New York's Cooperative and Condominium Community

Habitat Magazine Business of Management 2021

HABITAT

ARCHIVE ARTICLE

The Art of the Deal

Joan Oleck (above) is a freelance writer.

How one Brooklyn co-op sold its air rights and turned a developer’s dream into a building-wide bonanza.

 

I’ve lived in New York City apartments for 17 years and found something splendid about each of my rooftops: a place for solitude, a space for a party, a vista for romantic sunsets. But a moneymaker? Never.

Yet two summers ago, our co-op on St. John’s Place, off Grand Army Plaza in Brooklyn, was approached by developer Mario Procida. He was planning to construct a condominium next door and wanted to buy our development rights.

To most of us, it was news that unused space around a modest residential building might have value. In fact, our lot is zoned for a building larger and taller than that of our four-story, 12,528-square-foot co-op. So, because that difference had eye-popping value, we closed a deal with Seventeen Development LLC in October 2005 for an amount well over $800,000. As part of that deal, we transferred our development, or air, rights to Procida.

Therein lies a tale. Gold and oil were yesterday’s real estate finds; development rights are today’s. “Co-op boards that for years have looked at their roof as the end of their territory suddenly now understand that there may well be a volume of space hovering over their building that is worth a small fortune,” Shelly Friedman, our real estate attorney/negotiator, told me when I dived into the deal as a reporter as well as a beneficiary. He added that air rights have “a tremendous unleashed value that can keep maintenance charges down,” and more. So much more, that once word of our deal leaked out, the attorney said, 10 co-ops approached him to broker their air rights.

 

Deal Us In

Many buildings have unused space, but to sell air rights they need at least 10 feet of contiguous, shared lot lines. That said, a “daisy chain” effect can be achieved by joining contiguous lots into a single, mega-zoning lot (only landmarked buildings can escape the contiguity criterion). That’s how our neighboring properties – a co-op on one side, a temple on the other – sold their air rights to Procida, too.

All those theoretical square feet enabled his development to grow into a larger building than zoning alone would allow. Procida’s plan eventually settled on a 117-unit, 15-story luxury condominium. The designer was celebrity architect Richard Meier, creator of similar 15- and 16-story residential glass towers on Perry and Charles Streets.

But, pre-deal, our co-op board had to swallow hard. A glass tower? Next door? That was the catch-22 when Procida came courting, initially describing a 28-story, 312-foot-high development. The board not only swallowed, it gulped: a skyscraper wouldn’t sit well with our neighbors.

Indeed, board members considered Procida’s offer a Faustian deal with the devil, er, developer. Should we profit at our community’s expense? Would the matter come before our community board, requiring us to sit at the developer’s elbow?

My neighbors were unhappy about any building going up. Dr. Carlos Magalhaes, a family practitioner across the street, told me that, “In the long term there’ll be a lot of dislodgement of people who deserve to be here.” And a local real estate attorney flat-out refused to represent us, telling one board member: “I’m not sure I want to look across Grand Army Plaza and see another tall building.”

Our board’s task was to explain to our neighbors and our shareholders that Procida could build without our air rights, that the best option was to take the money and do our darnedest to negotiate some control over the design. As our then-board president, Steven Curtis, would later tell me: “We’ve been able to dictate to a large degree the way these two buildings interact and to specify our wishes” regarding construction and design. “The reality was there would be a building built on that property,” said Carol Leven, who was the co-op president next door at the time.

That’s why we owners – a liberal, food-co-op-style crowd – voted unanimously to sell our rights. Yet there was no way we were going to end up in a public process. Our bottom line was that we had to push Procida to abandon the 28-story plan and pursue an “as-of-right” project that needed no variance.

Sure, Procida had Meier’s big name as his incentive to win the 28-story plan. But we’d seen his back-up design for an as-of-right, 150-foot, 15-story building designed by architect Stephen Jacobs.

