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II. OVERVIEW OF TRANSFER OF DEVELOPMENT RIGHTS PROGRAMS A Transfer of Development Rights (TDR) program is intended to be a market-based solution to the challenge of preserving resource lands in rural areas. Demand for development rights in higher density urban settings is expected to provide the funding to purchase the development rights in the rural areas, thereby preserving those lands from development. The success of such a program is based on the existence of willing buyers and sellers, which in turn is based on perceived value at each end of the transaction. OVERVIEW A developer pursuing a project on any site will consider several issues in determining how much density to provide. These considerations include market demand for the product, physical characteristics of the site, the cost of the site and the allowable development per the zoning code. If the developer chooses to develop the site at a density below that allowed by zoning, there is no reason to explore acquiring additional development rights. If the developer chooses to consider higher density, he will consider whether the increased value of the development justifies the costs of the additional development rights. The additional development rights can be valued in simple terms by the amount of additional site area that would be required to yield the same amount of allowed development. In the R-3 zone for example, land is currently priced at approximately $20 per square foot, and the allowable density is 29 units per acre. The land value per unit is thus approximately $30,000. This estimate provides an initial threshold value of development rights under a TDR program or any bonus program. The valuation process is complicated by the fact that the revenue and cost factors that determine value for the underlying zoning may not apply to the incremental development. In particular, if the increased development costs are relatively higher than the increased revenues, the value of development rights will be lower than the value under the simple formula presented above. With more dense development, it's almost always true that incremental costs per unit will be higher. While there may be some construction cost efficiencies, there is a major inefficiency related to the cost of parking. With densities greater than 29 units per acre, some if not all parking must be provided in expensive structures, and the associated cost per dwelling unit can increase by 20% or more. At the same time, the denser product is likely to support higher rents or prices, as a result of better views, secure parking, and other project amenities. In order to evaluate the relationships among all revenue and cost factors, it's important to consider the financial performance of a variety of development scenarios. The financial analysis in this study is EVERETT TRANSFER OF DEVELOPMENT RIGHTS STUDY FINAL REPORT PROPERTY COUNSELORS PAGE 11