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Market-Based Exchanges of Rights within a System of Performance Zoning

 

by:
John R. Ottensmann
jottensm@iupui.edu
School of Public and Environmental Affairs
Indiana University
Indianapolis, Indiana 46202

 

Abstract

Performance zoning provides a context within which market forces can be allowed to provide greater flexibility. The rights created within a system of performance zoning could be exchanged among property owners in two situations: With performance standards intended to protect nearby landowners, those landowners could waive their rights to that protection. With performance standards based upon capacity limits, landowners could transfer rights related to development and those capacity limits to other landowners. Such transfers of rights in a market context could increase the flexibility and economic efficiency of land use regulation.

 


 

I. INTRODUCTION

Traditional zoning has been frequently criticized for its lack of flexibility and for the economic inefficiencies introduced into the land market. Proposals have been offered to radically alter existing systems of land use control to allow market forces to play a greater role in determining land use. But the question arises as to whether these proposals sacrifice the achievement of the public objectives sought in a system of land use control.

Performance zoning represents an alternative to traditional zoning. It provides greater flexibility by requiring that any development meet specified performance standards, rather than meeting detailed requirements as to allowed uses and the characteristics of those uses. The flexibility allowed by performance zoning should allow greater opportunity for market forces to affect land use and thus provide for greater economic efficiency.

Within a system of performance zoning, responsiveness to market forces can be further increased by allowing market exchanges of certain of the rights created. This paper proposes that such market-based exchanges of rights could be allowed while preserving the public objectives sought in a system of performance zoning.

The following two sections of this paper briefly review the problems with traditional zoning and the economic critique of zoning. The alternative of performance zoning and its fundamental characteristics are then described. The next section proposes how rights created by a system of performance zoning could be exchanged in two situations--rights involving the protection of nearby property owners and rights involving capacity constraints. Issues involved in the implementation of performance zoning and the establishment and operation of such an exchange system are then discussed.

II. PROBLEMS WITH ZONING

Traditional zoning, often referred to as "Euclidean zoning" after the approach approved in the Supreme Court decision, has been subject to regular criticism over the past several decades since John Reps (1964) declared his "Requiem for Zoning." Many of the problems that have been identified relate to the inflexibility of the system that separates distinct categories of land uses into physically separated zones and to the difficulties associated with making these decisions in advance of development.

The separation of land uses established by traditional zoning combined with rigid controls on development in the individual zones creates undesirable patterns of development. Reps (1964) argued that zoning "balkanizes" cities into separate use districts, preventing mixtures of uses even when that would be more desirable. That rigid zoning requirements prevent design innovation was noted decades ago in an American Society of Planning Officials report (1968). More recently, zoning has been repeatedly criticized as a barrier to quality design, especially the traditional neighborhood design proposed by the "new urbanists" (Diamond and Noonan, 1996; Duany and Plater-Zyberk, 1992). This criticism of zoning has recently found expression in the popular media in the Atlantic Monthly article by James Kunstler (1996).

A zoning ordinance theoretically establishes the allowed uses for each parcel of land within a jurisdiction and would then be self-executing. Variances and rezoning amendments would be available to deal with the occasional circumstances in which the existing zoning posed a hardship for the property owner or when changed circumstances warranted the allowing of another use. However, in many jurisdictions, the practice of zoning has evolved into one in which the control over development effectively takes place through the granting of rezonings rather than by the original ordinance (Reps, 1964, Wakeford, 1990). Ellickson and Tarlock (1981) suggest that this is the norm in most metropolitan areas, at least for major developments. In a study of development in Fairfax County, Virginia, Clawson (1971) describes how the granting of thousands of rezonings over a brief period of time led to a zoning map that by 1963 bore little resemblance to the original comprehensive plan and zoning ordinance established in 1958 and 1959. An unpublished student research project (Ehle, 1996) found that in Indianapolis, over 40 percent of major new developments other than individual single-family homes took place on land that had recently been rezoned. In perhaps the greatest irony, the parcel subject to dispute in Euclid v. Ambler Realty because it had been zoned for residential use is now the site of a General Motors plant (Brooks, 1989).

Many jurisdictions with significant amounts of undeveloped land have further institutionalized the use of rezonings to control new development by placing the undeveloped land into very low-intensity holding zones that force prospective developers to seek rezonings for virtually all new development (Nelson, 1989). The National Commission on Urban Problems (1968) described this as a "wait and see" approach to zoning designed to give municipalities control over new development. Ellickson and Tarlock (1981) go farther in describing this as a "dealmaking" strategy where the jurisdiction extracts concessions from developers in return for the granting of the required rezoning.

In response to these problems with zoning, Reps (1964) and many others have proposed allowing greater discretion over land use decisions to local zoning authorities. The trend has been toward the development of new devices that provide for greater flexibility for development and for the administration of zoning. Indeed, in a brief review, Martin (1968) lists over twenty zoning techniques intended to provide greater flexibility.