Procida ended up with the 15-story model and Meier as designer. Was it our pressure? “We came to the conclusion that we just weren’t going to spend the [time] to get the variance,” Procida told me. He referred specifically to “the stuff going on” with Atlantic Yards, Bruce Ratner’s controversial skyscraper/sports arena development just blocks away. Procida, in short, didn’t want to end up like Ratner.

Another explanation was that the Brooklyn Planning Department would not (unofficially) recommend the variance building. I asked Planning Director Regina Meyers why. “We thought the [zoned] height limit of 150 feet was appropriate,” she replied. And if the building were to go higher? No comment beyond a reiteration: “We were comfortable with the existing zone.”

A third factor was the street wall. The taller building would have rested on a small podium, pulling far back from the street into that 28-story tower. Existing zoning requires a minimum street wall height of 60 feet, 80 feet maximum.

Then there was us: the well-educated, vocal nudniks. “I came to understand why the variance became an issue for you,” Procida told me. Developers can empathize, he seemed to be saying: “You felt you had to deal with the potential opposition, living in the community.”

 

Negotiating the Deal

Friedman, our attorney, attributed Procida’s change of heart to the co-op’s pressure (“I think that’s just totally offbase,” Procida countered). “Part of our negotiation,” Friedman continued, “was to eliminate any possibility that [the developers] could be able to file for any permit that would have to come to a community board. [Procida] said, ‘How about an air-rights deal?’ I said, ‘Which building are you going to build?’” When Procida preferred the taller structure, Friedman told me that he said, “Call me when you’re ready.”

Herein lies a lesson for co-op boards: “Don’t underestimate your bargaining power,” Patricia Aro, currently our building treasurer, said to me recently. Aro is the only person left on the current co-op board who had been there during the deal, having joined in November 2005 as co-president.

Indeed: when it came to the price our board pushed Procida to more than twice his original offer. Friedman speculated that Procida assumed “the board would be easy pickings.” In fact, we demanded that the sum be pegged to the per-square-foot market price, causing a dustup about how to measure our floor area. Friedman demanded and got a certified appraisal.

Negotiations still could get tense. “There would be moments in a meeting where all the blood would leave my head and I would worry that we’d lost this,” Curtis, the former board president, told me. Friedman’s take: “Many times, you’ve got to walk the guy to the edge and expect that he’s going to look over and say, ‘It’s just not worth it.’”

Procida tried to flex his muscles, threatening to abandon us and buy air rights from the temple’s Eastern Parkway neighbor. “There were a couple of ‘who’s going to blink first?’ discussions,” Friedman acknowledged. The lawyer was confident no such abandonment would occur since the Eastern Parkway donor was a condominium, requiring separate negotiations with each owner. “I never thought [we’d lose] because the air rights were too valuable to him,” Friedman said. “He didn’t need you to build the building; he just wanted to build the biggest building he could.”

We made more demands: construction protections; garbage collection off our street; the parking garage entry farther away; our legal fees paid by Procida; a terrace added to the design so our upper-floor apartments wouldn’t face a wall. Procida would demur, Friedman recalled. “We kept saying, ‘Okay! Call us when you [know]!’ There’s always this sense of assuming that there’s going to be a step forward, when sometimes you just dance around in a circle until something substantive happens.”

That something was making the best of an outcome we couldn’t prevent. “This is perhaps my painting a happier face on it than some people would think is justified,” Curtis said, “but I do think that Mario’s whole approach to the development was impacted by the fact that he was dealing with people from this community.”

 

Post-Deal Pros and Cons

The second week of December 2005 brought a knock on my door one night and the sight of two board members, grinning ear to ear. “Merry Christmas!” they trumpeted, handing me a check for $7,618. It was my rebate for ten months’ maintenance, part of the first installment of our windfall: retroactive free maintenance for 2005. (Our air-rights deal had closed that October, so November and December fees already had been waived.)

