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The Soaring Price of Air

In New York, prices are rising for everything — even air. With the city's real estate market still strong, developers are bidding ferociously for air rights.

One of the most notable deals occurred in November when Vornado Realty Trust and Ruben Cos. announced that they would pay $500 million for a 99-year lease of air space above the city's Port Authority Bus Terminal on 42nd Street.

The developers plan to build a 1.3 million sq. ft. office tower over the station. Ironically, Vornado had agreed to pay $110 million for the lease in 2000. But the New York REIT had backed away from the deal after the economy softened in 2003.

Vornado's experience with rising costs is hardly unique. In many areas of Manhattan, prices of air rights have more than doubled during the past decade. “In the last several years, land prices have climbed, and we have seen record prices paid for air rights,” says Robert Davis, a partner in the New York office of Bryan Cave LLP, a law firm.

In the 1990s, land in crowded Manhattan typically sold for a maximum of around $100 per sq. ft., while air rights cost about half that, says Michael T. Sillerman, a partner with the New York law firm of Kramer Levin Naftalis & Frankel LLP. Now land sells for $300 to $500 per sq. ft., and air space normally costs $200 to $300. But in exceptional cases, air costs sometimes equal or exceed the price of land. “There is no rule of thumb any more,” says Sillerman. “Air rights sell for whatever the market will pay.”

One of the most expensive sales occurred in December 2005 when veteran developers William and Arthur Zeckendorf agreed to pay $430 per sq. ft. — or $37 million — to expand a 35-story apartment building at Park Avenue and 60th Street, a tony address.

The sellers were Christ Church, a United Methodist congregation, and Grolier Club, a private literary organization.

Bidding on Broadway

In most of the city, air rights can only be sold to neighboring properties. But there are special zones where rights can be sold to properties that are several blocks away. This makes air rights more valuable and potentially provides extra income to property owners. One such zone is the theater district, an area around Times Square that houses 22 Broadway theaters.

In order to help preserve the Broadway business, the City Planning Commission has allowed theaters to sell their unused space to properties that are located between 40th Street and 57th Street. In return for the special zoning, theater owners are not permitted to demolish their buildings or use them for other purposes.

In September 2006, the planning commission approved the sale of 140,000 sq. ft. from two Broadway theaters, the Brooks Atkinson Theater on West 47th Street and the Al Hirschfeld Theater on West 45th Street. The buyer, SJP Residential Properties of Parsipanny, N.J., paid about $20 million for the space, which will be used for a 42-story condominium located on West 46th Street. Under terms of the deal, the city required the developer to contribute $10 per sq. ft. of transferred air rights to a fund that is used to maintain the theater district. In addition, the new condominium will have to provide 3,500 sq. ft. of office space that will be used by small theater companies.

Another special zoning area is the West Chelsea district, which is bordered by the High Line, an abandoned elevated railroad that is being converted into a park. The tracks extend 1.5 miles on Manhattan's West Side from 33rd Street to 13th Street. Because preserving the tracks has limited the development potential of nearby buildings, the city is compensating owners by allowing them to sell air rights to buildings that are several blocks away.

The planning commission also has provided some flexibility for landmark buildings, which can sell their air rights to properties that are next-door neighbors — as well as properties that are located on adjacent blocks. The commission used the landmark provision when it approved a deal in September 2007. The seller in the transaction was the landmark Tiffany Building, located on the east side of Fifth Avenue at 36th Street. The buyer, a property on the other side of the street, obtained 173,000 sq. ft. of rights.

By acquiring the air rights, the developer could add an additional 23 floors for a building that will total 57 stories. The finished property will include 389 residential units, 200 hotel rooms and 28,000 sq. ft. of retail space. “The deal only worked because the owner got a special permit to transfer square footage across the street,” says attorney Michael Sillerman, who represented the buyer.

Figuring the right price

Trying to assess the value of air rights is no easy task. There is no central depository of price information. Buyers are not required to disclose the prices they have paid, and most deals include confidentiality agreements. Only a small group of lawyers and appraisers, specialists in the arcane field, seek to monitor prices.

The situation is complicated because many Manhattan buildings are owned by absentee landlords who know nothing about air rights, says Theresa Nygard, senior managing director of KTR Valuation & Consulting Services LLC, a Manhattan appraiser. “When they get a phone call offering to pay money, the owners are often surprised and are glad to accept a low price,” says Nygard.

More sophisticated owners can engage in protracted negotiations. Owners of unused air rights understand that their property may be valuable. In some cases, the air rights may be necessary for a big project to go forward. But because most properties in the city can only sell rights to contiguous buildings, the number of buyers is limited. “If you are the seller, and you really bargain hard, then you run the risk that the buyer will stop calling,” says Nygard. “You may have thought that your air rights were worth $20 million. But the minute the calls stop, the rights may be worth nothing.”

In recent years, condo developers have been among the leading bidders for air rights. However, lately the Manhattan condo market has cooled, and hotels have been more active purchasers. But no matter which kinds of properties take the lead, the market for air rights shows no signs of slowing.

“Developers are always looking for air rights,” says Nat Rockett, senior vice president in the New York office of Jones Lang LaSalle, a global real estate brokerage. “Even when they're expensive, air rights can increase the value of a property.”

Developers are willing to pay huge amounts for air rights in Manhattan. To appreciate why, it is necessary to understand New York zoning rules, which can be as Byzantine as the impressive architecture of the Park Avenue Methodist church, a property that recently sold its air rights.

Byzantine calculation determines cost of air

Consider a hypothetical example offered by Peter Hauspurg, chairman of Eastern Consolidated, a New York broker. A typical Manhattan lot is 100 ft. by 100 ft., or 10,000 sq. ft., Hauspurg says. Under the rules, a developer could be permitted to build a structure that is 10 times the size of the parcel, or 100,000 sq. ft. That would allow the construction of a 30-story condominium. In such a building, apartment units might sell for $1,100 per sq. ft.

In this hypothetical case, the condo developer would dearly love to add more floors, says Hauspurg. The additional units could sell for $1,800 per sq. ft. because buyers would pay a premium for high floors with views. Since he has already built the maximum height, the developer could only add the extra apartments by buying unused space allotments from neighboring buildings.

Suppose the property next door totals 90,000 sq. ft. on a lot that is 100 ft. by 100 ft. In effect, the neighboring owner has unused rights to 10,000 sq. ft. These rights can be sold to the condominium developer, who can then build three additional floors. Because the space on high floors may be so valuable, developers sometimes pay more for air rights than for the land.

“In Manhattan, apartments on high floors can be worth millions of dollars,” says Hauspurg. “By adding a couple penthouse apartments, a developer can increase his profits substantially.”
— Stan Luxenberg

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