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February 23, 2017

Transferable development rights: Where’s the incentive?

  • Restrictions on incentives make transferable development rights from the city of Seattle and King County under used.
  • By JOE STOCKTON and LARRY COSTICH
    Schwabe, Williamson & Wyatt

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    Stockton

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    Costich

    Transferable development rights (TDR) programs in the city of Seattle and King County are great in theory but poor in practice.

    These programs are intended to incentivize property owners and developers to increase project density while achieving these aspirational goals of local governments:

    • protecting agricultural and forest lands

    • promoting affordable housing

    • preserving landmark structures

    • limiting urban sprawl

    In practice, however, restrictions on their use and transferability, as well as the cost to purchase TDR, render this worthy tool nearly worthless to developers. In 2017 and beyond, the city of Seattle and King County have the ability to invigorate the TDR market by lifting a few restrictions on use and lowering the price at which they sell these rights.

    Such reforms could provide the proper incentives for developers to purchase regional development rights, thereby fulfilling the city’s and county’s aspirational goals.

    How does TDR work?

    As the name suggests, TDR programs are market-based tools that allow development rights to be transferred between parcels of land. Those development rights sold from one property — the “sending” site — can be purchased to achieve greater density on another property — the “receiving” site.

    Restrictive covenants or conservation easements are then recorded against the property title of the sending site to reflect the development rights sold. Washington’s Growth Management Act authorizes the use of TDR programs as a tool to achieve the act’s goals of preserving natural resource areas and concentrating urban growth.

    The city of Seattle and King County have each established TDR programs and marketplaces to allow developers to increase project density.

    Under the city’s program, development rights can be transferred from landmarked structures, affordable housing units and open space areas to receiving sites within the same zoning classification. Developers may also exceed the applicable base floor area ratio (FAR) limits for a project by purchasing the unused FAR from other properties within the same block.

    In 2013, King County and the city of Seattle entered into an interlocal agreement, requiring developers to purchase development credits from agricultural and forest lands in rural King County in exchange for obtaining greater density in South Lake Union and Denny Triangle development projects. As part of this agreement, developers for projects in these receiving sites must purchase regional development credits from the county to achieve 40 percent of their extra residential floor area and 25 percent of extra commercial floor area above the base FAR.

    So much TDR, so little use

    Although these TDR programs appear to offer significant public and private benefits, there are surprisingly few TDR transactions each year. City of Seattle data showed only two private intra-city transactions in 2015, while in 2016 there seems to have been only one noteworthy transaction. Similarly, King County sold TDR in five transactions in 2016 to increase density, primarily in South Lake Union and Denny Triangle.

    Two projects exemplify these transactions:

    • Solterra acquired 3,851 square feet of density from the Melrose Market at a cost of $134,785, or $35 per square foot, as part of the development of the Cove apartments at 601 E. Pike, scheduled to open this spring.

    • An office development at Ninth Avenue and Thomas Street purchased development rights to add 12,776 square feet of bonus commercial floor area and 1,029 square feet of bonus residential floor area at a total cost of $317,240, or a blended rate of $23 per square foot.

    In most TDR transactions, developers acquire the development rights through the TDR “banks” managed by the city and county. Yet, county and city purchases of TDR have far exceeded their sales, causing an oversupply of TDR maintained in their banks at artificially high prices. This stagnant TDR market is all the more surprising in light of the unparalleled level of development within the Puget Sound region and record high land costs.

    A few simple fixes

    In order to truly incentivize TDR transactions and achieve the desired goals, the city and county should remove unnecessary obstacles restricting participation in the TDR marketplace.

    • First, the interlocal agreement between the county and the city should not limit the receiving sites to just South Lake Union or Denny Triangle.

    The incentives to purchase regional TDR should apply equally to all areas where the city desires increased density, such as those areas identified in Seattle’s Housing Affordability and Livability Agenda (HALA). Developers throughout all of Seattle could then become prospective purchasers of regional development credits, which would serve to promote the hoped-for goals of affordable housing and natural resource preservation.

    • Second, the price for TDR credits sold through King County’s bank should be significantly reduced.

    King County currently prices TDR between $22,000 and $24,000 a credit, corresponding to approximately $22 per square foot of additional density. Considering increased land and construction costs, coupled with the opportunity to achieve bonus density at cheaper rates through other city incentive programs, developers are not properly incentivized to maximize their purchase of regional development rights.

    Profiting from selling TDR should not be the goal of the county’s program. Rather, the county should sell those development rights at an affordable rate to achieve its goals of preserving designated natural resource lands within its unincorporated areas.

    • Third, the city should liberalize the restrictions for TDR transactions within the city.

    Owners of landmarked and open space areas should be permitted to sell their TDR outside of their immediate zoning district to receiving sites in areas throughout the city, such as those identified through HALA. Thus, owners of sending sites could realize a potential revenue stream and therefore incentivize the acquisition and maintenance of such properties.

    Further, commercial or multifamily property owners should be able to sell their unused FAR to receiving sites anywhere within the same zoning district — not just the same block. By expanding the marketplace, the city will increase the demand for TDR transactions, thereby promoting infill development and greater density.

    • Finally, the city should limit the use of loopholes in its land use code that allow developers to maximize density on a project site through the use of combined lot agreements or FAR restrictive covenants, the result of which circumvents the TDR program.

    It has become commonplace for projects to enter into unregulated agreements with adjacent parcel owners to increase the amount of square footage applicable to the project, which in turn increases the project’s density but compromises the redevelopment potential of the adjacent site.

    Such combined lot agreements allow a project’s base and maximum FAR to be calculated using the square footage of two or more lots even though the actual project will be developed on a single lot. This practice is short-sighted in that it impedes future redevelopment on the other part of the site and may actually encourage sprawl in the long-term by eliminating urban infill sites.

    TDR programs in the city of Seattle and King County fall short of their lofty, but worthwhile, goals. Until the city and county properly incentivize participation, these programs will remain an underused tool to achieve their aspirational goals of preserving farmland, forest land, and historical buildings while promoting more affordable housing and open space.


    Larry Costich is a real estate development and transactions attorney who helps get industrial, residential and mixed-use projects built. Joe Stockton is a development attorney practicing in all areas of real estate and construction.





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