CONDUIT? YES, YOU CAN DO IT!

By Phyllis H. Weisberg

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 lot between two neighboring buildings' zoning-lots. As they say, location is everything.

Air rights may be transferred from one lot to another where the transferring party's lot is contiguous for at least 10 feet with the transferee's lot. When those lots aren't contiguous – because, say, your building is in-between – the developer must reach across the development property to acquire the air rights from nearby zoning-lots. And so buildings that possess no air rights may find themselves in the middle of a multi-lot merger.

Buildings that are approached to serve as a conduit in a multi-lot merger should be mindful of the strength of their bargaining position. In addition to receiving monetary compensation, the conduit property should seek to negotiate a package of additional rights and/or concessions. Among them:

• Reserved Air Rights

Merger participants who increase their utilized floor area may run afoul of zoning restrictions or be in breach of the governing merger agreements. For co-ops, this may be problematic when shareholders later seek to make alterations to their apartments that may increase the building's floor area. It may also prevent certain improvements to the building. Depending on the circumstances, it may be prudent to negotiate a small reserve of additional floor area available for the building's future use.

• Making a Non-Conformist Conform

For an older building that is "overbuilt" – i.e., beyond the FAR (see main article) of current zoning laws – the zoning-lot merger can provide an opportunity to acquire the floor area necessary to bring the building into compliance. The 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 your apartments, you may wish to use your bargaining position to negotiate certain restrictions on development, specifically with respect to new construction or structure height at certain portions of the development lot.

Other negotiating points might include construction easements across your property, setting forth the terms and restrictions for scaffolding along adjacent property lines, the storage of materials, and access across your property for construction staging and the deliveries; your right, at the developer's expense, to review and approve all construction plans which might affect the underpinnings or structural integrity of your building; an obligation by the developer to make necessary repairs to your building, such as the waterproofing and repair of a previously covered wall that becomes exposed to the elements during construction; and, of course, appropriate insurance and indemnities.

Caveats

Two caveats, which a proposed conduit property should consider before "cashing in":

• The Underlying Mortgage

If your building has an underlying mortgage, a zoning-lot merger may place you in default of its terms, even though you're not transferring any air rights. Check mortgage documents carefully in this regard. In addition, a zoning-lot merger can only be effected where all "parties in interest" in each lot (mortgagees, mechanics' lienors, ground or net lessees, and others) consent to the merger.

• Unbundling

Once the declaration has been filed, it is extremely difficult to unbundle your building from the merged lot if the developer's plans are cancelled or scaled back. This is particularly so where your 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 your building. 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.

Phylilis H. Weisberg is a partner at Kurzman Karelsen & Frank.

Adapted from Habitat February 2008