III. THE ECONOMIC CRITIQUE OF ZONING

The economic justification for zoning is that the regulations prevent the negative external effects associated with the proximity of incompatible land uses (Clawson 1971, Moore 1978). By eliminating these externalities, the argument goes, zoning can produce a pattern of land use that results in greater overall economic efficiency than would occur in the absence of regulation.

By introducing controls on the private use of land, however, zoning necessarily results in land use decisions that are less efficient from the perspectives of the individual landowners. Proponents of zoning argue that these private inefficiencies would be offset by the increases in economic efficiency obtained by the prevention the negative external effects associated with unregulated patterns of land use. But the question arises as to whether the private inefficiencies created are indeed offset by the reduction in externalities (Nelson 1989). Furthermore, even if the net social benefits associated with zoning are positive, the question remains as to whether traditional zoning creates greater private inefficiencies than would be produced by alternative, more flexible forms of land use regulation.

Many have attacked traditional zoning on this basis. They have generally argued that zoning represents an excessive intrusion into private property rights. And they generally conclude that zoning, by interfering with the operation of the private land market, leads to economic inefficiencies in the private use of land that are not offset by any benefits gained through the reduction in negative externalities. Pogodzinski and Sass (1990) present a comprehensive review of economic theories of zoning.

Various critics of zoning have offered alternatives to the current system. These critiques share the desire to reduce government regulatory intervention and to increase the effectiveness of the market. Many of the suggestions involve dramatic departures from current practice and are likely to be politically unfeasible. Also, others would argue that they fail to adequately achieve the public purposes served, however imperfectly, by current systems of land use control. Garrett (1987) and Nelson (1989) review some of the critiques of zoning and the alternative proposals that have been offered as remedies.

Ellickson (1973) suggests that zoning be discarded in favor of an enhanced system of nuisance law. He argues that the appropriate function of zoning is the protection of landowners from the negative effects of land use on nearby properties. Nuisance law can serve the same purpose by providing mechanisms for compensating landowners for these negative effects. Such a system would either prevent the establishment of incompatible land uses or compensate nearby landowners when such a use would be economically efficient. Ellickson also favors the use of private covenants as another alternative to zoning for the control of land use.

Seigan (1972) favorably reviews development in Houston in the absence of zoning. He argues that covenants among private landowners represent a preferable alternative for protecting properties from incompatible nearby development. Widespread use of private covenants is thus offered as the alternative to traditional zoning.

Nelson (1984) takes this concept of privatization of land use controls one step further. He advocates the establishment of private neighborhoods as the alternative to zoning. The neighborhood organizations would possess not only the power to enforce covenants but also the power to authorize and sell rights for development in their communities.

Fischel (1985) provides perhaps the most comprehensive critique and the most extensive proposals for the reform of zoning. He argues that zoning regulations should be viewed as creating property rights or entitlements. These entitlements can then be analyzed within a market context. At the heart of his proposed reforms is the suggestion that zoning entitlements be made salable. Local governments would be authorized (and in some cases, required) to sell zoning entitlements to prospective developers.

Kmiec's (1981) proposal would replace zoning with a limited set of land use intensity standards for undeveloped land. These intensity standards would be established for residential, commercial, industrial, and mixed-use developments. Landowners could select the set of intensity standards to be used for developing their land. Kmiec would further require a developer to undertake improvement of public facilities up to the value of the increase in the value of their property provided by the selected intensity.

The common thread running through all of these analyses and proposals is the belief that traditional zoning places excessive restrictions on the use of private property. The goal is the establishment of less-restrictive systems that would allow private market forces to play a greater role in establishing land uses. The proposed remedies are all quite drastic, calling for the elimination of traditional systems of land use controls. Many of the public objectives achieved through zoning would be foregone with these alternative systems. Furthermore, the nature of the changes proposed make it quite unlikely that any of these proposals would be adopted as a replacement for zoning.

IV. THE ALTERNATIVE OF PERFORMANCE ZONING

Performance zoning--land use regulation based upon the application of specific performance standards--represents another alternative to traditional zoning. Performance zoning provides for greater flexibility, avoiding the detailed specification of acceptable uses for specific parcels inherent in traditional zoning. It provides for the exercise of greater discretion by the regulatory jurisdiction at the time developments are proposed while at the same time establishing specific standards for the exercise of this discretion. This addresses many of the problems that have been identified with traditional zoning. The increased flexibility should also allow for land development and use to be more responsive to market forces, resulting in more economically efficient outcomes. Furthermore, performance zoning provides a framework for the establishment of a system for the exchange of certain rights that could allow for even greater responsiveness to the market while preserving the public objectives sought in a system of land use control.

Under performance zoning, land development and use are regulated by a series of performance standards relating to specific impacts of a proposed development. Performance standards can, for example, limit the intensity of development, control the impacts of development on nearby land uses, limit the effects of development on public infrastructure, and protect the natural environment. Performance standards can be negative or positive. They can set a maximum level for the noise impacts on adjacent property or they can require specified types of buffers to be established between certain types of land uses.

