TDR’s – The New Gold

International Municipal Lawyers Association 74th Annual Conference

How to structure the use of transferable development rights to potentially create open space and millions of dollars of income for cities, property owners and developers:

Sunny Isles Beach, Florida: A TDR success story
by Lynn M. Dannheisser. Esquire
Land use and Local Government Lawyer
Miami, Florida

“This is an informational and educational report distributed by the International Municipal Lawyers Association during its 74th Annual Conference, held October 17-21, 2009 in Miami, Florida. IMLA assumes no responsibility for the policies or positions presented in the report or for the presentation of its contents.”

 I. INTRODUCTION – WHAT ARE TDRs

Transferable Development Right (“TDRs”) for some local governments have become the “new gold.” The City of Sunny Isles Beach made tens of millions of dollars through their use. TDRs create a transferable right of development in a parcel of land that, as a result of regulation, has a diminished use, thus allowing a local government to balance its interest in promoting a certain goal, i.e., preservation of land or landmarks, with a landowner’s interest in developing his parcel. TDRs defy the traditional boundaries of zoning laws by allowing a landowner purchasing such rights to build in excess of that which zoning restrictions on the property normally allow. Essentially, this transfer of zoning rights has its foundation and stems from the bundle of rights theory of property law where a landowner has rights such as possession, exclusion, and the transfer of land. ¹ TDRs recognize these rights are separable and a TDR program takes advantage of the distinction between the rights of ownership versus the right to develop. ² A TDR program is valuable because it allows city officials, on the one hand, to create new markets full of development potential and suitable for growth in conjunction with growth management strategies, while on the other hand, either fostering a goal that might not otherwise be achieved, such as affordable housing, or ensuring the protection of areas that contain historic landmarks or require environmental shelter-all without causing a taking.³

II. THE HISTORY OF TDRs & THE KEY CASES

From the first occurrence of TDRs in 1968⁴ , the practice has progressively evolved from simple plans that only allowed the transfer of development rights from one lot to an adjacent lot to the complex and innovative land use planning tools that they are today. ⁵First generation TDRs began in New York with the Landmarks Preservation Law.⁶ Historically, the city had its first zoning regulations in 1916 with major amendments occurring in 1961 and, finally, the 1968 amendment implemented the Landmarks Preservation Law. ⁷The objective of this law was to preserve historical landmarks, but it also had the effect of diminishing development rights.⁸The TDR program was implemented to compensate the landmark landowners for their unused development rights.⁹

The United States Supreme Court has interpreted TDRs on three occasions.¹⁰ The first major case, Penn Cent. Transp. Co. v. City of New York¹¹  arose from the Landmark Preservation Law. ¹²  In Penn Central, the owner-developer wanted to build a 53-storey building atop New York’s famed Grand Central station.¹³   After requesting permission, the owner-developer was denied on the grounds that the station was a historical landmark.¹⁴ The city’s position was that New York’s standing as a worldwide capital of tourism and business would be threatened if they were not allowed to enact legislation to protect the city’s major landmarks.¹⁵   Penn Central asserted that there were similar tall buildings all around Manhattan such that nothing would be diminished by their proposed project.¹⁶  Accordingly, Penn Central argued that prohibiting the development constituted a taking without just compensation in violation of the Constitution.¹⁷   The Court reasoned that although Penn Central’s most valuable use of the property had been taken away by the restrictions, the fact that the developer also owned a number of other building sites in Midtown Manhattan, to which the owner-developer’s Penn Central development rights could be transferred, prevented a finding that there was a taking.¹⁸   The Court further emphasized that although transferred development rights may have value less than development rights in the original site, this does not automatically amount to a taking without due process of the law.¹⁹  In essence, the Penn Central case gave legitimacy to TDRs as the wave of the future.²⁰

