Making Transfer Of Development Rights Work for Downtown Preservation and Redevelopment
Jane J. Voget, J.D.	© & Author Info

Abstract

Information in this article describes how Seattle's Transferable Development Rights (TDR) System works and how the City uses the System, including its TDR Bank, to implement public policy objectives in the context of growth and redevelopment of downtown Seattle.

Seattle's TDR System: How it Works

The Concept:

Density transfer through TDRs can be an effective mechanism for reconciling sometimes divergent interests of private landowners and the public's interest in regulation of land use. Jurisdictions can lower density through TDR transfers and thereby counter development impacts adverse to preservation of open space, residential neighborhoods and the environment while permitting development to maximum density in locations where growth is encouraged. Proceeds of TDR transfers may be used to preserve open space uses, construct affordable housing and restore historic landmark structures integral to heritage and neighborhood preservation. TDR systems offer the advantage of flexibility because ownership of property involved in a TDR System may be in common control or separate control and the same property may be involved in multiple TDR transactions.

In Washington, TDRs are real property and may be owned, conveyed and banked just as are other interests in land and buildings. Conveyance of TDRs is by deed and real estate excise tax is paid upon transfer of TDRs Ch. 82.45 RCW, Ch. 458-61 WAC. Purchase of development rights in Washington survived the first legal challenge when King County's Farmland Preservation Program was upheld and development rights were recognized as a valuable property interest. Louthan v. King County, 94 Wn.2d 422, 617 P.2d 977 (1980). Subsequently, passage of the Growth Management Act in 1990 authorized TDR programs as part of implementation of local comprehensive plans. RCW 36.70A.060 (4).

For Seattle, TDR ".....means rights to build a specific amount of square feet of gross floor area that may be transferred from a Sending Site to a Receiving Site, either directly or in some cases after an intermediate transfer to the City's TDR Bank or another party." SMC 23.84.024.

TDRs are an important tool for preservation, development and revitalization of the City's urban core. In 1985 Seattle followed the lead of New York City in permitting the transfer of development rights. Seattle's TDR system is structured principally to alleviate development pressure on low-income housing and landmark structures while permitting concentrated development to highest and best use for sites in the designated office and retail zones. With the adoption of the 1985 Downtown Plan residential properties occupied primarily by low-income households with annual incomes at or below 50% of median income and structures designated as Seattle landmarks by Seattle's Landmarks Preservation Board became "Sending Sites" eligible to sell TDRs to office, hotel and retail "Receiving Sites". Recently, in 1995, the TDR System was expanded to provide a vehicle to help fund major civic cultural institutions such as landmark performing arts theaters and the Benaroya Hall Music Center, which is leased to the Seattle Symphony.

The Elements of Seattle's TDR System:

There are three building blocks of the Seattle TDR System: Chargeable Gross Floor Area ("GFA"), Floor Area Ratio (FAR) and of course, TDRs. GFA or Chargeable Gross Floor Area means the amount of above ground floor area measured from the inside face of the outside walls at the floor, less any specifically exempted floor area (e.g. bonus features such as retail, cinemas) and less a 3.5% of GFA allowance for mechanical equipment. GFA is defined particular to each individual building, in accordance with the development standards in the Code for the zone in which the building is located.

Figure 1: Chargeable Gross Floor Area

FAR or Floor Area Ratio is a measure of development density. FAR is measured as one square foot amount of development per square foot of site area. For example, one (1) FAR is equal to the site area and Two (2) FAR is equal to twice the site area. Base FAR is the density permitted as a matter of right without use of bonuses or transfer of development rights.

The following chart illustrates the number of Floors which can be constructed based on different building configurations for a 4 FAR site:

For the primary office core zones, TDR is calculated as the development rights available for transfer when the GFA is subtracted from the base density allowed for the site (calculated as the site area x Base FAR).

By way of example, following is a sample calculation of TDRs available for transfer from a Low-Income Housing TDR Site.

The Tiering System:
Making the TDR System Responsive to Development Impacts and Policy Priorities

The Tiering System illustrates the connection between the commercial development and its impacts on downtown residents and the City's downtown infrastructure, including the stock of affordable housing. Through the use of TDRs and bonuses earned through provision of or financing of certain public benefits, impacts from development are mitigated and new development is accommodated into Seattle's urban core. (See for example, Table of Public Benefit Feature Area Bonus, SMC 23.49.050 B).

