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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.

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