The challenge to TDRs did not stop there. In Fred F. French Investing Co. v. City of New York²¹ , there was a huge residential complex located in midtown Manhattan.²² Within the complex, there were two parks rezoned exclusively as being areas open to the public.²³ The owner of the complex was granted TDRs to use elsewhere.²⁴ However, the TDRs were floating, as they were not tied directly to specific properties.²⁵ The complex was later sold to a new owner who wanted to build a 50-storey tower in the parks.²⁶ The owner-developer sought to have the area rezoned, but this request was denied.²⁷ The Court held that the floating nature of the TDRs failed to secure the economic value of the development rights as they existed when attached to the property, and was, therefore, not a proper allocation of the economic burden since it left just compensation almost up to coincidence.²⁸ The court further held that to the extent that TDRs are necessary to compensate the owner of the original site, they must be either “in cash, acceptable in kind, or easily translatable to cash.”²⁹

Unlike the Penn Central case, the regulations that deprived the original site of any possibility of producing a reasonable return (only parks being permitted) and the TDRs were left in “legal limbo” (not readily attachable to any other property), the court felt the Plaintiffs were deprived of property without due process of law.³⁰

Finally, there is the Suitum v. Lake Tahoe Regional Planning Agency³¹ where Mrs. Suitum owned a lot in Lake Tahoe that a land zoning commission gave zero credit, which prohibited her from development of her land because it was located in a stream environment zone.³² Suitum was given TDRs that would allow her to transfer her development rights to other parcels of land.³³ However, Suitum never attempted to utilize the TDRs, instead, she filed suit for just compensation alleging that the rezoning was a regulatory taking.³⁴ The lower court granted summary judgment on ripeness grounds, holding that Suitum was required to await the decision of an administrative hearing, exhausting all remedies, before bringing suit.³⁵ The Supreme Court remands the case and holds that she only needs the administrative hearing if there is no adequate alternative for compensation.³⁶ In his concurrence with Justices O’Connor and Thomas, Justice Scalia agreed with the majority on the ripeness issue, but tackled the issue lurking in Penn Central, asserting that the availability of TDRs can only determine what compensation is owed to a landowner.³⁷ Scalia stated that there must, first, be a determination of whether there was a taking before the court can decide whether TDRs are just compensation for the alleged taking.³⁸

III. HOW AND WHERE TDRs WORK

Because development rights may be removed from property, it logically follows that these same rights may be added to other properties. A TDR program resembles tradable air and water programs because it creates a market through the reassignment of rights.³⁹ These rights are transferred by permission of the local government through a TDR “bank” also administered by the same agency.⁴⁰

In TDR program transactions, there are “sending”⁴¹ parties and “receiving”⁴² parties that are established by the local government beforehand.⁴³ The “sending” area refers to the land from which the development rights are transferred.⁴⁴ Conversely, the “receiving” area refers to the land that is allowed more development than its underlying zoning generally permits as a result of the “senders” transferred rights.⁴⁵ Next, local governments legally separate the development rights from the property.⁴⁶ This is accomplished by putting a procedure into place to effectuate and document the transfer from the “sender” to the “receiver.”{47. See Merwin, supra note 10, at 832; Fulton et al., supra note 4, at 22-23 components of a successful TDR program; Walls & McConnell, supra note 1, at 9.] The owner of the “sender” site is then required to record a restrictive covenant permanently running with the land that reflects the forfeiture of its development rights.⁴⁷ Probably the most difficult aspect of creating such a program, though, is assessing the market between buyers and sellers and “valuing” the TDRs. The success of a TDR program depends largely on the presence or absence of incentives for a market to develop. “Sending” and “receiving” parties are left to reach an equilibrium that allows the newly created markets to balance.⁴⁸ A TDR bank is an extremely useful mechanism in addressing this last issue. The Sunny Isles Beach program discussed below was successful in calibrating the market by using all available planning tools including a bonus program and creating a bank that served as an intermediary that bought and sold TDRs. The bank is now serving as a holding mechanism in these less than jubilant economic times.