Performance zoning dispenses with the large numbers of narrowly-defined and highly-specific use districts typical of traditional zoning. In its purest form, performance zoning may allow all possible uses and establish a uniform system of performance standards throughout a jurisdiction (Acker 1991). Some systems of performance zoning, however, do provide for the specification of a relatively small number of more generalized zones, with some broad restrictions on types of use and different performance standards in the different zones (Kendig 1980).

The key aspect of performance zoning lies in its regulation of land use through the establishment of standards intended to achieve specific public objectives. If one public objective is to limit the negative impacts of land uses on adjoining uses, attempts are made to define the undesirable levels of such impacts and develop standards to prohibit these. For purposes of assuring that development takes place within the capacity of the public infrastructure, such capacity levels are established. Then development is limited based upon these specific infrastructure-based impacts and limitations. For example, the effect of development on the transportation system could be controlled using standards involving maximum levels of trip generation per acre.

From the perspective of trying to achieve public objectives relating to land use, performance zoning is more flexible and ultimately more powerful than traditional zoning. Performance standards can potentially be established to achieve virtually any legitimate public objective. This is in contrast to traditional zoning, where the tools of specifying use and use intensity in zoning districts are relatively crude tools for assuring land uses that meet certain public objectives.

Because of the flexibility of performance zoning as a tool for regulating land use, a variety of very different systems have been developed and implemented. Kendig (1980) describes one approach that was originally developed in Bucks County, Pennsylvania. Comparative descriptions of some early applications of performance zoning have been provided by the Oregon State University Extension Service (Stackham 1974). A more recent study by the Urban Land Institute (Porter, Phillips, and Lassar 1988) describes performance zoning systems in seven communities.

By not restricting land use in any area to a narrowly-specified set of uses as does traditional zoning, performance zoning allows landowners much greater flexibility. Various commentators (Acker 1991, Eggers 1990) have suggested that this allows performance zoning to operate with less intrusion on the land market. The result would be greater economic efficiency in land development and use than under a system of traditional zoning. Yannacone, Rahenkamp, and Cerchione (1976) further suggest that performance zoning may be a useful alternative in reducing the extent of suburban exclusion associated with traditional zoning.

The types of restrictions imposed under a system of performance zoning are not unlike the restrictions that are included in private covenants. Of course, performance zoning involves government regulation, imposed and enforced by government, while private covenants are agreements among private landowners, enforceable by those parties. Because performance zoning is imposed through government action, performance zoning can affect all properties and provide a uniform level of standards throughout a jurisdiction. This overcomes a problem with the reliance upon covenants to provide protection, the very great difficulty of reaching agreement on and imposing private covenants within an area that has already been developed and with ownership dispersed among many parties. Those attracted by the advantages of covenants, as presented by Seigan (1972) and Nelson (1984), might consider the possible advantages of performance zoning in allowing such restrictions to be imposed on all landowners in a jurisdiction.

V. EXCHANGES OF RIGHTS

A system of performance zoning would create a series of rights or entitlements associated with the various performance standards. (Fischel 1985, provides one of the most extensive analyses of zoning in terms of the creation of rights.) Some of these rights would accrue to the owners of properties governed by the standards. These would involve rights to develop and use the properties and create impacts up to the levels provided for by the standards. For example, a property owner would have the right to develop the property and its associated travel up to the trip-generation-per-acre standard. Other rights would be created for those owning property in proximity to another property. Such a nearby property owner might, for example, have the right not to be subjected to noise from a property above a certain level or have the right to be protected from the impacts of nearby development by the mandated requirement that a specified buffer be provided.

These rights would be created and would inure to the various property owners by virtue of the establishment of the system of performance zoning and the associated performance standards. They are comparable to the rights that are produced by traditional zoning ordinances. For example, the owner of property in a particular zone would obtain rights to, say, develop a single-family house on a lot that exceeds a specified minimum size.

Within a system of performance zoning, it may be possible to identify specific situations in which the exchange of such rights among property owners could take place with little or no adverse impact on the remainder of the community. That is, one property owner might sell a portion of the rights created by the performance zoning system to another property owner. The second property owner would then be in a position to exercise (or not exercise) those additional rights as he or she chose. Such an exercise would typically involve the undertaking of more development or of development with additional adverse impacts than would have otherwise been allowed under the original allocation of rights.

If, as postulated, the exchange of rights can occur with little or no adverse effect on others in the community, allowing such an exchange might be deemed desirable by the community. The broader community is not made worse off by the exchange of rights. The landowners entering into the exchange of rights--one landowner selling rights to another--would be made better off as a result of the exchange. (If the landowners exchanging the rights were not made better off, they would not voluntarily agree to the transaction.) Since the welfare of the rights-exchanging landowners is increased, and the welfare of others in the community is not decreased, the exchange of rights would result in a net increase in the total welfare of the community.

The economic argument against zoning claims than zoning introduces economic inefficiencies by restricting the operation of the private land market. The exchange of rights in a system of performance zoning would allow a degree of flexibility in land development and use beyond that provided by the initial allocation of rights associated with the performance standards. Therefore, allowing the exchange of rights would increase economic efficiency.

