Property rights are at the core of the American success story. Businesses won’t invest in plants and equipment if they worry about losing the rights to the future profits generated by that property (see Venezuela). When we talk about somebody’s home being their castle, we are talking about the owner’s right to control her property. While the basic concept of property rights is generally well understood, what is underappreciated is how flexible property rights can be when markets are created for unbundled parts of those property rights.

A perfect example of how useful unbundled property rights can be is air rights. Many people involved in development are familiar with air rights from their use in New York City. In New York City air rights are really a transferable development rights program on an ultra-local level. A developer can buy up the unused density from adjacent buildings that are shorter or smaller than zoning specifies and use those “air rights” to build a taller building than would otherwise be allowed.

Thus, New York City allows the right to build a certain number of floors or units to be bought and sold, thereby increasing the flexibility of what types of buildings can be constructed. The buying and selling of air rights in this manner increase the overall value of the properties that are built. The value gains come from the fact that a twentieth floor apartment is worth more than one on the fifteenth floor. Thus, two buildings that are 10 and 20 stories tall, respectively, will have a higher value than two equivalent 15 story buildings.

However, air rights have a second meaning. You can also buy and sell the right to build above a certain height simply as a commodity. In Seattle, people are purchasing the air rights to nearby lots in order to preserve their views. Density is not transferred, but rather eliminated, yet value is still maximized because, given natural slopes, value is greatest when all the properties can enjoy a scenic view. By unbundling property rights, homeowners can preserve their views without having to buy a nearby lot to prevent any building occurring. Creative property right markets increase economic efficiency, maximizing value and minimizing waste. Seattle’s air rights markets are so creative people only buy the air rights for their direct line of sight, so neighbors can still build taller in other spots.

An additional market in unbundled property rights exists for development rights. Farmers wishing to remain in farming but wanting or needing to harvest some of the value of their land sell the right to ever build on the land (other than agriculturally related buildings). The farmer still owns the land and continues to earn a living farming; he just cannot later turn his farm into a subdivision.

The purchased development rights can be utilized by the buyer in two ways. The most common is for land conservation. In that case, the development rights are simply retired, never to be used, because a community or a nonprofit values the presence of undeveloped land enough to dedicate the needed funding to purchase the development rights. The second possibility is called transfer of development rights (or TDRs). Similar to New York City air rights, in this case, a community still gets the land conservation but also moves the development rights to another location where the purchaser of the rights applies them to a development of higher density than would otherwise be allowed. Transfer of development rights are often used in the suburban-rural fringe to concentrate residential development into clusters so that some farmland can be conserved. In contrast to New York City air rights, TDRs in suburban/rural settings often move density over fairly long distances (like from the outer edge of a county to the center of town).

In Nevada, there is even talk of splitting up the property rights to water into different pieces to make water markets more efficient and unlock value that currently cannot be realized in a functioning market.

We too often think of property rights as the right an owner has to develop her property as she chooses and typically find those property rights constrained by zoning ordinances. Most of us also mistakenly think of property rights as something that come with the property when it is bought and sold. We can unlock a lot of potential real estate value by creating free markets for the unbundled components of property rights. The property right one owner or developer has no interest in, might be very valuable to a neighbor.


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