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LEGAL/FINANCIAL

HOW LEGAL/FINANCIAL PROBLEMS ARE SOLVED BY NYC CO-OPS AND CONDOS

Selling Your Building's Air Rights: Easy Money That's Not Pie-in-the-Sky

Bill Morris in Legal/Financial

New York City air rights – formally, Transferable Development Rights, or TDRs – originated with 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 or her project, and erect a taller building than otherwise. Since the upper floors of a building fetch higher prices, developers consider height to be a prime asset.

As a rule of thumb, air rights sell for a bit more than half as much as the land beneath them.

One Example

In 2005, Extell Development Corporation offered the co-op board at 152 West 58th Street $100 per square foot for its air rights, one of many Extell was buying to boost the height of a hotel and condominium complex near Carnegie Hall. “We did our own research,” says Carl Tait, the co-op board president, “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.

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 ... at a time when we were looking at an increase of five percent or more because of taxes and oil costs,” Tait says.

Attorney Stuart Saft, a partner at Dewey & LeBoeuf with 35 years' experience in New York real estate, helped negotiate that air-rights sale. He notes that, until recently, many co-op and condo boards had been reluctant to sell air rights, fearing 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, boards are increasingly using 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.

What Can Go Wrong

Of course, there’s no end to the ways an air-rights sale can turn sour. Shareholders can disagree on the wisdom of selling, on how much the rights are worth, and on how to spend the proceeds of a sale.

Board members involved in air-rights negotiations say averting such problems starts with finding out what rights are worth in your part of town, preferably from a professional appraiser. “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.” Then get advice from your lawyer and accountant, and build a consensus among board members and shareholders.

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 to 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.”

Technicalities

In most cases, a board 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, which 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 venerable news anchor 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.

 

Adapted from Habitat, November 2007. For the complete article and more,  join our Archive >>

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