Air is money. It has taken New York’s co-op and condo boards a long time to wake up to this curious fact of life. But now, after years of ignoring a building’s least visible asset, more and more boards are turning the space above their roofs, almost magically, into gold.
“It’s only just recently that it’s taken off,” says Robert Shapiro, president of City Center Real Estate, a veteran negotiator of air-rights deals on behalf of both developers and co-op and condo boards. “The prices of land have grown so large, and these air rights have grown with them. But most people don’t understand it. Most people don’t even realize the value that can be created.”
The value of air rights – formally known as Transferable Development Rights, or TDRs – can be traced back to the 1961 revamping of the city’s zoning laws. In essence, if a building adjacent to a construction site is lower than neighborhood zoning laws allow, the developer can acquire that building’s unused air space, add it to his project, and then erect a taller building than zoning laws would typically permit. Since the upper floors of any building fetch higher prices, they are considered a prime asset by developers. In certain rare cases, developers build directly above a standing building, a configuration known as a “lollipop.”
It wasn’t until the 1980s that New Yorkers began to wake up to the value of air. As a rule of thumb, air rights sell for a bit more than half of what the land beneath them sells for. But lately the price of air, like the price of everything else in New York, has been behaving like a kangaroo. In 2005, when air rights were going for about $200 per square foot in Manhattan, developers announced a plan to pay a staggering $430 per square foot (a total of $37 million) to the Grolier Club and Christ Church on East 60th Street so they could erect a luxury apartment tower at Park Avenue and 60th Street. The upper floors – the fruit of the air-rights acquisitions – were to have priceless views of Central Park.
That deal awoke many co-op and condo boards to the fact that selling their air rights can be like “winning the lottery,” in Shapiro’s words. But just as there is no shortage of lottery winners who have come to grief, there is no shortage of ways that an air-rights sale can turn from a windfall into a nightmare.
In other words, be careful what you wish for. And know what you’re getting into.
How Can We Make Money? In 2001, Extell Development Corporation approached the co-op board at 152 West 58th Street about selling the air rights to the 33-unit, nine-story (plus penthouse), World War I-era brick building. Extell was busy buying up the air rights to half-a-dozen nearby buildings in order to boost the height of a high-rise hotel and condominium complex it was planning directly across West 57th Street from Carnegie Hall.
“The project was going to go up. Since we couldn’t stop it, the question was: how could we make some money off it?” says Carl Tait, 45, a fast-talking computer scientist who has served on the co-op’s board for six years, the past three as president.
Extell offered the co-op $85 per square foot – then mysteriously disappeared. Four years later, the company came back with an offer of $100. “We did our own research,” says Tait, “and we found out that rights were selling for substantially more than they offered, about $200 a square foot.”
When Extell made an unacceptably low counteroffer, the co-op board, aware that it was holding all the chips, walked. “Our willingness to walk away from the table let them know we were serious,” Tait says.
Many people involved in air-rights negotiations liken them to high-stakes poker, and in this case the board’s no-blink strategy worked. Extell agreed to the co-op’s demand of $200, and in January 2006, the developer paid $4.1 million for 20,500 square feet of the co-op’s air rights. (The board retained 500 square feet so that it would be free to make minor modifications in the future.)
The board used the windfall to pay off the outstanding $1.9 million on its mortgage, reduce maintenance, tackle Local Law 11 repairs, and pay off $1.9 million in taxes and closing costs. In order to protect the co-op’s tax deductibility for shareholders, the board took a “short tax year” of one month when the windfall arrived.
“Our maintenance came down 20 percent, forever – at a time when we were looking at an increase of five percent or more because of taxes and oil costs,” Tait says with obvious pride.
Attorney Stuart Saft, a partner at Dewey & LeBoeuf with 35 years of experience in New York real estate deals, helped negotiate that air-rights sale. He notes that, until quite recently, many co-op and condo boards had been reluctant to sell air rights because of fears that a new development would destroy the fabric of the neighborhood. “But as prices have gotten higher in the past ten years,” Saft says, “it has become more difficult for boards to say no.”
Instead of fighting the inevitable, he says, boards are increasingly using their air rights as leverage to negotiate such things as the placement of the development’s elevators, garages, and heating and cooling systems. Some co-ops and condos have even gained access to health clubs and dictated construction schedules, Saft says.
For board president Tait, selling the air rights was a bit like the Dire Straits song “Money for Nothing.” He notes: “In general, everything’s been positive. The only downside was that it was stressful, a lot of paperwork. But it was exciting at the same time. There’s been amazingly little negative.”
Negotiating for Air. Of course, there’s no such thing as money for nothing – and there’s no end to the ways an air-rights sale can turn sour. Shareholders can disagree on the wisdom of selling air rights, on how much the rights are worth, on how to spend the proceeds of a sale.
Board members involved in air-rights negotiations agree that there are ways to avert these problems. Do your homework, they advise, and find out what rights are worth in your part of town, preferably from a professional appraiser. Then get advice from your lawyer and accountant. And build a consensus among board members and shareholders.
“If there’s dissension over the price,” says Saft, the attorney on the 152 West 58th Street sale, “the shareholders aren’t going to believe the board. So, it’s to the board’s advantage to get a professional appraisal.”
James Samson, a partner at Samson Fink & Dubow, offers an even more fundamental piece of advice: review your offering plan or do a title search and make sure the air rights are yours to sell. Sometimes sponsors reserve the rights and sell them without notifying the shareholders.
“You have to be very, very careful,” Samson cautions. “And you want to keep at least some of your air rights so that, say, a penthouse owner can expand.”
In most cases, a co-op or condo that wants to sell its air rights must share at least ten feet of lot line with a developer’s building site. There are exceptions. If the developer buys air rights from an adjacent building, he can then buy rights from the next property on the block, and the next, and the next...
Amass enough air rights and you can punch a hole in the sky. This is precisely what Donald Trump did while developing Trump World Tower, his sleek black box that soars 72 stories above the United Nations Plaza. The project met the letter of the law – it was “as of rights”– but it infuriated many residents of the Turtle Bay neighborhood, including veteran newsman Walter Cronkite, who complained about the building’s “grossness.”
Buildings with landmark status, another exception to the rule, are allowed to transfer their air rights to a development across the street. And in select zones, such as the Broadway theater district, certain properties are allowed to transfer their air rights anywhere within the zone.
In the city today, where a new high-rise seems to be shooting up on every block, it’s hard to imagine that there has ever been resistance to developers’ relentless push into the sky. But there has been resistance, some fruitful, some futile. In the 1980s, a group killed Riverwalk, a luxury development planned for the East River between 18th and 23rd Streets. And in 1987, umbrella-toting demonstrators, including Jacqueline Kennedy Onassis, argued that planned towers on Columbus Circle would blot the sunshine from Central Park. The result of that quixotic protest is the behemoth AOL Time Warner complex – and some very long shadows in the park.
The reason, of course, is that air is money. And in this city today, few things talk as loudly as that.
Real estate attorney Stuart Saft will conduct a seminar, “Selling Your Air Rights,” at the Cooperative Housing Conference at Baruch College on Sunday, November 11, from 9:15 to 11:15 AM. For more information, call (212) 496-7400.