A well defined and legally enforceable system of private property rights is critical for the smooth functioning of markets, real estate or otherwise.
Another national trend has been the use of taxes and user fees to finance state and
local government programs that either purchase land outright or purchase the future
development rights for that land. Eleven states have such purchase of development rights
(PDR) programs in place, and they have acquired the development rights for almost 350,000
acres of land. New Jersey Governor Christie Todd Whitman recently announced an initiative
to raise public funds to purchase the development rights of open space and farmland in New
Jersey. Michigan initiated its own PDR program in 1996 as a modification to the tax credit
program started in 1974.
While Michigan is in the process of purchasing the rights to several pieces of
property, there are significant risks with these programs (see box, below).
First, PDR programs are permanent. Once the development rights are sold to the
government or a private land trust, future development value is virtually eliminated
because the land will be off-limits for development. This hamstrings communities as well
as the state. As communities evolve over time, their needs and preferences change as well.
Land that was considered ideal for one use may become more suitable for another use in the
The Risks of Program Inflexibility
Suppose local government officials determined that 20% of local land should be reserved
for open space and they use the state’s property development rights (PDR) program to
purchase future development rights for undeveloped farmland and open space in a
concentrated area of the city. Ten years later, citizens decide that the emergence of
other smaller parks scattered among residential neighborhoods has more than adequately
addressed the open space needs of the community. Working with urban planners, local
elected officials determine that 5 to 10% of the community’s land devoted to parks is
more than enough. Freeing up this land would increase the quantity and quality of housing
in the city, making housing more affordable. But the PDR program has eliminated any
flexibility the community or private developers would have over the use of land. Parkland
could not be redeveloped as affordable housing regardless of its potential benefit to the
PDR programs compound inefficiencies because they eliminate the most effective
mechanism for ensuring that land uses are put to their highest and best social use: the
real estate market. PDR programs place land off-limits to consumers seeking to purchase
and use land to fulfill their own housing and family preferences. This means that a
political process rather than an economic process will determine future land uses:
Bureaucratic rules and political whims will rule over the preferences of individual
households and families.
A superior alternative to PDR programs already exists in Michigan. The Farmland and
Open Space Program (Public Act 116) allows farmers to voluntarily withdraw their land from
the real estate market in exchange for tax credits for periods between 10 and 90 years.
This program is flexible since it does not permanently withdraw land and does not require
a direct outlay of tax money to purchase future development rights. Real estate markets
will continue to allocate land for the highest and best economic use as land is gradually
removed from the program. As mentioned previously, 41% of Michigan farmland is already
enrolled in this program.