Appraisal of Air Rights & Transferable Development Rights (TDRs)

Appraisal of development site in Jefferson County, CO

Appraisal of development site in Jefferson County, CO

Strictly speaking, all real estate appraisals are, in fact, appraisals of real property. Real estate is physical land and appurtenances attached to the land.

Real property consists of all interests, benefits, and rights inherent in the ownership of physical real estate. In no other property types is this distinction brought out more explicitly than in the appraisals of transferable development rights and air rights.

Transferable development rights, or TDRs, consist of the rights to develop one property that can be conveyed to another property. The rights to develop a property are limited by zoning laws, local ordinances and, in some cases, state and federal laws. Local governments are most likely to permit the transfer of development rights when their transfer facilitates the preservation of agricultural land, recreational property, open space, or historic properties.

These properties might be zoned in such a way that the owner is legally permitted to develop the real estate at a higher density. These rights can sometimes be conveyed to a non-contiguous parcel.

The property that receives the development rights is one that is better suited to take advantage of the higher density than the development rights permit. This is known as the receiving parcel and must be in a receiving zoning district. The parcel that conveys some of its development rights to another parcel is known as the sending parcel and must be in a sending district.

A local TDR provision may define development rights in units per acre, in square feet of floor area, or in units of height of structures, among others. It may establish rights in terms of credits that may, in turn, be sold. In almost all cases, the sending and receiving districts for transferable development rights are defined by local zoning ordinances.

Development rights can be purchased by private land owners who own land in a receiving district or by municipalities who wish to preserve property in the sending district. Municipalities typically issue bonds to fund such purchases. The development rights may also be transferred from a sending district in one municipality to a receiving district in another through inter-municipal agreements. If there is no immediate demand for development rights in available receiving districts, the development rights can be purchased and deposited in a development rights bank.

The preferred method of developing a professional opinion of the value of TDRs is a sales comparison approach using sales of similar TDRs as comparable sales. It’s critical that this analysis is performed by any one of a number of qualified Jefferson County commercial real estate appraisers who are state certified in Colorado, provided they have extensive experience in the valuation of TDRs. In the absence of sufficient sales of this type, however, the difference per unit of sales of properties with the defined development rights and properties without the development rights also provides an acceptable indication of value.

Incorporating an income approach, by contrasting the income potential of different development densities, is another method that may be used to support a value conclusion. The difficulty with these last two approaches is that the value of the transferable development rights to the sending parcel might not equal the value to the receiving parcel, as the level of density conveyed might not be demanded in the receiving district.

Air rights are rights to use space a defined distance above the land surface. If they are transferable, they represent a type of transferable development right and are valued in a similar way. A major difference between air rights and more conventional transferable rights is that exploiting air rights often requires additional construction elements to support their use. This may involve a building foundation that can support additional loads or structural elements above the surface level on which construction at the air rights level can take place.

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