Although there are a variety of incentive programs specifically geared towards the preservation of historic buildings, most people are primarily familiar with tax incentives at the federal and local levels. However, there is another class of incentives that falls under the rubric of "regulatory relief," that can be very important to developers. Regulatory relief for registered landmarks in Seattle can come in the form of building code variances, zoning use variances, and density bonuses. One of the more complex regulatory incentives is a type of density bonus, known variously as Transfer of Developable Rights (TDR) or Transfer of Development Credits (TDC) programs.

TDR Basics

Zoning regulates building size in two principal ways: through height restrictions, known as the building envelope, and through density restrictions. Downtown density is regulated by floor to area ratio (FAR). In the simplest terms, to determine the FAR of a structure, the square footage of a building is divided by the square footage of the lot, so that an FAR of 1 means that a building has a floor area equal to the area of the lot (but it does not mean that all of the square footage is contained within one story, such as when a building footprint occupies only 50% of the lot).

Generally, downtown lots have, by right, a base FAR that can be expanded based on bonuses given for public amenities, such as landmarks, low income housing, public open spaces. In a hypothetical example, a lot may have a base FAR of 5 and a maximum FAR of 10. Without additional FAR, a building on this lot would limited to half its potential density.

TDR programs began attracting the attention of planners in the 1980s as a powerful incentive to encourage certain kinds of development. The concept behind TDRs is relatively simple. Under certain circumstances, the owner of a public asset can calculate current FAR and allowed FAR and "sell" or transfer the difference (also known as development rights or air rights) as commercial square footage. Typically, this transfer runs with the land and the rights cannot be exercised again. The building with surplus development rights is known as the "sending site" and the building receiving these rights is referred to as the "receiving site." The sale of development rights for older buildings or city landmarks with surplus FAR can be a lucrative source of equity.

Local Examples

Seattle uses density incentives and controls to accomplish a variety of objectives, from the prevention of sprawl, to housing, to landmarks preservation. The combination of zoning, density bonuses, and TDR programs is complex, and the implications can be difficult to predict. Landmark TDRs have rarely been used in Seattle, and recent changes to the law both enhance, and potentially reduce, their usefulness.

Prior to 1985, Seattle permitted the transfer of development rights between buildings on the same block. Examples of early in-block transfers in Seattle include the Coliseum Theater on 5th Avenue and Decatur Building on 6th Avenue. Unlike later incarnations of the TDR program, in-block transfers do not require special public amenity status of the sending site. This means that any building with extra square footage over its base FAR can transfer that square footage to any other building on the same city block. This type of transfer is still used. A current example is the transfer of rights from the downtown YMCA Building to the IDX Tower project between 3rd and 4th Avenues and Marion Street.

Although the YMCA is a Seattle landmark and would have been able to sell credits under the landmark TDR program, as an in-block transfer, it did not need to. The YMCA Limited Partnership owned surplus square footage over its base FAR through its low-income housing status and additional square footage purchased from the City of Seattle's TDR Bank (discussed below). The IDX project needed that square footage to reach its target height. The transfer provided capital toward the YMCA renovation and fostered a closer cooperation between the YMCA and the IDX Tower design team, which increases the likelihood that the two structures will be compatible with one another.

As part of Seattle's 1985 Downtown Plan, a tiered TDR program was established for Seattle's downtown core that included two principal components: the protection of Seattle landmarks and the preservation and rehabilitation of low-income housing. Eligible sending sites were landmark buildings or low-income housing that were located in DOC1, DOC2, DRC and DMC zones south of Virginia Street. The transferable credits were determined either by subtracting existing square footage from the base FAR, in the DOC zones, or for DMC zones, by subtracting floor area from a FAR that was determined by the height limit.

Under the original 1985 program, maximum allowable density could be reached without the use of landmarks TDR credits. Landmarks TDR credits could be used for the first and second tiers of downtown core projects, but the same densities could be achieved through the inclusion of other amenities and bonuses. It was possible under this program to achieve up to twice the base FAR using landmarks credits alone, but to gain FAR above this required housing credits.

In 1988 the city, to protect the TDR market from lack of demand, created a TDR bank that could purchase and hold TDRs. However, for many years the TDR bank was not authorized to purchase landmark credits. This, in combination with Seattle's strong landmark controls and a developer's ability to use density bonuses other than landmarks credits, kept the market for landmark TDRs soft. Originally designed to promote affordable housing, the TDR bank's purchasing authority was later expanded to Major Performing Arts Facility and Landmark Performing Arts Theater TDR credits. Although Landmarks Performing Arts Theater TDR purchasing has been discontinued due to its narrow focus, it provided over $2 million for projects such as the Paramount Theater and Eagles Hall/ACT Theater renovations. Most recently, Landmarks and Open Space TDRs have been added to the TDR Bank program.