If one accepts this argument and the desirability of allowing the exchange of rights under the conditions specified, the issue then becomes one of identifying situations that meet those conditions. Within a system of performance zoning, under which circumstances could rights be exchanged among property owners with minimal impact upon others in the community? Two such situations are identified in this paper. One involves the case of performance standards protecting nearby property owners from the adverse impacts of land development and use on a parcel. The second arises with performance standards limiting development so as to meet some capacity constraints existing within an area.

Rights Protecting Nearby Property Owners

In virtually any system of performance zoning, certain performance standards will be imposed to protect nearby property owners from the potential adverse impacts of land development and use on a piece of property. As indicated above, such standards can involve prohibitions on activities that would generate negative effects above some threshold level. A limitation on the noise impacts of the use of a piece of property, requiring that any noise be less than some specified decibel level at the property line would be one example of such a standard. Other standards can involve affirmative requirements that the developer of a parcel of land make certain provisions to protect nearby property owners from certain negative impacts. A standard requiring the provision of a buffer having certain characteristics would be an example of this type of standard.

Both types of performance standards have the effect of creating rights that inure to the benefit of the nearby property owners. The negative standard, such as the noise limit, would provide nearby property owners with the right not to be subjected to noise in excess of the threshold from uses of that parcel. The affirmative standard, such as a buffer requirement, would provide nearby property owners with the right to have such a buffer developed in the event of development of the property.

Such performance standards (and the associated rights that would be created) would substantially affect only the owner of a piece of property and those nearby property owners. The owner of the property has his or her rights to use the property reduced by these standards. Nearby property owners gain rights to be protected from the negative impacts and to benefit from the affirmative requirements. Property owners in the remainder of the community neither gain nor lose to any substantial degree by the establishment of these standards and these rights.

Assuming these conditions are met, the conditions are created for permitting the exchange of such rights among the parties. The nearby property owners could sell their rights (or a portion of their rights) to a property owner. The property owner acquiring these rights would then be allowed to undertake development and use the land in a manner that did not respect those rights. For example, the nearby property owners might sell a portion of their rights to be protected from noise impacts at the prescribed level, allowing a higher level of noise. Then the property owner could undertake to use the land in a manner that produced greater noise, up to the agreed-upon level. Or the nearby property owners could relinquish their rights to have a specified buffer created as part of the development, agreeing to a more limited buffer or to no buffer at all. The property owner could then develop the property and provide less buffering than otherwise would have been prescribed by the performance standards.

The transfer of the rights from the nearby owners could be induced and take place in a number of ways. Most obvious would be the direct purchase of the rights, with cash compensation. In other situations, property owners might agree to exchange such rights with one another, allowing all of the parties to undertake the development and use of their land without being subject to certain performance standards. (Of course, rights might also have to be acquired from other nearby landowners not party to such an exchange.) Rights could be transferred in exchange for noncash compensation, including agreements to undertake certain actions in developing the property. For example, a nearby property owner might agree to transfer rights associated with a buffer requirement in exchange for a promise on the part of the land owner to provide greater setbacks and to undertake other enhanced landscaping. Finally, especially in the case of proposed activities involving only minimal violations of the standards, a neighboring landowner might be willing to transfer the rights without compensation. This might be most likely to occur within residential neighborhoods, where norms of neighborliness and community standards might serve to encourage such transfers in those situations. Ellickson (1991) stresses the important role that such norms and exchanges based upon expectations of neighborly behavior can play in land use conflicts, superseding the use of formal contracts and cash compensation.

In establishing a program to allow for the transfer of such rights, the jurisdiction establishing the performance standards might choose to place limits on the levels of certain rights that could be transferred because of concerns for public objectives that transcend the interests of the individual parties. For example, rights associated with the prevention of noise impacts might be limited to increases in noise only up to some maximum level. Rationales for such limits could include concerns for public health or concerns that even greater impacts could have negative community effects extending to other parties than the nearby property owners transferring those rights.

One difficulty that could arise in the negotiation of the exchanges of rights with nearby property owners would be the possibility of one of the nearby property owners holding out, either for personal reasons or to extract a monopoly profit associated with any one landowner’s ability to make or break a deal. Of course, this holdout problem is hardly unique to performance zoning within the field of real estate. The problem of the holdout in a land acquisition situation is perhaps the classic example of the problem. And for that matter, it could be argued that negotiations with surrounding landowners over a proposal to rezone a property could also be subject to holdout behavior.

Rights Involving Capacity Constraints

Some performance standards would likely involve constraints upon development based upon the capacity of natural or man-made systems to accommodate such development. For example, the capacity of the road system in a particular area might dictate standards involving maximum levels of trip generation per acre for new development in that area. Similar standards might be associated with the capacity of other types of infrastructure to provide services within an area. Other performance standards might be associated with the natural characteristics of an area and the desire to protect the natural environment by limiting certain impacts within the limits of the capacity of the environment to bear those impacts.

