Density Transfer Fee: A Fee in Lieu of a Transfer of Development Rights (TDR) Program

The Town of Berthoud, Colorado has a population of almost 5,000 people. It is located between Denver and Fort Collins in an area that continually gets rated by major magazines as one of the top 100 best places to live in the United States. Although historically an agricultural town, it is under tremendous growth pressure. The Town is trying to preserve its small town charm and its agricultural heritage by maintaining surrounding productive farmland.

A conventional TDR program was considered to help pay for the needed preservation dollars. However, due to limited budget and staff, it was deemed too complicated to design and implement. The main concern was the effort required and feasibility of actually creating a robust market with competitive pricing for the TDRs. Charging a fee in lieu of a TDR program was determined to be far easier. The fee method also has the benefit of providing more control over exactly where preservation dollars are spent. This is especially important since certain farms are more important to preserve than others and not achieving preservation of the entire targeted area is a very real possibility.

The Town refers to the fee as a density transfer fee. It is collected upon issuance of a building permit for a new dwelling unit that was made possible by a Town upzone (a rezone that allows higher density). The fee is calculated in conjunction with subdivisions and credits are given for prior density allowed on the property and for every acre of qualifying open space provided. The proceeds are spent to purchase existing development rights from surrounding farm property in accordance with Town’s land use plan. Thereby completing the transfer of units from farmland to Town. (Ordinance)

For example, the owner of a 100-acre property with county zoning density can build 20 homes. It is then annexed into town and given an upzone. The developer receives approval for a subdivision with 400 homes and 20 acres of qualifying open space. The fee would be then calculated as follows. The base fee in Berthoud is currently $3,000 per house, in this case multiplied by 400 homes totals $1,200,000. From this figure credits are subtracted: 20 for prior allowed density and 20 for qualifying open space. Each credit is equivalent to one home, thus 40 credits times $3,000 equals $120,000. This credit is subtracted from $1,200,000 creating a total of $1,080,000 due from the subdivision. Dividing this total by 400 homes equates to $2,700 due with each building permit. These dollars are then spent on purchasing development rights from surrounding farms. Grants and matching dollars are also sought in order to leverage Berthoud’s agricultural preservation and open space fund. (Density Transfer Fee Calculation Guidelines)

While this fee is easier to design and implement than a TDR program, the difficulty comes in determining the appropriate and defendable fee for your area. Enclosed is a separate page showing how Berthoud approached this task. The assistance of a local land appraiser is probably a necessity. This process is similar to setting impact fees for schools, parks, etc.

The density transfer fee is different from an open space impact fee, since it applies only to property that receives an upzone from the Town. The difference in justification in turn leads to a difference in the justifiable amount of the fee. Since courts have upheld traditional TDR programs to date, the density transfer fee may provide an attractive alternative to an open space fee that uses the standard rational nexus approach. Berthoud’s density transfer fee was started in March of 2000 and has not been challenged. For added security, the Town’s standard annexation petition states that the petitioner agrees to pay the fee.

Since the fee is applied at the time of pulling a building permit, it will likely be paid by the homebuilder or homeowner rather than the developer. Depending on the market, the majority of the fee will be passed onto the homeowner rather than cutting into developer’s profits. While the density transfer fee is justified by a additional residential density from the Town (i.e., upzone) it has the negative effect of raising home prices, as do other actions by the Town that improve quality of life.

The Town of Berthoud has decided that a development pattern of compact urban density surrounded by farmland outweighs the initial higher home prices caused by the fee. This development pattern will help maintain the small town charm and agricultural heritage, as well as lower infrastructure costs compared with sprawling large lot development. Monies will start to be collected from the fee in the spring of 2001 and several conservation easements are currently pending using money from other sources.

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