Another successful TDR program that utilized a TDR bank was achieved in the South Street Seaport Historic District of New York because preservation and redevelopment areas were specifically designated; the areas had high land values, and hence preserved the landmarks and facilitated development.⁴⁹

Seattle, Washington has a successful program aimed at creating affordable housing wherein development rights can be transferred from low income “senders” to more developer “receivers” with the purpose of preserving low income sites, while at the same time, bringing in more profitable buildings.⁵⁰ The program necessitated a simultaneous transfer of development rights and utilized a TDR bank that absorbed what excesses that the private market could not. Another reason for this program’s success was that the demand for development rights always exceeded the supply. ⁵¹ This was a strategically achieved market condition because they executed initiatives to ensure that they demand always exceeded the supply of development rights.

In Montgomery County, Maryland a TDR program was created to protect farmlands, agricultural, and rural areas.⁵² This involved the transfer of development rights from rural farmlands to areas ripe for development in closer proximity to Washington, D.C.⁵³ The program’s success was attributed to incentives, a comprehensive plan that included analysis of the economy and incorporated information on the relevant real estate market, and a relatively easy procedural process. Public support of the TDR program was also very high.

The New Jersey Pinelands TDRs are an example of a regional TDR program. It was developed to preserve an environmentally unique agricultural area.⁵⁴ The Pinelands TDR program was a success because of a well-thought out comprehensive plan, incentives, and public support.⁵⁵ Some of the elements of both the Montgomery and Pineland plans that contributed to their success were the measures taken to ensure marketability of development rights (using TDR banks) and careful limitations in development in the receiving areas to avoid adverse impacts.

There are many other successful programs but some have been subjected to challenges that question for example: where their authority is derived from, whether they constitute an antitrust violation, and whether the program and bank can cross over into a governmental abuse.⁵⁶ Such challenges are described next.

IV. LEGAL ISSUES THAT MAY BE RAISED IN A TDR PROGRAM

Legal challenges to TDR programs have arisen in the form of takings and due process actions.⁵⁷ Land use regulation can be considered a taking, but a two-pronged test has been established to determine whether, in fact, there has been a taking.⁵⁸ First, one must determine whether the regulation advances a legitimate state interest.⁵⁹ Second, a determination must be made as to whether the regulation denies all viable use of the land.⁶⁰ Landowners can also assert challenges under the Tenth Amendment⁶¹ concerning whether the regulation is a valid exercise of the state’s police power.⁶² However, the state can defend on the grounds that the regulations are in furtherance of the general welfare of the citizens.⁶³ Notably, takings claims are rarely, if ever, successful in TDRs cases because the regulations do not remove all economic viability from the subject land.

Another avenue of challenge to TDRs arise in “just compensation” claims dealing with the fairness in value of such programs.⁶⁴ There has not been any case law specifically addressing this issue, although the opinions in French⁶⁵ , Penn Central⁶⁶ , and Suitum⁶⁷ provide general guidelines for determining whether TDRs constitute just compensation.⁶⁸ Because value is attached to TDRs, it may constitute just compensation, thereby, avoiding a takings claim.⁶⁹ While there is no definitive answer regarding this issue, Justice Scalia’s concurring opinion in Suitum⁷⁰, alludes to the idea that TDRs should be evaluated solely for a determination of just compensation.⁷¹ As such, the determination of whether there was a taking is a wholly separate inquiry.

On the flip side of the takings debate, however, under certain circumstances, the owners of the land in the receiving area might raise objections. If, for example, a city restricts allowable development in the receiving area to an amount below what might otherwise normally be permitted so that with the acceptance of the TDRs it can be increased to the original allowable amount, such owners might argue that a TDR program is simply a mechanism for a municipality to raise funds by “selling zoning” in the receiving districts with no particular benefit to them. The Sunny Isles Beach Florida TDR program discussed below addressed this issue by creating a intensity and density bonus program rather than restricting or reducing the receiving area zoning.⁷²