Aside from the Paramount Theater and Eagles Auditorium, most TDRs from older buildings within downtown Seattle have been low-income housing, such as the Larned Apartments on Westlake and the Fleming Apartments in Belltown. Many of these were purchased by the TDR Bank, which highlights its importance for facilitating TDR usage.

In 1989, the downtown height and density regulations were changed by the controversial passage of the Citizens' Alternative Plan (CAP). CAP significantly reduced building height limitations and both the base FAR and the maximum FAR. Currently the maximum FAR in the commercial core is 14, and for most downtown areas the base FAR is 5. However, a result of these changes was that many other older buildings in the city were suddenly at or above their base FAR, which reduced the available supply of TDR credits.

The well known Rainier Club at 4th Avenue and Marion Street is an example of a downtown landmark that is below its base FAR. The base FAR in this zone is 6; the building contains approximately 57,452 applicable square feet on a 28,564 square foot lot. This equals slightly over 2 FAR, meaning that slightly under 4 FAR are potentially available. Multiplying the available FAR (4) by the square footage of the lot (28,500) shows us that the Rainier Club has approximately 114,000 square feet that it could sell.

A survey conducted by the city in 2000 estimated that while 1.6 million square feet of TDRs were needed to meet development goals, there were only 1.2 million square feet eligible for transfer. Since then, the eligible sending area has been expanded north to Denny Way in an effort to address this deficit, and the base FAR for DOC-1 zones has been increased.

Likewise, Seattle's TDR programs were restructured last year to focus on housing development downtown, and are no longer tiered. The calculation of transferable FAR was simplified to use base permitted FAR, rather than a height dependent FAR in some zones. General bonuses through the inclusion of onsite amenities, without a housing component, can now achieve a maximum of one additional FAR over base. Further gains in FAR can only be achieved through a composition of 75% housing bonuses or TDRs, and 25% credits or bonuses from an "other" category, which includes Open Space TDRs, Landmark TDRs or FAR granted by the inclusion of onsite amenities. The 75/25% distribution applies to the downtown DOC-1, DOC-2 and DRC zones only; outside of the downtown core, additional density can be achieved through general bonuses.

The Market

Because it is no longer theoretically possible to achieve maximum density through landmarks TDR credits alone, the city's TDR bank is now permitted to purchase and sell landmark credits. To guarantee a market for these city owned credits, the 25% allocation must contain at least 1/5 Landmark TDRs specifically from Seattle's Landmark TDR Bank, if they are available. If not, this stipulation does not apply. Because Seattle has a strong set of controls built into the landmarks process, this places increased importance upon the city to solicit and purchase Landmark credits through its banking program.

The inherent complexity and somewhat unpredictable nature of the real estate market, and therefore the market for development credits, creates another barrier toward their usefulness for owners of historic properties. It can be difficult for owners to assess the value of landmark development credits. This fact has been partly addressed through a TDR inventory commissioned by the city in 2000, which estimated the TDR square footage available and assessed development conditions, and through the future use of the bank.

Recently there have been discussions about extending Seattle's TDR sending site eligibility to further outside of the Seattle downtown core, because suburban land is inexpensive. However, Seattle downtown landmarks are often on land that is relatively inexpensive compared with Seattle's commercial core, which is the main receiving area. For example, the high-rise financial district near Madison Street, a DOC-1 zone, currently has a much higher average value per square foot than does the area long Westlake Avenue in the Denny Triangle, zoned DOC-2 and DMC. Buying square footage in the Denny Triangle and developing it along 5th Avenue and Marion might be sort of like buying a house in Bellingham and selling it in Seattle. In terms of return on investment, the purchase of a TDR bonus can already be very beneficial.

The evolution of TDR programs and density bonuses in Seattle shows a desire to solve many development issues within the downtown area, but as a result there is a complex system of bonuses, exemptions and transferable rights. Although a potentially valuable source of equity for a development project, understanding these programs can be somewhat daunting. Persons interested in finding out more about TDR programs should contact the Department of Design, Construction and Land Use at 206-684-8600, or visit their web page. For information regarding Historic Preservation in Seattle, visit the Office of Urban Conservation's website.

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