In some of these cases, the public objective served by the imposition of standards relating to capacity constraints may be met so long as the total of the burdens placed on the system by development in the area does not exceed the total capacity. Within a given area, the distribution of those burdens may not substantially affect the ability of the system to accommodate them. The example of trip generation standards associated with the capacity of the road system will be considered. Within a specific, limited area of the city, the road system is considered to have a certain level of capacity to carry automobile trips. A performance standard involving a maximum level of trip generation per acre is established to limit automobile trips to the existing or planned capacity of the road system. The objectives are to minimize congestion and provide for an adequate level of service on the system. However, for purposes of achieving these objectives, it may matter little where within the area those trips come from. It may only be important that the total number of trips in the area is limited to the capacity of the system. The imposition of a uniform limitation on trip generation per acre through the performance standard is implemented not because it represents the only manner of achieving the objectives but because it represents an equitable allocation of the rights to generate trips to the property owners throughout the area.

This then describes the situation in which the exchange of rights among property owners might again be considered: A performance standard involving maximum levels of some impact is imposed in an area to achieve objectives associated with the capacity of some system in the area to handle such impacts. The standards are established in some uniform manner throughout the area. However, the achievement of the objectives is not affected by the distribution of those impacts within that area. In such cases, the exchange of rights created by the imposition of the performance standard could take place with little or no adverse impact in terms of the achievement of the desired objectives.

Under a maximum trip-generation-per-acre standard, every landowner would gain the rights to use their land in such a manner as to create a certain number of trips, which would depend upon the standard and upon the size of the landowner's parcel. One landowner could transfer the rights to generate some portion of those trips to another landowner within the area. The landowner giving up some of the rights would then have reduced options in terms of the use of the land, for any allowable use would now have to generate fewer trips. On the other hand, the landowner receiving the rights would now be allowed to generate more trips. That landowner's options in terms of development and the use of the land would be increased. The landowner would be allowed to undertake more intensive development that produces a greater number of trips. In terms of the original objective, however, the transfer of the rights would have no effects. The increased number of trips that could be produced by the second landowner would have been exactly offset by the reduction in the number of allowable trips for the original landowner. The total number of trips that could be generated within the area would not have been increased. The achievement of the original objectives would therefore not be affected.

Once again, the exchange of the rights could take place pursuant to cash or noncash compensation. The barter or direct exchange of rights would not be applicable in this situation for the same rights, because such an exchange would have no effect. Situations might be envisioned in which property owners might choose to trade one capacity-based right for another when they had different needs. Or they might trade a capacity-based right for rights associated with the protection of nearby property owners.

As suggested in the previous situation, the jurisdiction establishing the performance standards might choose to place limits on the extent of the transfers that would be allowed. This might likely take the form of a maximum percentage increase in the impacts that could be accumulated and exercised by any property owner. For example, total trip generation as the result of accumulating rights from other property owners might be limited to some percent increase over the trip generation originally permitted by the performance standards. Such limitations would be appropriate when it is deemed that the excessive concentration of the impacts might pose additional problems that go beyond the desire to limit the overall impacts within an area.

VI. IMPLEMENTATION OF PERFORMANCE ZONING AND THE EXCHANGE SYSTEM

The suggestions for the possible exchanges of rights presuppose the existence of a system of performance zoning in a jurisdiction. Implementation would involve both the enforcement of the system of performance zoning and the development of appropriate provisions to govern and manage the exchange system.

Implementing the Performance Standards

While the primary contribution of this paper is intended to be the proposal for allowing the exchanges of rights within a system of performance zoning, some basic observations will be offered on the implementation of the performance zoning itself. Upon hearing about performance-based land regulation, many fear that this would involve the complex measurement and monitoring of impacts after a development has been constructed. While such activities might be required for some performance standards, compliance with many standards can be established by assessing the nature of the proposed development and its construction.

Systems of performance zoning invariably establish a permit process for new development in which compliance with the standards is assessed prior to the granting of the permit. The assessment is based upon the nature of the proposed development and on the plans submitted for that development in a manner very similar to the process for the implementation of subdivision regulations. The nature of the assessment and the ultimate enforcement of the performance standards will vary for different standards.

Some of the performance standards will require that the physical development of the site meet certain requirements. For example, performance standards might set a maximum impervious surface ratio or might specify the provision of certain types of buffering. Assessment of the development proposal would be based upon the extent to which the plan for the proposed development was consistent with these standards. The ultimate enforcement would depend upon the inspection of the development after completion to determine that it was consistent with the approved plan. This is no different from the enforcement of the requirements of subdivision regulations. In fact, the enforcement of such performance standards is not fundamentally different from the enforcement of height, setback, or side yard requirements of traditional zoning ordinances: One would look at the development as built and determine whether it met the requirements.

