Do We Have Rights to Sell that We Don’t Know About?

Air rights can provide a lucrative windfall to property owners who sell them. But even buildings with no air rights for sale can sometimes cash in on an air rights transfer, pulling money out of thin air by serving as a conduit or “pass-through” lot between two neighboring buildings that
are not wholly contiguous with one another. As they say, location is everything in New York.

The height and size of every building in New York City is primarily determined by the floor area ratio (FAR) of the zoning lot on which it is situated. The FAR varies from zoning district to district. When multiplied by the lot area of a particular zoning lot, the FAR yields the maximum amount of floor area that may be utilized for a building on that lot. Thus, the floor area of a property to be constructed on a 10,000-square-foot zoning lot in a zoning district with a maximum FAR of 2.0 cannot exceed 20,000 square feet. The maximum amount of floor area permissible on a particular zoning lot is referred to as its “development rights.”

Air rights, more properly known as unused “development rights,” may be transferred from one zoning lot to another where the transferring party’s zoning lot is contiguous for at least ten feet with the transferee’s lot. And, that is where the pass-through concept comes into play. Because of the contiguity requirement, buildings that possess no air rights – often older buildings that are “overbuilt” in that they exceed their permissible floor area under current zoning – can become key players in an air rights transfer. Such buildings may find themselves in the middle of a proposed multi-lot merger where the developer of an adjacent lot must reach across the development property to acquire and utilize the available air rights from nearby zoning lots.

A transfer of air rights is accomplished through a zoning lot merger (Note: a zoning lot and a tax lot need not be the same, so while a cooperative will continue to own only the property as described in its deed – and its tax lot shall include only that property – for zoning purposes, it may be considered as part of a larger lot.) Zoning lots are merged when the owners of the lots execute and file a “Declaration of Restrictions” declaring their properties to be a single zoning lot.

Negotiating the

Pass-Through Deal

Buildings that are approached to serve as a conduit in a multi-lot merger should be mindful of the strength of their bargaining position – especially where the developer cannot acquire any unused development rights without the inclusion of the conduit lot in the proposed deal. In addition to receiving monetary compensation for executing the declaration, the conduit property should seek to negotiate a package of additional rights and/or concessions relating to such matters as property and construction easements, building repairs, reserved air rights, and construction practices. While some of these issues may be relevant to a more typical air rights transfer, some are unique to the pass-through. Among them:

Reserved Air Rights. Merger participants who, after the merger and the developer’s acquisition of all available air rights, increase their utilized floor area, may run afoul of zoning restrictions and also may be in breach of the governing merger agreements. In the case of a cooperative, this may be problematic where, following the zoning lot merger, shareholders seek to make alterations and/or improvements to their apartments that may increase the building’s floor area. In addition, it may also prevent or limit the future implementation of certain improvements to the building. Depending on the circumstances within the conduit building, it may be prudent to negotiate a small reserve of additional floor area that will be available for the building’s future use.

Making a Non-Conformist Conform. For an older building which is “overbuilt,” the zoning lot merger can provide an opportunity to acquire the floor area necessary to bring the building into compliance with applicable zoning requirements.

h e merger agreements, however, must make clear the rights of the parties in the event of a downzoning (a decrease in the FAR), so that the building’s rights to build or restore are no worse than before the merger.

Restrictions on Development. To protect the light and air of apartments on the conduit lot, the conduit property may wish to use its bargaining position to negotiate certain restrictions on development, specifically with respect to the placing of limits on new construction or structure height at certain portions of the developer lot.

Other Issues. Other negotiating points, which would probably be part of any air rights transfer, might include construction easements across the conduit property setting forth the terms and restrictions for the erection of scaffolding along adjacent property lines, the storage of materials and access across the conduit property for construction staging and the delivery of materials; the right of the conduit property owner, at the developer’s expense, to review and approve all construction plans which might affect the underpinnings or structural integrity of its building; an obligation by the developer to make necessary repairs to the conduit building, such as the waterproofing and repair of a previously covered wall that becomes exposed to the elements during the course of construction; and, of course, appropriate insurance and indemnities.

Caveats

Some caveats, which a proposed conduit property should consider before “cashing in,” include:

The Underlying Mortgage. If the conduit property has an underlying mortgage, a zoning lot merger may place the building in default of its terms, even though the conduit property is not transferring any air rights. Mortgage documents should be checked very carefully in this regard. In addition, a zoning lot merger can only be effected where all “parties in interest” in each lot consent to the merger. Parties in interest include mortgagees, mechanics’ lienors, ground or net lessees holding a recorded interest and other holders of an enforceable recorded interest (or an unrecorded interest which would be disclosed by physical inspection).

Unbundling. Once the declaration has been filed, it is extremely difficult to unbundle the conduit property from the merged lot if the developer’s plans are cancelled or scaled back. This is particularly so where the conduit lot was “overbuilt” before the merger. One possible solution is to place the merger documents in escrow to be released to the developer only at such time as the developer elects to complete the merger.

Zoning lot mergers may also involve imposing certain restrictions and obligations on the conduit property and its owner. Although in practice many of these will be negligible, every merger brings its own unique issues and concerns. A board must balance the proposed restrictions and obligations against the potential rewards before literally casting its lot in with its neighbors.