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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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