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Morgan Hill, California

Morgan Hill, population 40,246 (2011), lies 20 miles southeast of San Jose, California. The first section of this report is taken directly from the book Beyond Takings and Givings (2003). Ordinance changes that occurred between 2003 and 2011 are noted in the last section of this profile.

Background

The City wants to preserve its most prominent natural landmark, El Toro Mountain, as well as other open space. Specifically, Morgan Hill’s general plan calls for the preservation of open space above the 500 foot elevation line on El Toro Mountain. To implement this goal, the City has adopted a Hillside Combining District which allows the development rights from higher elevations to be clustered on lower elevations of the same parcel. In 1981, the City also adopted an ordinance which allows the development rights, or credits as they are called in this program, to be transferred from one parcel to another. In addition to traditional transfers, Morgan Hill uses other techniques to preserve El Toro Mountain.

Process

In the Morgan Hill program, sending sites are land parcels located at the higher elevations of El Toro Mountain as well as other land with a grade steeper than 20 percent. On El Toro Mountain alone, 850 acres lie above the 500-foot elevation contour; 250 acres are within the city limits and the remainder is located in the County. Regardless of whether these steep lots are located within the City or the County, Morgan Hill allows TDCs from these lots to be transferred to receiving sites within the City.

Of the 250 acres in the City, 150 acres remain undeveloped and could accommodate roughly 25 homes if Morgan Hill allowed development in this area. However, Morgan Hill effectively prohibits development on slopes over 20 percent. Owners of property with a slope greater than 20 percent can cluster development in portions of their property with less steep grades. However, if these owners still cannot achieve the density allowed by zoning, they must transfer their development credits in order to maximize the economic potential of their property.

The development potential of sending sites is established either by the provisions of the Hillside Combining District or the underlying zoning, whichever allows less development. The amount of development allowed on the potential sending sites is calculated using slope-density regulations; the greater the slope, the more lot area is needed to allow one dwelling. An environmental study must be performed to determine whether any portion of a proposed sending site is unbuildable due to environmental constraints; if so, the development rights available for transfer must be reduced accordingly. Once the City has agreed on the number of units which could be built on site, the number of units available for transfer is calculated at twice that amount. That represents a 2:1 transfer ratio.

Prior to transfer, either fee title or dedication of an open space easement must be transmitted to the City. The easement prohibits cultivation as well as all residential, commercial or industrial uses. In the early 1990s, TDCs typically sold for $25,000 to $40,000 each when the purchase price was negotiated between buyers and sellers.

Eligible receiving sites must be at least one acre in size and have a slope of ten percent or less. A TDC transaction cannot increase the density of a receiving site more than ten percent greater than the density allowed under base zoning. The planning commission must approve a detailed site plan for the receiving site and the transfer itself must be approved by both the planning commission and the city council. Once approved, a record of the transfer must be recorded as well as the transfer of fee title or dedication of an open space easement.

As described above, one incentive to purchase TDCs is to achieve up to a ten percent increase in density on a receiving site. As an additional incentive, Morgan Hill recognizes the use of TDCs in its Residential Development Control System (RDCS) process. Under RDCS, a limited number of residential building permits are issued each year based on the City’s population goals. Typically, 250 allocations are issued each year. Developers must compete for these limited permits by gaining points for providing schools, parks, affordable housing and other benefits including open space. Developers can maximize the number of points available in the open space category of RDCS by incorporating TDCs in their proposed projects.

Specifically, larger projects are awarded three points for acquisition of TDCs at the rate of one per 24 units. Projects of 24 units or less as well as projects with higher densities receive six points by purchasing double TDCs. Alternatively, smaller developments and affordable housing projects can receive four points for payment of an open space fee or six points for double the open space fee. In 2002, this open space in lieu fee was $15,000 per TDC. The fee can be adjusted annually based on the percentage change in median single-family home prices.

In addition to the straightforward TDC approach described above, Morgan Hill uses two other programs involving transfers. One alternative program was developed when Morgan Hill had limited sewer capacity. A sewer allocation is needed to obtain a permit to build a new dwelling unit. To encourage hillside preservation, a certain number of sewer allocations were set aside to be used with TDCs transferred from El Toro Mountain. Under this option, a developer was encouraged to acquire a TDC as a way of obtaining a sewer allocation. However, there no longer is an incentive to use this option since a new sewage treatment plant was built in 1995 and sewer allocations are now plentiful.