Compliance with other performance standards would be based upon the assessment of the proposed development by using specified handbooks or formulas to determine the impacts of the development. For example, trip generation could be assessed by determining the trips associated with the proposed use by using a handbook of trip generation rates. Compliance with the standard would depend upon the user of the development maintaining the proposed use. There would not necessarily be any attempt made after completion of the development to measure the actual trip generation. Rather, as long as the proposed use were not changed, the property owner would be deemed to be in compliance with the trip generation standards. Thus, enforcement would not be any different from the enforcement of the use requirements in a traditional zoning ordinance. (Obviously, those jurisdictions imposing requirements for trip reductions below those normally associated with a given use would need to undertake subsequent monitoring of actual trip generation.)

Performance standards associated with the adequacy of existing public facilities would be assessed at the time the permit was being issued. No issue would arise with respect to continuing compliance based upon possible future changes in the provision of those public facilities.

Finally, there might be some performance standards that might require the subsequent measurement of impacts after the use has been established. A maximum noise standard might be one example. In most cases, the need for such measurement and any subsequent enforcement actions would likely be required only in a small minority of cases and would most likely be undertaken in response to public complaints.

One of the objectives in establishing a system of performance zoning would be the identification of standards that would minimize problems in enforcement. Standards associated with the nature of the development as built or with handbook or formula-based determinations of impacts would in general be preferred to those requiring subsequent measurement and monitoring, to the extent they are able to achieve the desired public objectives.

Implementing the Exchange System

Statutory provisions would be required to authorize and recognize the exchanges of the rights established under the performance standards. These provisions would need to specify those standards for which the exchanges of rights would be allowed, which parties could be involved in such transfers, and any limitations associated with the exchanges. Procedures would also need to be established for the recording of rights exchanges and for the interpretation of such exchanges in the event of modifications to the performance standards.

For the exchange of rights involving the protection of nearby property owners, the performance standards affecting only nearby property owners would have to be identified. This would involve a judgment that the benefits produced by a standard accrue primarily to the owners of nearby properties and not to others in the community. The determination would not necessarily have to be that the total effect of a standard is on those nearby property owners. The decision could be reached that the effect on others farther removed from the property is sufficiently small that it is reasonable to allow the nearby property owners the rights of exchange.

Which nearby property owners are deemed to hold the rights that would have to be acquired would have to be defined. Presumably this would be a distance-based criterion, specifying either owners of adjacent properties or owners of all properties within so many feet of the affected property. A determination would be required as to whether rights would have to be acquired from property owners in all directions or, in cases where the impacts involved properties only in certain directions, whether rights would need to be acquired only from property owners to that side of the property. For example, could the owners of property along one lot line of the affected property sell their rights to be protected by a buffer, obviating the requirement to develop the buffer along that property line only?

The decision regarding the nearby property owners to be included involves a tradeoff. The more parties that are included, the less is the chance that someone who felt affected by the standard would not be a party to any exchange or subsequent modification in the nature of the allowed uses. On the other hand, the inclusion of more parties makes the possibility of arranging the exchanges more difficulty and less likely. In particular, the greater the number of nearby property owners from whom rights have to be acquired, the greater will be the likelihood of one of the property owners causing problems by holding out, as discussed earlier.

It is possible that the judgment as to the affected nearby property owners could differ for various performance standards, with some standards involving impacts with effects on more remote property owners than others. A judgment would have to be made as to whether the advantages of having differentiated definitions of nearby, affected property owners outweighs the additional complexity created.

For certain of the performance standards made subject to exchange, limits might be placed upon the extent of the rights that could be transferred. These limits could involve determinations that exchanges (and hence land development and use) above some level might create negative impacts that extended beyond the nearby property owners or otherwise might not be in the public interest. A standard involving noise impacts would present an obvious example. A restriction might be placed on the level of the rights to be transferred to noise up to some maximum level. Two reasons might serve to justify such a limit: Greater noise levels would have negative effects on others beyond the "nearby owners" (however defined). Also, noise levels above a certain level might be deemed inappropriate given considerations of public health.

Similar considerations would have to be addressed for the exchange of rights involving capacity constraints. First would be the identification of the performance standards for which such exchanges would be appropriate. This would involve the determination that the exchange would have sufficiently minimal negative impact with respect to the objectives sought.

The extent of the areas within which such exchange could take place would have to be defined. For certain capacity standards, the definition of the area may be clearly established by the nature of the physical systems involved. Rights involving drainage standards, for example, might reasonably be exchanged within watersheds. For other standards, such as a trip generation standard, the determination of appropriate areas might be more difficult. Exchange areas either could be defined as a fixed set of areas within which exchanges would be allowed or could be based upon distance (within so many feet or miles of the property).

The larger are the exchange areas, the more opportunities would be provided for such exchanges to take place. However, the larger the areas, the greater the possibility that the exchange could result in an outcome less desirable than provided for under the original standards. The tradeoff is similar to that involving the definition of the nearby property owners.

Maximum limits would likely be desired regarding the magnitude of the rights that could be acquired and exercised for any property. This might well be expressed as some maximum percentage above the initial impacts allowed under the performance standard. Thus, for trip generation, a trip generation level per acre would be allowed that is no greater than some percentage above the level provided for in the performance standard. This would avoid "excess" accumulation and exercise of rights at one location that could have negative effects and be detrimental to the public interest.