Density above the Base Far is granted on the basis of the FAR Tiering System which provides a menu of options based upon certain public needs impacted by development and developer preferences. Tier 1 is commonly known as the amenity tier because it allows developers to choose from several options which are also amenities frequently included by architects in plans for downtown office hotel, and retail uses. Such amenities include urban plazas, public atriums, transit station access easements, sculptured building tops, overhead weather protection, retail shopping, short term parking and parcel parks. Tier 2 is the intermediate tier with fewer choices. Tier 3 is the top tier which offers developers choices: preservation of low-income housing ("Low-Income Housing TDR Site"), preservation of landmark performing arts theaters when such projects also include preservation or production of low-income housing ("Landmark/Housing TDR Sites", Ordinance 116513, January, 1993) and major performing arts facility TDRs ("MPAF TDRs", Ordinance 117954, December, 1995).

The Linkage Process: Connecting Density Transfer Sites

Office, hotel and retail development creates jobs the byproduct of which is demand on the City's supply of affordable housing, particularly housing located in downtown neighborhoods. For this reason, TDRs from low-income housing are transferable in eight of the eleven downtown zones. TDRs from other types of Sending Sites are limited to the two main office core zones (Downtown Office Core 1 and 2) with the exception of Pioneer Square Infill Site TDRs and Within block TDRs which are also transferable in the Downtown Mixed Commercial ("DMC") zones. The Within block TDR is permitted to allow greater opportunities for full site development when the same entity has site control on more than one lot in the same block.

Receiving Site Linkage Process:

High-rise residential projects in DOC 1 and office, hotel and retail projects in DOC 1 and DOC 2 and certain other downtown zones are eligible TDR Receiving Sites. Application is made to the City Department of Construction and Land Use ("DCLU") as part of the Master Use Permit ("MUP") process. The MUP is the land use permit issued for the project after review under applicable provisions of the Code and after SEPA review. As part of the MUP process, the developer executes a Public Benefit Feature/TDR Declaration which describes the menu of options chosen by the developer to exceed the Base FAR allowed for the zone where the Receiving Site is located.

Generally, at the issuance of the first building permit (usually the shoring and excavation permit), the developer must post security sufficient to assure DCLU that the public benefit features and/or TDR projects chosen by the developer will be constructed and completed in accordance with the Code and any applicable agreements with the City of Seattle. Security may be either in the form of an irrevocable letter of credit for the exclusive benefit of the City of Seattle or a cash placed in a restricted escrow account for which the City of Seattle is the beneficiary.

Generally, security will be held by the City for up to three (3) years from issuance of the MUP or until the Sending Site projects are completed and accepted by the City, whichever is earlier. If after the three year period expires, the Sending Site project(s) are not accepted by the City, the security becomes the property of the City for the uses and purposes provided in the Code. So for example, if a linkage with a housing provider for construction of a Low-Income Housing TDR Sending Site should fail or occur outside the three year security period, the City would place the amount of the security in its Low Income Housing Fund to finance other low-income housing projects in the downtown neighborhoods. The following illustration describes a typical linkage process for a Receiving Site.

Figure 3: Receiving Site

Sending Site Linkage Process:

Sending Sites transfer TDRs to finance construction or rehabilitation or maintenance of the Sending Site with the TDR sale proceeds. All TDR transactions receive approval from the DCLU which provides varying levels of review depending on the type of project. At a minimum, DCLU issues a TDR Authorization Letter which certifies, based upon review of building plans and the Code, how many TDRs are available for transfer from a particular Sending Site. Because of the need for financial analysis including a subsidy review to certify the financing gap which will be financed through sale of TDRs, the City's housing finance agency, the Office of Housing ("OH") must also approve applications from Low-Income Housing TDR Sites, Landmark Performing Art Theater/Housing TDR Sites, and Priority TDR Sites.