In a second permutation, Morgan Hill itself purchased a 43-acre property on El Toro Mountain and, as a result, obtained control over 17 TDCs. Morgan Hill has made projects which use these 17 TDCs completely exempt from competition in the City’s Residential Development Control System (RDCS). The City has set the price for these TDCs at $75,000 each. In 1991, the City considered reducing the price to $50,000 or $60,000 per TDC in response to market conditions; but, ultimately, Morgan Hill decided to maintain the original price. The City intends to use revenues from the sale of these TDCs to purchase other open space land.

Program Status

Morgan Hill is achieving its primary goal of preserving the top of El Toro Mountain simply by effectively prohibiting development in this area. In addition, the City is experiencing a relatively high rate of transfer activity. In the traditional TDC program, 46 TDCs had been transferred as of 1991. These transfers permanently preserved 92.5 acres on El Toro Mountain and 46 acres in other areas. As described above, the City also obtained 17 TDCs by purchasing a 43-acre property on El Toro Mountain. Finally, a property owner deed-restricted a 30-acre hillside property in 1995 and will be selling the TDCs in the private market. Consequently, the City has preserved a total of 211.5 acres of open space. In addition, another 28 acres of steep land have been permanently preserved via clustering of development at the lower elevations of single land parcels.

Despite the price tag of $75,000 each, developers have also purchased four of the City-owned TDCs in order to exempt their developments from having to compete in the RDCS permit-allocation process. However, even when sewer allocations were scarce, no one took advantage of the option in which TDCs could be purchased to obtain sewer allocations.

In the mid 1990s, Terry Linder, Associate Planner, reported that the pace of TDC acquisitions slowed during the early 1990s. Every year, all 250 building allocations were issued. However, multi-home projects are not required to buy TDCs until several homes in the project are built. Since the demand for new homes has declined, it takes longer to reach the threshold at which the TDCs must be purchased. Nevertheless, the land preservation activity has provided an adequate supply of TDCs.

The effective prohibition of development on steep sending sites strongly encourages the owners of these properties to sell their development credits. The City has also created a strong incentive for receiving site owners to buy development credits by giving TDCs a point value in the competitive process used to allocate a limited number of residential building permits each year. In addition, the City supports its program with information for affected property owners and regular status reports on the TDC program. And finally, the City monitors its program and makes adjustments when needed. For example, Morgan Hill realized that the price which receiving site owners could afford to pay for a TDC was less than the price which sending site owners wanted. As a result, the City made a mid-course correction and created the two-to-one transfer ratio.

In an October 1999 update, Lindner reported that the City made slight revisions in the TDR provisions in 1992, 1993, 1995 and 1998. The components of the program remained unchanged but certain procedural requirements were modified. For example, applications for TDC must now include a title report and any other documentation disclosing all existing interests or obligations against a sending site property to be affected by the open space easement. If other interests exist, a subordination agreement acknowledging the reservation of the City of Morgan Hill’s open space easement claim must be submitted with the title report.

Code Changes: 2003 to 2011

In 2008, minor changes were made to the Hillside Combining District (18-44). For example, the zones that could receive transferred development rights, up to a 10 percent density bonus, were limited to 7 districts: Residential Estate, R-1 Low Density, R-1 Medium Density, Single-Family High Density, R-2, R-3 and R4.

Morgan Hill’s residential development control system (RDCS) was instituted by voter initiative (Measure E) in 1977 and subsequently extended and amended via Measure P in 1990. In 2004, the voters once again passed an initiative extending the RDCS through fiscal year 2019/20. In addition to various other changes, this initiative established the following requirements and procedures related to TDR under 18.78.220.

a. The project will receive three points for a commitment to purchase TDCs from property owners with land of greater than 20 percent slope.
b. Projects of 50 units or less which do not provide a common area park or open space will receive 6 points for a commitment to purchase double TDCs.
c. Projects zoned R-2, R-3 or similar higher density classification will receive six points for a commitment to purchase double TDCs.

In lieu of TDC, projects of 50 units or less, Downtown Area projects and affordable housing developments will be awarded three points for the payment of an open space fee at the rate of $36,880 per TDC per 20 units. Or projects that elect to pay double the open space fee will be awarded six points. The amount of the open space fee shall be based on the average cost per dwelling unit for an equivalent TDC commitment as specified above. The open space fee is adjusted annually in accordance with the annual percentage increase or decrease in the median price of single-family detached homes in Santa Clara County. The base year from which the annual percentage change is determined shall be January 1, 2005.