The proper recording of exchanges of rights would be required so that the information would be available for use by the agency administering the performance zoning and to provide notice to prospective purchasers of properties as to any such exchanges that affect those properties. The actual exchanges of the rights and the recording of those exchanges might most appropriately be done using standardized forms that would be provided by the planning department or other agency administering the zoning.

It would be appropriate that the exchanges of rights be recorded with the agency so that they would have that information available for making the required decisions for the granting of permissions for land development and use under the performance zoning. To further assist them in administering the standards, it would be reasonable to require that an applicant for such permission note any applicable rights exchanges in the request. Having the rights exchanges recorded with the planning department would also allow the analysis of the extent and patterns of such transfers to allow assessment of the broader implications.

The question exists as to whether the recording of the information with the planning department or comparable agency is sufficient to provide adequate notification to potential purchasers of properties and other interested parties. The information would be a matter of public record, and the agency could provide such information to any party making a request. This is generally where variances to zoning ordinances are now recorded. However, if the rights exchanges became commonplace, the provision of this information on a routine basis to the public might become a substantial burden on the department. Also, some potential purchasers of property might not be aware of the need to seek such information from the department.

As they are being viewed here, the rights exchanges involve transfers of specific interests associated with real property. A rights exchange could be viewed as being similar to such actions as the granting of easements allowing access across a piece of property. As such, rights exchanges might be recorded in the office responsible for all such land records. In this manner, they could be consulted and would be presented in any title search involving any piece of property.

Some might argue that such recording--in the planning department or the land records office--might constitute insufficient notice to potential purchasers of property. Especially for unsophisticated purchasers, such as many homebuyers, the inclusion of such information in a long and complicated title search, presented at the time of closing, might be considered less than adequate. There is also the concern that transfers involving nearby properties but which might not be included within a title search, might have significant ramifications for the property under consideration.

One factor would tend to mitigate such concerns in many circumstances, however. The rights transfers would most frequently be sought shortly before planned development of a piece of property. For example, the developer of a parcel might obtain rights that would allow a reduction in the provision of buffers or permit more intensive development with greater trip generation. In most instances, development of the property is likely to take place within a reasonable period of time after the exchange of rights. Once the development has taken place, the consequences of the exchanges of rights are likely to be visible and obvious at the site. A prospective purchaser of a nearby property would see the amount of buffering that had or had not been provided and would see the intensity of the development that had been undertaken. The prospective purchaser would take that into consideration in the determination of the value of the property in question. The "notification" would come through the observation of the conditions in the area, so that reference to the formal exchange of rights would have lesser import. Likewise, if the exchange of rights diminished the development that could take place on a piece of property, the prospective purchaser would see the consequences in terms of reduced development. Only when vacant land were involved--when either the parcel under consideration for purchase or a nearby parcel are vacant--would reference to recorded transfers be the sole source of information. And any purchaser in such situations should be reasonably expected to pay attention to the conditions for development on the parcel in question and on nearby parcels, just as they now should reasonably determine the zoning of the properties in question.

The issue also arises as to how exchanges of rights are to be interpreted when changes are made to the original performance standards. Should exchanges be made in absolute terms or in terms relative to whatever is the prevailing standard? For example, in allowing more noise, how should an increase of 10 decibels above a current standard of 60 decibels be viewed? It could be a relative transfer--the right to generate 10 decibels more noise than the prevailing standard--or an absolute transfer--the right to generate 70 decibels of noise. These alternatives have significantly different implications in the event that the noise standard is raised or lowered from its current level. The decision regarding the nature of the transfer and the associated assumption of risks in the event of changes in the performance standard could be left to the parties to the transaction. Alternatively, provisions might be made to require one or the other approach if that were felt to serve the public interest and to protect the interests of the parties to exchanges.

VII. CONCLUSIONS

Assuming a system of exchanges of rights under performance zoning were to be instituted as described above, what would be the consequences? If the assumption is met that the exchanges would have little or no impact on those who were not parties to the exchanges, other parties would presumably be unaffected. In reality, the exchanges would mean differences in development from what otherwise would have been allowed. Some might have preferences--negative or positive--regarding the newly-allowed development. For capacity-related constraints, the different patterns of development and use would have somewhat different impacts, and these could be favorable or unfavorable. But any of these consequences would presumably be minimized by limiting exchanges to those situations where the effects on other parties is minimized.

Obviously the parties to any exchanges of rights would be made better off by the establishment of the opportunities to make the exchange. This follows directly from the fact that they voluntarily entered into the transaction.

The entire discussion has focused upon landowners and their rights. What about any effects of rights exchanges upon tenants? Individuals renting housing might be adversely affected by certain rights transfers by the owners of their housing. Since residential leases are usually of terms of a year or less, tenants could respond to negative consequences by moving, so their exposure to the negative impacts would be very limited in duration. After any adverse impact had been created as a result of a rights transfer, prospective tenants would reasonably consider that impact in making a decision as to whether to rent the housing and what price to pay. The owner of the property should reasonably consider the effects of any such rights transfer on the future rental value of a property.

