The Return of TDRs

Supervisor David Sluzky has started pushing transferrable development rights (TDRs) again, Charlottesville Tomorrow reports. The Weldon Cooper Center is hosting a series of discussions about whether creating a development-rights market would be helpful in shaping growth in Albemarle County. The meetings are including stakeholders from all of the major local groups interested in the topic. Now that state law has enabled the county to do so, Sluzky has renewed his efforts to establish such a system, despite the BoS’ prior disinterest. I’m not smart enough to know if TDRs are a great idea, but I know I’ll be the first in line to sell my development rights.

21 thoughts on “The Return of TDRs”

  1. As I commented on Charlottesville Tomorrow’s blog, I think the major issue with TDR is that it has come too late.

    Basically, we’ve already granted the growth area a huge number of development rights for free. IMHO, that was a really bad move. Now we don’t have anything to really trade rights for, unless we expand the growth area. That’s basically what Sluzky has proposed, except that the new area is basically going to be relatively unregulated in terms of design. The old west of sprawl, if you get my drift. Basically, as long as developers buy the TDRs, they can cul-de-sac, and pave to their hearts content.

    Since the whole point of the TDR was to try and preserve the quality of Albemarle county. I question whether creating another sacrificial lamb is really the right approach. I wonder if there could be instead some sort of point system for sustainable design, and a minimum score. Developers could then either buy TDR’s to increase density, or buy them and exchange them for some point value. This would create an incentive for well designed, sustainable neighborhoods, and provide greater flexibility to developers.

    I’m not at the point yet where I’m going to say TDRs are a really bad idea, but I think we have to thing really carefully about how we do this. The sacrificial lamb philosophy was already employed on 29 North with disasterous effects. Now we’re planning to essentially do the same thing from a residential perspective in a big ring around Charlottesville. There’s got to be a better way…

  2. This just creates an unregulated securities market to enable wealthy land owners to cash in on their property without the inconvenience of selling it and moving.

    The board of supervisors is responsible for zoning and permits and development planning. It seems to me they are determined to turn Albemarle Co into Fairfax Co.

    This plan allows the landed gentry to remain landed and cash in big at the same time. What are the tax consequences of this government giveaway anyhow

  3. I have yet to figure out how anybody but the first 10% make any money. The only way a market makes sense it that all the rights are marketable. It seems like a Ponzi scheme.

    When it doesn’t work how much will the county have to pay out in the enormous class action lawsut?

  4. Well, I can’t claim to know a whole lot about this, Perlogik. But here’s how I understand it. Let’s pretend that there are 50,000 development rights available in the county. And let’s likewise pretend that there are 5,000 in a designated section of the urban ring. As that urban ring becomes more dense (i.e., Whole Foods’ new parking garage, the Places 29 project, etc.), let’s pretend that there will be demand for, say, 15,000 developments rights in that ring, or 10,000 in excess of what current rights permit. So developers can purchase development rights from landowners holding any of those excess 50,000 development rights. Of course, not many landowners will want to or know how to sell off their developments rights. (For instance, I could sell off mineral and oil rights to my land right now. But I wouldn’t have the slightest idea of how to go about it, and I really don’t care.) So some quantity of landowners will participate. If that quantity possesses less than 10,000 development rights, then they’ll be able to command a high price. And if they possess more, than developers will be able to bid them against each other, and bring the price down. If demand eventually climbs to above those 15,000 units, or if the county expands the area eligible to purchase those development rights, then more people will be able to sell their rights. If not then, like any other market that is saturated, people will be precisely where they’re at now: they’ll have construction rights that they choose not to exercise and do not have a market for.

    I don’t understand the “Ponzi” bit, though. There’s no promise of enormous returns, and no promise that the money will come from subsequent investors. It’s just one person who wants to build on their land buying that right from another person. That’s a pretty straightforward transaction.

  5. I think a ponzi scheme is an apt description for TDRs. A ponzi scheme involves may people financially involved but only those who cash out early make any profit.

    If there are 10,000 rights only 2,000 may ever actually be used to put development in an area that would not have had any development anyway. This allows for the possibility that when you decide to sell your remaining development rights they may be no one to sell them to. What happens when the market collapses and those who wait to sell have no buyers because there is no where to use the rights.

    The ONLY way this isn’t true is if each development right has a place to develop when it is exercised That is markets 101. If it is proven that each right can ultimately be used then this might make some sense

  6. The hallmark of a Ponzi scheme is that it’s necessary to recruit others as investors who will certainly not make money in order for the first group to make money. Whether or not the other 8,000 people choose to have anything to do with this market has no impact on whether those 2,000 make a penny. In fact, the opposite is true: the more interest that there is among those other 8,000, the less that those 2,000 will make, as market forces will naturally drive down the price.

    The second point that’s missing here is that everybody can exercise their developments rights, all 10,000. There’s nothing stopping me from building a second house on my property right now. Or, if I prefer, I can divide my land in two and sell off half of it for somebody to build a house. Every right can ultimately be used in this most basic of manners. The fact that a market doesn’t exist for everybody to sell off those development rights to another part of the county in no way restricts landowners from exercising their development rights.

  7. isn’t everyone recruited by the fact it’s county wide? You first condition of the ponzi scheme is met because everyone is included in the making of a market.

    Just because you can develop your property doesn’t mean the right will have any value in the market place. This is the big deal. How do these actions assure a vibrant on going marketplace- without it you have a problem

  8. isn’t everyone recruited by the fact it’s county wide? You first condition of the ponzi scheme is met because everyone is included in the making of a market.

    But, again, the important thing is that it’s not necessary to recruit anybody else for the market to work. A Ponzi scheme is one in which there’s no money to be made on the product, only in gaining new investors. No such mechanism is present here—it’s just people selling building rights to other people.

