Last year, I represented two cooperatively owned buildings on the west side of Manhattan that each earned $2 million by selling unused development rights (commonly called air rights) to a developer. The development rights were something that the co-op did not need or know that it had. More recently, I advised a 32-unit cooperative near Gramercy Park in the possible sale of its excess development rights for almost $15 million, which would have resulted in the average shareholder receiving more than $460,000; an amount of money that is greater than the cost of any of the apartments. Only in New York can money be made by selling air.
Every building in New York City was built using rights allocated by the city’s zoning code to determine a maximum size. Boards of cooperative and condominium buildings built by developers who neither retained nor utilized all of the property’s available development rights have the ability to obtain a windfall by selling their unused development rights. Except in special circumstances (described below), these rights can only be transferred between adjacent parcels in the same zoning district. The transfer occurs through a zoning lot merger, which is the joining of two or more adjacent lots into one new zoning lot. Unused development rights may be shifted from one lot to another “as-of-right” (meaning without government intervention). Development rights can also be transferred from one non-adjacent zoning lot to another in special circumstances, usually to promote the preservation of historic structures, open space, or unique cultural resources. For such purposes, a transfer is permitted where the transfer could not otherwise be accomplished through a zoning lot merger (because certain conditions, such as intervening streets, separate the lots). In the case of a landmark building, for example, a transfer may be made by a special permit from the lot containing the designated landmark to an adjacent lot or one that is directly across a street or, if the landmark is on a corner, diagonally across an intersection.
The size of every building depends on a concept called floor area ratio (FAR), which is the relationship of total building floor area to the area of its zoning lot. Each zoning district has a FAR control number which, when multiplied by the square foot area of the lot, produces the maximum amount of floor area allowable in a building to be constructed. For example, on a 10,000-square-foot lot in a district with a maximum FAR of 3.0, the floor area of a building cannot exceed 30,000 square feet. If the FAR were 6.0, the building could contain up to 60,000 square feet. If developers want to build higher than the zoning permits, buying air rights from another property is often their only option.
Although buildings constructed in the last 20 years usually utilized all available development rights, older buildings often did not because it was uneconomical or there was no market for the space. Every co-op board should investigate the FAR available for its site and the actual amount of floor space contained in the building.
The negotiation of development rights is an interesting dance and usually depends on whether there are other potential buyers or sellers. Their interest will create competition and usually a higher price. For instance, since the rights can only be used on an adjacent parcel, if the co-op sits between two development parcels, then the co-op has the ability to enable the developer to combine the two areas into a much larger parcel. If the parcels are owned by different developers, the co-op can get them bidding against each other.
Conversely, if the development parcel sits between two co-ops, than the developer can either buy the rights from both buildings or, if it doesn’t need much, can force the two co-ops to lower their prices. The problem for the co-op is that once the adjoining parcel is developed, there is no one else to whom it can sell its unused development rights, in which event the co-op will have to use them to make its own building larger or give up the value of the rights. Unfortunately, because the rights can only be used on an adjoining parcel, once that is developed without your development rights, that asset is again worth nothing. Development rights only have value if someone needs them.
Nevertheless, a co-op board with unused development should not ignore the possibility of expanding the building by adding a penthouse or several additional floors of apartments on to the top of the building or other locales on the property if feasible. Of course, if the building already has a penthouse, which controls the roof area onto which the additional floors might be constructed, that approach may not be feasible. In addition, if there is a roof top terrace that is a building-wide amenity, then expanding the building is feasible but may not be politically popular. Still, because of the hidden value in the unused development rights, every board should investigate whether they are available, and, if so, what can be done with them.