Landmark designation is a condition of eligibility for Landmark TDR projects so Landmark TDR applications are made to the Department of Neighborhoods, Office of Historic Preservation ("OHP") and the Seattle Landmarks Preservation Board ("LPB") for a Certificate of Approval. LPB approval is required to obtain a DCLU TDR Letter of Authorization. Unless the project is also a housing and/or landmark, no financial analysis is involved with approvals for Pioneer Square Infill TDR Sites projects and Within Block TDR Sites projects so these projects are approved by DCLU.

Following is a chart depicting the typical Low-Income Housing TDR Site linkage process.

Figure 4: Sending Site

Valuation of TDRs

The value of TDRs is established by appraisal or reference to recent appraisals done for TDR projects. There are four recognized methods for valuing development rights: " ...1) the comparison of direct sales of development rights, 2) an analysis of the prices paid per allowable building area, 3) an analysis of the prices paid per achieved building area, and 4) a land residual analysis." As a practical matter, the incentive to link with a Sending Site is that developers may pay an amount less than the amount of security required for the additional permitted density. The security is established by means of a Schedule of Bonus Values set by OH and published in a DCLU Director's Rule. The Bonus Values are calculated on a land price paid per achieved building area formula such that for DOC 1 and the DRC zones, the Bonus Value is $20 per gross commercial square foot of additional density and is set at $13 per s.f. for all other Receiving Site zones. Since Receiving Sites have the flexibility to make housing and landmark linkages in Receiving Site zones with a $13 Bonus Value, that price has tended to set the ceiling for the per square foot Fair Market Value for TDRs. Bonus Values are scheduled for evaluation in 1999.

Following are some examples of direct linkage transactions between Sending and Receiving Sites:

Other Conditions for Transfer:

Any person may purchase TDRs. It is not necessary to have a designated Receiving Site at the time of purchase. This enables a developer to "bank" TDRs before a project is under site control and gives the flexibility to transfer to another developer if the proposed project is delayed or abandoned. The additional advantage of pre-purchase of TDRs is to avoid posting security as a condition of issuance of the first building permit. When the first building permit is issued however, the Receiving Site develop must demonstrate that the TDR purchase is of record and such TDRs are not available for retransfer.

Sending Site Conditions

Low-Income Housing TDR Sites

Sending Sites must have a legally enforceable ownership or leasehold interest in the Sending Site and must provide a minimum of 1 FAR in low-income housing use for twenty years. During the twenty year period rent increases are limited to the annual percentage increase in the Consumer Price Index (CPI) or 7% per year whichever is less for the required low-income units. If a building existed as low-income housing on January 1, 1983, additional requirements apply. If the Sending Site project is approved, after application to DCLU and OH, Sending Site owners enter into a TDR Agreement with the City as a condition precedent to the valid sale of TDRs. The TDR Agreement guarantees the residential developer's performance. Sending Site owners further guarantee performance by granting and recording a Deed of Trust and recording Use Covenants which detail the conditions for Sending Site eligibility for the twenty year performance period. Any linkage agreement with a Receiving Site is reviewed for approval by OH prior to any valid sale of the TDRs to help ensure the price paid is at Fair Market Value and is commensurate with the financing gap certified for the project. DCLU records any transfer of TDRs on the plans and permit for the Receiving Site project.

Landmark Structures

Landmarks must be designated pursuant to SMC 25.12, be located in an eligible Sending Site zone, and based schematic drawings of the proposed rehabilitation/restoration of the landmark must be consistent with the Controls and Incentives Agreement applicable to the Landmark structure. If approved, the Landmarks board will issue a Certificate of Approval describing the conditions under which the TDR transfer will be approved. A TDR legal agreement must also be executed. The Master Use Permit will not issue for the project under the landmarks review process is completed and a DCLU Letter of TDR authorization is issued.

Landmark Performing Arts Theaters ("LPAT") and Priority TDRs

Whether or not the LPAT owner agrees to offer its TDRs for sale at appraised value to qualify as a Priority TDR project, in addition to designation as a landmark pursuant to SMC 25.12 and issuance of a Certificate of Approval by the Landmarks Preservation Board, the LPAT must have a least 20,000 s.f. of performing arts space held available for live performances of theater, dance or music for at least 180 days annually. The LPAT owner must agree to binding covenants ensuring the use for at least 40 years. The LPAT owner executes a Performance Agreement including covenants and grants a deed of trust to the City to guarantee performance. Proceeds from the sale of TDRs may be drawn from the escrow account subject to OH approval. Any low-income housing must be maintained on-site for at least twenty years in accordance with the rules for Low-Income Housing TDR sites or must be replaced off-site.

