The Real Deal New York

Unf-air rights? Officials mull dueling estimates for Midtown East air rights

REBNY says cost should be $179 psf
By Kathryn Brenzel | April 26, 2017 01:45PM

Midtown East

The going rate of air rights in Midtown East is nearly $400 per square foot. Or $179. It depends on who you ask.

The Real Estate Board of New York maintains that the floor price for air rights in the district should fall at the lower sum, based on the 10 most recent air rights sales in the area. A separate Cushman & Wakefield study, meanwhile, put air rights values at $200 to $325 per square foot — depending on location.

The floor price for landmarked air rights in the district has been a major source of debate as the proposal to rezone Midtown East winds its way through the land use review process. REBNY, the owners of the air rights and public officials have sounded off on what they see as an excessively high minimum price set for these transactions, which the city tentatively set at $393 per square foot.

“Changes should be made to the plan so that development is more rather than less likely to occur,” REBNY President John Banks said in a statement. “The inflated price of air rights and the concept of a floor price will impede development and should be reconsidered.”

The city’s balancing act

Under the rezoning proposal, the city will take $78.60 per square foot or 20 percent of air rights sales (whichever is greater) for public improvements. During a City Planning Commission hearing on Wednesday over the proposal, Deputy Mayor Alicia Glen noted that the city needs to make sure that the contribution isn’t too high to discourage development nor too low to prevent needed infrastructure improvements.

“This is a delicate balancing act, and we continue to work toward a solution,” she said.

Council member Dan Garodnick also urged the commission to consider the dueling evaluations. When asked by vice chairman Kenneth Knuckles if he had a “precise opinion” of what the minimum contribution should be, Garodnick said no.

“There’s a $200 swing in what people believe is the proper price of air rights in Midtown East,” he said.

Garodnick said the city needs to definitively decide why it’s setting a floor price.

“Is it to ensure that the public is going to get a certain amount of money in each transaction? Is it to prevent fraud?” he said. The councilman later noted that he knew of no recent incidents of under-the-table air rights deals. (One rationale for the floor price that’s been floated is that it would establish transparency in these sorts of deals.)

The source of disagreement over floor price is a difference in mathematical approach.

How they arrived at those numbers

Earlier this month, Manhattan Borough President Gale Brewer recommended that the minimum price be set at $250 per square foot, based on the Cushman & Wakefield study. The brokerage used both air rights sales from 2005 to 2015 (the same time frame that the city analyzed) and recent office land sales in the area.

In a letter to REBNY and the Archdiocese of New York, City Planning Director Marisa Lago noted that only one air rights sale took place in Midtown East during this time period. To calculate the floor price for these rights, the city took 65 percent of the lower quartile of the last 10 office land sales in the district. (Cushman & Wakefield noted in its report that the value of air rights can be calculated in this manner, by finding 65 percent of the underlying fee value of the receiving site.) To calculate the portion of the sale proceeds that will go toward a public improvement fund, the city took 20 percent of the lower quartile ($78.60).

REBNY and Cushman & Wakefield have faulted a market study by Landauer Valuation & Advisory — the report used by the city — for only looking at land sales to calculate the value of air rights in the district. They also concluded that the report inflated the market growth estimates and the value of many of the land sales. Representatives for Landauer, which is a division of commercial brokerage Newmark Grubb Knight Frank, didn’t respond to requests seeking comment.

By doing a sort of hybrid of the mathematical routes taken by the city and Cushman, REBNY came up with $179 per square foot for the air rights. The organization took the lowest quartile of the 10 most recent air rights sales — in Midtown, but mostly outside the district — to calculate the lower floor price, according to a memo provided to The Real Deal.

The infrastructure question

The proposal to rezone 78 blocks in Midtown East is expected to create 6.5 million square feet of new office space over the next two decades. Purchasing from a pool of 3.6 million square feet of landmarked air rights is just one option available to property owners to build out their office spaces. Sites that fall within a transit improvement zone will be required to pay for specific infrastructure improvements.

During Wednesday’s hearing, Brewer rehashed her concern over the district’s Third Avenue boundary, again asking that residential buildings on the east side of the thoroughfare be excluded from the rezoning. She also asked that property owners benefiting from the rezoning be required to build public plazas. She reiterated her stance on the air rights floor price.

“This is a floor,” Brewer said. “You pick a price too low, we can all live with that. You pick a price too high, you can undermine our efforts.”