There may be another issue with regard to the fact that TDR banks are usually run by a local government and this has given rise to antitrust claims.⁷³ An outspoken critic of has voiced concerns about the utilization of government-run TDR bank.⁷⁴ Forcing all sellers to trade through a TDR bank may result in competition that is illegally reduced thereby potentially violating antitrust laws.⁷⁵ Pooling of resources by sellers and buyers also results in antitrust violations.⁷⁶ This critic asserts that the South Street Seaport TDRs were a valid program because it permitted the seller to sell their TDRs to third parties, not just the TDR bank.⁷⁷ While states are exempt from federal antitrust law, local governments are not sovereign and the Supreme Court has held that municipalities are not automatically entitled to immunity afforded to states.⁷⁸ However, there are several programs that protect local governments. These programs including the Sunny Isles Beach program described below (which also uses a bank that allows the holders of TDRs to sell to third parties), while presumed valid, have never been tested or upheld in courts, so it is imperative that practitioners are aware of this issue.

With regard to due process challenges, there may be some validity to such a claim if the landowner is forced to solely bear the economic burden of the regulation associated with TDR programs. Once again, however, these claims are mitigated by the development and use of TDR banks that now undertake much of the economic burden of TDR programs.

A final issue that arises within the context of TDRs is exaction. Nollan v. California Coastal Comm.⁷⁹ stands for the proposition that you need to show an essential nexus between the harm alleged and the condition of the land.⁸⁰ The court used a regulatory takings analysis instead of determining whether there was a legitimate state interest at play.⁸¹ Dolan v. City of Tigard⁸² established a standard of high scrutiny where rough proportionality must be made, with the city assessing an individualized determination of whether the required dedication is related in both nature and extent to the impact of the proposed development.⁸³ The Nollan⁸⁴ and Dolan⁸⁵ decisions may create an additional challenge.

In Barancik v. County of Marin⁸⁶ , a Plaintiff ranch owner in Marin County, challenged a TDR program claiming the program was unconstitutional based on Nollan⁸⁷. After adoption of reduced density zoning requirements, Barancik was summarily denied several requests to develop his ranch⁸⁸. The county implemented a TDR program whereby development rights could be purchased and accumulated as long as the development was within the confines of the community wide plan.[91.See id.] Barancik objected to the cost of the development rights and did not acquire any development rights.[92.See id.] Barancik suggested that the TDR program was essentially an exaction with no essential nexus between the TDR program and a legitimate government purpose[93.See id.]. The court held that preservation of agricultural land is rationally related to a legitimate government purpose and payment to a private owner, as opposed to a state, precludes the finding of an exaction[94.See id.].

It is clear that none of these challenges is insurmountable. Like many other successful programs, the Sunny Isles Beach TDR program addressed most, if not all, such issues.

V. SUNNY ISLES BEACH, FLORIDA TDR PROGRAM: TURNING “STRAW INTO GOLD”

The Sunny Isles Beach TDR Program attempts to address all possible legal challenges as outlined above and achieve the City’s three most pressing land planning goals: 1) encourage redevelopment of a blighted aging community; 2) secure revenues for replacement and upgrading of the City’s aging infrastructure and 2) fill the need for open space, parks, education and recreational facilities. Sunny Isles Beach is a fairly new city (incorporated in 1997) located north of Miami Beach on the same barrier island in the northeast corner of Miami-Dade County. It is a small, intensely zoned, urbanized municipality with approximately 20,000 people living along 2.2 miles from north to south along A1A (Collins Avenue) bounded on the East by the Atlantic Ocean and on the West by the Intracoastal Waterway. In the County’s comprehensive plan, this area is located within the urban development boundary zone and also inside an area that is exempted from the requirements of transportation concurrency. In other words, from a planning perspective, this is a region in which the Florida Department of Community Affairs was encouraging urbanization and growth as a countermeasure to the suburban sprawl that had been occurring in Miami- Dade County.⁸⁹

In 1997, when the charter for the incorporation of this heretofore unincorporated area of Miami-Dade County was adopted by the electorate, this area was populated with older apartment buildings, housing a large population of senior citizens, a number of rundown, aging beachfront motels, hosting a variety of illegal activities, including prostitution, drug dealing, and other assorted criminal pursuits. Policing was sparse, code enforcement virtually nonexistent, and zoning was high density, however, there was little infrastructure to support that density and whatever was there was aging. Good future land use planning was absent.