Major Performing Arts Facilities TDR

Sending Site owners must agree to maintain the use for at least forty years. No TDRs may be sold until construction on the building is substantially underway and the final permits have been issued.

Pioneer Square Infill TDR

The Sending Site must be proposed for infill development and be vacant as of January 1, 1984. Surface parking lots and buildings subject to abatement order on or before January 1, 1984 are also eligible. TDRs may not be transferred until the project is complete and a certificate of occupancy has been issued by DCLU.

Within Block TDRs

Receiving Site projects in eligible zones can be constructed to Tier 2 density levels with TDRs transferred within the same block. Tier 3 density cannot be achieved unless Low-Income Housing, MPAF or LPAT TDRs are transferred to the Receiving Site. Other than permitting conditions, there are no other special conditions for Within Block Sending Sites other than same-block location.

Role of Seattle's TDR Bank

"A TDR bank helps to expedite the process, benefiting the community as a whole, as well as individual buyers and sellers of TDRs. Inasmuch as valuation difficulties compound transactional problems, a bank creates an initial market and ensures that a minimum price will be paid, thereby establishing parameters for valuation. In addition, by pooling development rights a bank enables small holders to receive a competitive price for their TDRs and makes it easier for purchasers to buy large numbers of TDRs in a single transaction."

A TDR Bank also places a critical role in bridging the gap between when a Sending Site project requires financing and demand for TDRs from commercial Receiving Sites. When the 1985 Downtown Plan was adopted, predictions were made for a dramatic downturn in the downtown development cycle. Anticipation of the fall-off of office/retail and hotel development led the City to create the TDR Bank (Ordinance 114029, June 27, 1988) to finance acquisition of TDRs from low-income housing. The TDR Bank was an important part of the City's initiative to preserve 7,311 low-income housing units in downtown neighborhoods.

As predicted by City planners, between 1987 and 1997, there was no private demand for TDRs which resulted in actual purchase of TDRs so the TDR Bank became the principal financing mechanism for projects where TDRs were an integral part of the financing. The TDR Bank started with $1.25 million in City General Funds. $3.1 million was later made available for purchase of the TDRs for preservation of the landmark Paramount Theater and the landmark Eagles Auditorium. Acquisition of TDRs and related affirmative uses and easements were means of City participation in these privately financed projects which otherwise would not have been eligible for permanent financing from City programs. By 1998, the City had purchased $3.9 million in TDRs from eight projects, gained 372 units of low-income housing and facilitated the restoration of two landmark performing arts theaters. In addition the City owns 423,000 TDRs the sale of which will be used to as permanent financing for the Benaroya Hall Music Center.

There have been two sales of TDRs from the City's Bank. In 1997, Starwood Lodging Corporation completed plans for construction of The W Hotel in downtown Seattle and closed on the purchase of 130,012 s.f. of TDRs for $1,471,500. Approximately one-half the hotel floor area to be constructed was requires the use of these TDRs. In 1999, proceeds from the sale of 119,368 s.f. of TDRs purchased from the TDR Bank in December, 1998 will be used to finance renovation of the downtown Young Men's Christian Association ("YMCA") landmark structure including provision of twenty units of low-income housing in the project.

Look to the Future

After thirteen years of implementation, it is time to update Seattle's Downtown Plan and with it the TDR System. As part of the City's Comprehensive Plan process, representatives of downtown Seattle's five neighborhoods have worked with City staff to develop plans for each neighborhood. Five plans describing the needs and priorities of the Denny Regrade, Denny Triangle, Pioneer Square, International District and the Commercial Core will become the guides for downtown Seattle's entry into the 21st Century.

Representatives of these five neighborhoods came together to work through common issues and reconcile differences in the Downtown Urban Core Planning Group ("DUCPG"). DUCPG recommendations to increase the size of the Pioneer Square Historic District and to increase incentives for mixed use and mixed-income buildings are currently under consideration by the Mayor and City Council for possible adoption in May, 1999. More recommended changes, many of which pertain to density and height limits, will be studied by the City for possible adoption in 1999-2000.