    Just because you can develop your property doesn’t mean the right will have any value in the market place.

    Except, of course, that it does have value in the marketplace. It always does. There are scant few locations in Albemarle where a house could be built where absolutely nobody would be willing to do so at any price.

  9. No, I believe TDR’s can become worthless as a transfer device if the growth area isn’t expanded to take all right into account. This why I’m leery of the whole concept. Where is the math? Slutsky has yet to show his work. How many rights exist, how many can be exercised? The simple act of taking an inventory of possible TDR’s before this discussion is paramount to serious consideration of such a groundbreaking precedent.

  10. As to a ponzi scheme; the early investor who get out do make money- handsome returns in some cases. It’s what happens at the end that makes it a scheme. People holding worthless TRANSFER rights because the cash went to the people who had the good sense to get out first.

    If you take the T out of TDR’s that is where the markets fails

  11. I guess I’m just not being explicit enough. I’ll take another shot here.

    Anybody can sell homemade bread. You are as capable as I at whipping up a loaf and selling it. The thing is, demand for bread isn’t particularly elastic. Let’s say that there’s demand for just 10,000 loaves a day. Now, you and I start making and selling bread. Maybe a few thousand other people do likewise. Soon enough, the market is saturated. What about the rest of the county’s population? Where will they sell their bread? Does that make a Ponzi scheme? Of course not—the market is just saturated.

    I’ll spell out the circumstances under which TDRs would be a Ponzi scheme. Let’s start by looking at the definition of a Ponzi scheme, as suppled by Wikipedia:

    A Ponzi scheme is a fraudulent investment operation that involves promising or paying abnormally high returns (“profits”) to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business.

    The entire schtick with a Ponzi scheme is that nothing of value, no end product, and there’s a scammer through which all of the money flows. Let’s pretend I’m the mastermind. I announce Waldo TDRs. You give me $1,000, and I’ll sell your development right, to be paid in ten monthly installments of $1,000/acre. A 900% return on investment! I sell the same opportunity to nine other people the same day (Group A). A month later, I repeat the process with ten more people (Group B). That same day I go back to Group A and give them back their $1,000. No longer skeptical, they sell me all of their development rights. So instead of collecting $10,000 from this group, I collect, say, $100,000. I use that money to pay back Group B and, in the meantime, I rope in a Group C, only this group has 100 people. As the money continues to cascade down the line, my job is to keep everybody getting their money. And the moment it gets too big—as soon as there’s no longer enough money to float this scheme, I take the money that I have in hand and I leave town. Nobody ever bought TDRs. They didn’t exist, because I didn’t have the power to do that. I was just shuffling money between investors to give them confidence that they could make way, way more if they gave me more money.

    As I hope I’ve made clearer, TDRs bear absolutely no resemblance to a Ponzi scheme. They’re simply a product that are limited in both supply and demand. There might be reason why you don’t like that, or maybe even reasons why they’re bad economics (I have no idea), but they’re not a Ponzi scheme, not even in the same ballpark.

  12. Your painfully clear explanation makes a point that I don’t think I actually disagree with. If you are trying to say it isn’t a exact ponzi scheme- you win. I was trying to say it is like a ponzi scheme not that it is a ponzi scheme- more of a simile. I think I made it clear that the hallmark of this comparison is the early people make the money and the people at the end could end up with nothing to sell(TDR’s that can’t be sold to a developer because there would be no place a developer could redeem them). That is not a fair market that a government should sponsor.

    TDR’s have never worked anywhere I’m aware of and I am very skeptical to be the first. Where the simple math that shows it is even possible a fair market.

  13. Sorry I can’t add anything to the conversation about development rights.
    It seems like a sin for the rest of the Wingfield property to be allowed to be destroyed….”King’s Grant.” Have you ever heard of any consideration of saving it?
    R. Arthur

  14. Thanks Jim Ducan, I need to read though and see how all those TDR’s are working. The downzoning of the entire rural is something that is also troubling in how it might take away divison rights from many who haven’t used them.

    Is there somewhere else that is more recent data? Some of the update are lapsed.

  15. Thanks Jim for the links. They dispell a rumor that’s used pretty often around here regarding growth issues, that by retricting development that we’ll lower property values. Obviously, according to the data you’ve provided (and common sense)the housing market adjusts when you downzone in a fair and consistent manner.

    We also saw that here when the stream buffers were originally applied to half the county. It had little affect at all on property values, even though it effectively removed a significant number of development rights.

  16. I’m looking forward to reading both of those tonight, Jim. Lonnie, I’m interested by the notion that growth restrictions would reduce property values. I’ve always worried that precisely the opposite problem would result—property values could skyrocket, making Albemarle a land of the rich. (After all, if demand exceeds supply, value increases.)

    FWIW, I want to make clear that I know very little about TDRs beyond the basic concepts. Though in the abstract they sound like a great idea, I’ll be really interested to peer into the internals and find out how they’ve done elsewhere.

  17. It’s that old paradox… People want homes to be “affordable” but they don’t want their home to be affordable when they sell it. If home values increase faster than wages then homes become unaffordable for lower and middle income people, but if home values drop suddenly then people feel they’ve lost money on their investment (for the short term at least). Both sides have winners and losers.

    If I understand the paper Iim linked to though, the net impact of downzoning is that it doesn’t have a whole lot of effect either way, even though there is a slight trend towards increasing prices. My own thought is that normal supply and demand economics don’t always work in an obvious way in the housing market because it isn’t really a local market. That means that for a good percentage of home sales, if they don’t buy a home here, then they’ll just buy one somewhere else. Likewise, there is no way for us to increase the local supply enough to satisfy a national demand. I think the effect of tougher zoning means that it increases demand somewhat from people looking for that kind of community and that offsets the loss of division rights.

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