The Real Deal New York

Midtown rezoning has air rights players watching and waiting

Building owners, investors nervous about how Bloomberg proposal will pencil out financially

October 01, 2012
By Jake Mooney

Real estate players with interests in Midtown aren’t quite sure how to react to the city’s sweeping Midtown East rezoning proposal, which would allow for the construction of taller buildings in the area.

The proposal is “a double-edged sword,” said Paul Selver, an attorney for Argent Ventures, which, through a subsidiary, owns more than 1 million square feet of Grand Central Terminal’s unused air rights. The rezoning could either help or harm the value of the company’s investment, he said.

Potential buyers of the air rights that Argent and others own are also anxiously awaiting some of the plan’s key details.

The Bloomberg administration proposed the rezoning in July as a way to encourage developers to replace the aging office buildings in Midtown East with more modern office towers — thus making New York City more globally competitive.

The proposal is now on a tight schedule to get a green light before Mayor Bloomberg’s term expires at the end of 2013 and must pass through the city’s Universal Land-Use Review Procedure, which includes approval from the City Council.

Under the plan, developers in the entire 74-block Midtown East area would be allowed to construct taller buildings if they make a payment, called a District Improvement Bonus, into a new city fund. In addition, the existing “transfer zone” for the so-called Grand Central Subdistrict — a subsection of the broader Midtown East area — would be expanded, so that air rights there can be sold more freely.

Expanding the transfer zone in the Grand Central Subdistrict is a significant move because, typically, air rights in the city are transferrable only to adjacent lots — or, in the case of landmark properties, across the street. (The city established the subdistrict, which includes the area between East 41st and 49th streets and Fifth and Third avenues, in 1992 in an effort to encourage the use of air rights. But in an illustration of why it’s now expanding the zone, only one such transfer has occurred since — to 383 Madison Avenue, a 47-story building completed in 2001.)

In 2006, Andrew Penson’s Argent Ventures made a bet on the Grand Central area. The company bought the land under the train station and, by extension, its air rights from the American Financial Group, which, years earlier, had taken over the remnants of the Penn Central railway. Argent now holds about 1.3 million square feet of the unused remaining air rights.

According to PropertyShark, other air rights owners in the area include St. Patrick’s Cathedral (1.2 million square feet), St. Bartholomew’s Church (646,299 square feet), 390 Park Avenue Associates (358,994 square feet), 250 Park Avenue (304,628 square feet), Landgray Associates (185,625 square feet) and Central Synagogue (165,049 square feet). Some of those owners, however, are in the broader Midtown East area and not the Grand Central Subdistrict, so will only be able to sell to adjacent building owners or those across the street.

But the Daily News reported last month that the Archdiocese of New York is lobbying the city for the right to transfer its development rights anywhere in the zone, despite the fact that Grand Central is the only landmarked building that would be able to do so under the current proposal.

Selver, Argent’s lawyer and the cochairman of the land-use department at the law firm Kramer Levin, said in an interview with The Real Deal that the future value of his client’s air rights will be determined, in large part, by the specifics of the rezoning.

That is because under the Bloomberg proposal, in order to use the air rights that they purchase, developers would first have to buy separate development rights from the city, with the proceeds from those sales going into the fund to pay for pedestrian and transit improvements in the area.

For example, within the Grand Central Subdistrict, building a tower with a floor-area ratio of up to 15 — in other words, a building with 15 times as many square feet as on the underlying lot — would be allowed as of right. But in order to build more, up to a FAR of 18, developers would have to pay into the city fund. To build even higher than that, to a FAR of up to 21.6, developers could either make additional payments to the city or buy air rights from those like Argent who own them.

Consequently, the amount the city sets for the price of the separate development rights that it will be selling will affect the value of the privately owned air rights.

A competitive edge

Howard Goldman, a partner in the land-use law firm Goldman Harris, said in its current form, the proposed rezoning could put the city fund in competition with private air rights owners.

“Any requirement that you use the city’s air rights first basically creates serious competition,” Goldman said. “The city can set the price. They can underbid Grand Central if they want to and also give themselves a competitive advantage.”

Selver expressed a similar concern.

“In the past, the city has set the number at which they will ‘sell’ development rights too low,” he wrote in an e-mail. “They will tell you that they need to do so to encourage development, and even accepting that, I’ve never seen them set a number high enough.”

Since so few air rights have been sold in the Grand Central Subdistrict, there are no comps and pricing is expected to be tricky.

A spokesperson for the Department of City Planning, which is overseeing the rezoning, said the city is still determining the payment amounts it would require for its fund. But she said that the decision-making process will take into account the value of privately held development rights in the area, and will be complete before the public review process begins in the first quarter of 2013.

There is also the question of how many developers will be interested in buying extra development rights. The proposed rezoning would only allow taller new buildings on sites with full avenue frontage and at least 25,000 square feet of lot size. The goal is to encourage what the planning department calls “significant new commercial buildings.”

Still, there are a few sites within the Grand Central Subdistrict whose owners — or future owners — would qualify.

The Metropolitan Transportation Authority said early this year that it’s planning to sell its headquarters, a row of prewar office buildings at 341, 345 and 347 Madison Avenue that take up the length of the block between East 44th and 45th streets. Under the proposed rezoning, a buyer could demolish those buildings and construct a larger tower in their place.

Meanwhile, 380 Madison Avenue, at East 46th Street, was left without a major tenant in March when Investment Technology Group moved out, and the owners are reportedly planning to renovate or tear down the building.

‘The real impetus’

Goldman called replacing Midtown’s aging office stock “the real impetus” for the rezoning. East Midtown’s office buildings are significantly older than in “competitor cities” like London and Tokyo, city planning officials say.

To address that, Bloomberg’s proposal would also allow owners of qualified buildings that are “overbuilt” — meaning that their towers exceed the allowable height under current zoning guidelines, but were likely grandfathered in — to tear them down and replace them at their existing height or, in some cases, taller if they pay into the new fund.

Goldman said he thinks many qualifying owners will seize the opportunity — despite the mandatory payments into the city fund.

Another source, who asked not to be named, noted that the costs of rebuilding would be significant, but that landlords would look at the longterm financial benefits. “Potentially, it’s anyone who owns a property that’s either underbuilt — which very few of them are — or is old and tired, and the owner is willing to demolish it, lose his rent stream for a couple of years and build another one.”

The city may not need many property owners to modernize to deem the rezoning a success: The city planning spokesperson emphasized that the goal is to seed the area with just a handful of modern and sustainable office buildings.

All this depends, of course, on whether the proposal is approved (and in what form) before Bloomberg’s term is up.

“I think the city put out a proposal within a relatively short time frame, and now I think they are in the process of listening to what people have to say about it,” Goldman said. “I’m absolutely certain there will be changes before it’s in its final form. What the changes are is a different question.”

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