The money was lovely. But some of the post-deal negotiating that followed – about how to spend our windfall in full – was not. Aro’s advice: “Try not to get caught up in the politics. Everybody has their own ideas of how the money should be spent. But in the end it’s a gift; it’s a great thing for the building. And even if everybody doesn’t get exactly their own way, everybody got something good out of it.”

Once the board knew the final sum, committees were formed: one (on which I served) was for funds allocation, another for capital improvements decisions. “I would say my advice to anyone doing this,” Aro told me, “is to get as much shareholder involvement as possible because not everyone will get what they want, but at least everyone will feel like they were heard.”

The maintenance abatement was certainly legal: “Speak to your lawyer about money payouts,” Aro advised. Our board did and found out: if you have the money to run the building without collecting maintenance – and we did, at least temporarily – then maintenance abatement is legal. This then became our first use of the air-rights money. Not only were owners refunded 2005’s total but we got a 60 percent decrease for 2006; a 30 percent decrease was planned for 2007.

Nonetheless, problems erupted. At the end of 2006, our boiler broke, requiring a $30,000 repair; insurance money didn’t materialize, so that 2007 rebate was scaled back to three months instead of twelve. Worse, in 2006, the “C” column of four apartments facing the construction began to grouse, demanding an extra abatement for the extra noise as well as the netting that had covered their windows during construction. They also felt that they deserved compensation for the permanent end of their formerly open views of Grand Army Plaza.

All four “C” owners, as it happened, were on the board at the time of the deal. They were replaced by others during our annual election in November 2005; but the “Cs” still got their successors to agree to an extra three months’ abatement, amounting to about $2,000 apiece. The rest of the building, to put it mildly, saw red over the issue, but it was rammed through. In the end, the “D” column also got one month’s abatement because their kitchen views were now permanently blocked. When the “B” column began making noise about losing light from their back windows, the rest of us put our collective foot down.

The second pot for the money was one for capital improvements, which grabbed $100,000, though Aro and some other board members thought more was needed. So far, the money has gone to roof repair and new paint and carpet for the hallways – a process facilitated by the hiring of an interior designer, also thanks to our air-rights fund.

The third pot went to tax considerations. “We have an accountant who’s done this many times,” said Aro, “and he said, ‘You’re exchanging something of value, which is development rights, for cash, so you didn’t ‘gain’ anything by it, you just liquidated something.” So, owing to that subtlety and the lack of any mention of development rights gains in the federal tax code, we had no reason to expect a tax bill, our accountant told us.

But caution seemed wise. “Someday the IRS is going to catch up with it,” our accountant said. So our board banked 40 percent of our windfall into a three-year escrow fund. And of course everything in the bank was quickly invested in CDs to gain a little interest while we were at it.

Aro offered other bits of advice for the air-rights blessed: Keep shareholders informed, she says. Second, maintain friendly relations with the developer—the workers needed our water to drink on hot days; so we allowed them access (with the understanding we’d be compensated for costs beyond our usual water bill). We deliberately avoided too many complaints over the construction noise. “We could be this screaming outraged neighbor,” Aro said, but “by keeping this friendly relationship, we get things.” Those things include a promise to repair our basement stairs, damaged during construction. Aro’s third piece of advice? “Take good care of your super.” Ours has been a brick, showing up to let in and supervise the parade of consultants sent by the developer, plus the boiler repair people.

It is now early 2007 and cold outside. The growth of the giant glass behemoth next door, called “On Prospect Park” (www.onprospectpark.com), is continuing apace. Its condos are priced from $690,000 up to $6 million; interior work continues. The annoying pounding and dust of last summer are just a bad memory. And in our building, we shareholders are looking forward to freeing our extra windfall money from escrow next year. We also happily anticipate the increased values our own apartments will enjoy when the construction ends.

All in all, air-rights money is a mix. There’s good, there’s bad, there’s ugly. So while we enjoy the benefits, we also sometimes bemoan the gentrification happening, the blocking of our once-glorious views across Grand Army Plaza, and the overall impact on that nightly show the stars put on for free.

Surely that’s the biggest price of our air-rights deal.

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