the terminal, alleged that the landmark regulation destroyed so much of the value of its property that it constituted an uncompensated taking, and that its TDRs were worthless and therefore were not just compensation for the taking, because no purchasers existed under the then-existing transfer rules.[37] To blunt this claim, the Landmark Preservation Commission adopted two amendments in 1969. The first permitted the transfer of TDRs to “any site connected to the landmark through a chain of lots under common ownership.”[38] The second amendment removed the twenty-percent limit on the increase in FAR at the receiving site, but only for sites in the highest-density commercial districts.[39] In 1978, the Supreme Court rejected the takings claim, and therefore did not need to address the question whether the TDRs were adequate compensation for a taking. But the Court did rely on the value of the TDRs in its determination that no taking had occurred, reasoning:
Second, to the extent appellants have been denied the right to build above the Terminal, it is not literally accurate to say that they have been denied all use of even those preexisting air rights. Their ability to use these rights has not been abrogated; they are made transferable to at least eight parcels in the vicinity of the Terminal, one or two of which have been found suitable for the construction of new office buildings. Although appellants and others have argued that New York City's transferable development rights program is far from ideal,the New York courts here supportably found that, at least in the case of the Terminal, the rights afforded are valuable. While these rights may well not have constituted "just compensation" if a "taking" had occurred, the rights nevertheless undoubtedly mitigate whatever financial burdens the law has imposed on appellants and, for that reason, are to be taken into account in considering the impact of regulation.
438 U.S., at 138 (notes and citations omitted).[40]
Although the litigation over the Grand Central development rights eventually led the City to create a special district program like those described in the next section, the landmarks transfer program has remained largely as it was prior to the litigation. Under Section 74-791 of the current New York City Zoning Resolution, the owners of both the landmark seeking to transfer development rights and the potential receiving lot must submit an application to the City Planning Commission (CPC) for a permit to allow the transfer. This permit application – in contrast to a zoning lot merger, which can be done as of right – is subject to New York City’s Uniform Land Use Review Process (ULURP). The permit application must include a site plan of the granting landmark lot and the receiving lot, all plans for development on the receiving lot, a program for continuing maintenance of the landmark, a report from the Landmarks Preservation Commission, and any other information required by the CPC.