This rather unconcerned consideration of the effects on tenants applies to those situations in which the tenants have reasonable ability to move to other housing. It might not necessarily apply to low-income residents of low-cost housing, whose options are more severely limited. There may be room for some legitimate concern regarding the effects of rights transfers on their welfare. This certainly argues for limits on rights transfers such that they could not result in impacts that have negative consequences in terms of public health. There may be a need for further consideration of possible adverse consequences in such situations.

The problem of rights transfers generating adverse consequences for tenants may be more severe in situations involving long-term leases. Should consent from and compensation to long-term lessees be required as part of an exchange of rights? Since these generally involve commercial leases, perhaps the lessees are more able to protect their own rights. It could be argued, perhaps, that a rights transfer constitutes a unilateral change in lease terms that would form the basis for a cause of action against the lessor.

Which property owners, under which circumstances, would be most likely to engage in exchanges of rights as described above? Since few similar approaches to land use regulation have been implemented, the consideration of this question is largely speculative. One might guess that larger landowners might be more involved in exchanges than owners of smaller parcels. This could arise from their greater sophistication (on average), the fact that fewer exchanges might be needed to achieve a desired outcome, and the fact that the benefits of the exchange might accrue to more property and hence be more valuable. Does this imply that more exchanges are likely between owners of present or future commercial and industrial property? Perhaps the exchanges of rights would allow property owners in a commercial or industrial area to establish mutually-acceptable standards for development and use that are consistent with their interests but that do not necessarily meet all of the performance standards. But, I must stress, this is speculation.

Traditional zoning can also involve negotiations with nearby property owners and offers of certain forms of compensation in return for their support for petitions for rezoning. In that sense, some of the same kinds of activities as those being suggested here are already occurring. The question then arises as to whether providing for the exchange of rights under performance zoning has advantages over the current practices. In at least two areas, the performance zoning alternative would seem to be better: in reducing the transaction costs involved and in placing the negotiations and the ultimate outcome more clearly within a framework determined by deliberate public policy.

If both traditional zoning and performance zoning with exchanges of rights led to similar outcomes, then one basis for distinguishing among them would be the transaction costs imposed by the systems. In both instances, a landowner attempting to undertake a development not allowed under existing regulation would be required to negotiate with adjoining landowners. In the performance zoning case, the range of parties to such negotiations and the specific subjects for the negotiation--the rights that could be exchanged--would have been defined previously. Under traditional zoning, the negotiation would be for "support" in a subsequent proceeding, with the range of participants and the subjects of negotiation being relatively open and undefined. The clearer framework for the negotiating process in the performance zoning case might make such negotiations easier and reduce the transaction costs. One exception might come with the possibility of one party in the performance zoning negotiation holding out, which might be more feasible in that case because of the legal specification of the required parties to the negotiation. Under performance zoning, successful conclusion of the negotiation would result in exchanges of rights and the ability to move forward. With traditional zoning, the process and the transaction costs continue after the conclusion of any negotiations, with the rezoning case being considered in a public hearing before a planning commission, which is empowered to make the next decision with respect to a rezoning. Furthermore, the uncertainly associated with rezoning decisions and the possibility of a negative outcome impose further costs.

An additional advantage of the system of performance zoning and exchanges of rights is that the process and the ultimate outcome take place within a framework that has been established through prior, explicit public policy decisions. The performance standards, the provisions for the exchanges of rights, and therefore the context for arriving at the eventual outcome would have all been provided for in the ordinance. The process of negotiation and rezoning under traditional zoning is quite the opposite. The zoning ordinance establishes the provisions for the initially-zoned uses. Negotiations and the nature of concessions appropriate to gain support for rezonings are never addressed. Likewise, traditional zoning provides few criteria for the making of the final decision as to rezoning. The rezoning of properties is largely an ad hoc decision making process. While some might argue in favor of the greater flexibility provided in this case, rezonings open the possibility of rather arbitrary decision making that is antithetical to sound public policy.

If the assumptions set forth in this paper are met, allowing the exchange of rights within a system of performance zoning would make it possible for the parties to the exchange to increase their welfare with minimal adverse effects on other parties. The market forces influencing land development and use could thus be accommodated to a greater extent than would be the case in a similar system that did not provide for such exchange. This could provide for increased economic efficiency while maintaining the public objectives initially sought in the system of land use regulation.

 


Acknowledgements: I would like to acknowledge the importance to the development of these ideas the stimulus provided by the members and staff of the Zoning Alternatives Task Force of the Regulatory Study Commission of the City of Indianapolis: Tom Crouch, Marsha Mackey, Mike Quinn, Eugene Lausch, and Tom Bartlett. I would also like to acknowledge the contributions made by students in my land use planning seminar, especially Charles Heintzelman. Finally, two anonymous referees made valuable suggestions regarding additional issues to be addressed. Neither the Zoning Alternatives Task Force nor any other individuals necessarily support the proposals presented in this paper and certainly bear no responsibility for anything contained in this paper.

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