Incorporation allowed this area to immediately assume responsibility for and address the policing, zoning, and code enforcement issues. The burgeoning challenge for this newly incorporated city, however, became how to create better planning, encourage redevelopment, and replace the aging infrastructure and overall blighted conditions. In particular, it was the vision of the founding father of this city, who originally hailed from Chicago, to create more open space and recreational, cultural and educational amenities and programs for the aging population, the increasing numbers of immigrants moving to the City, as well as the incoming younger families (looking for affordable apartments and tired of the commutes generated by suburban sprawl). To him, the challenge was to do all of this without imposing a greater tax burden on the City’s elderly citizens generally living on fixed incomes. This meant attracting new real estate investment that would create additional property tax revenues and/or generating other kinds of revenue sources.

Being the original drafter of the charter and the first city attorney, I, along with the City Manager and the planners accepted this challenge. We started with the fact that the State of Florida in the 1970’s had instituted a growth management program that required local governments to adopt their own comprehensive plans consistent with the overall State plan. Consequently, the City began to tackle these issues in a visioning process that solicited and generated public support and eventually resulted in a City Comprehensive Plan. As one of the goals, policies, and objectives of Future Land Use Element, the Plan contained the following language:

“The City shall encourage the transfer of development rights from lands acquired by municipal government after the date of June 16, 1997 for uses other than residential or commercial purposes but including public open space, parks, and recreational facilities, community facilities, public educational and cultural facilities, and public utilities to development sites within the Town Center and commercial and resort districts abutting Collins Avenue to promote redevelopment and unified planning and design of sites, mixed uses, and the revitalization of the economic base of Sunny Isles Beach… to prioritize density increases where practical for production of affordable housing⁹⁰.”

At the direction of the City Commission, using this language, we crafted land development regulations designed to implement it including the attached ordinance. The ordinance created a program that, without altering the density cap set by the City and approved by the State of Florida, designated sending and receiving sites, methods of valuation, a TDR bank for both public and privately owned TDRs, and limitations on the receiving sites to accept increased density, among other things. Probably the most innovative creation in this program, however, was allowing the City itself to sever the zoning rights from the land that was purchased by the City to create open space on the west side of Collins (non waterfront properties) and to sell those rights to developers of lands within the receiving district which were waterfront at the fair market square foot value of the receiving site. Developers in the receiving district could increase their density up to thirty (30%) percent. The price of these TDRs, while extremely profitable to the City, was still significantly lower than the cost of land and clearly would still result in huge profits to the developers. Thus, this TDR program turned “straw into gold” for the City and encouraged unprecedented redevelopment.

The Ordinance⁹¹ is self-explanatory and we believe addresses all the legal issues discussed in this paper. The original version as well as today’s codified regulations as they have evolved are attached to this paper. The oral presentation will go into detail on how it worked but, suffice it to say, to date, this TDR program has created approximately thirty-five ($35,000,000) million dollars in revenues which has, and continues to, fund nine (9) new parks, a wide array of amenities and recreational programs, a K-8 school where in partnership with the Miami-Dade County school system, the City provided the land and the School Board built and now operates the facility.

In addition, the roads have been repaved, the land and a decorative façade for a brand new electrical substation has been provided to FP & L, aging underground water, sewer, and electrical conduit pipes have been replaced, storm water drainage programs have been instituted in this low lying area between two bodies of water, and dozens of other public works projects have been initiated, including the under grounding of all electrical lines works.

There was indeed “gold” in these TDRs.