The Real Deal New York

Analysis: Here’s what Midtown East landlords could make from air rights sales

City Council is expected to OK rezoning next week
By Kathryn Brenzel | August 02, 2017 04:00PM

Clockwise from top left: Grand Central Terminal, St. Patrick’s Cathedral and St. Bartholomew’s Church

The sale of 3.6 million square feet of air rights could net Midtown East landlords roughly $896.7 million over the next 20 years — if they were to stick to a floor price set by the city.

Under the proposed rezoning of the district, landlords aren’t technically bound to charge $307.45 per square foot — they can price the rights at whatever they want. But that’s the price that determined how much the city will take from each sale. If property owners charge up to that amount, the city takes $61.49 per square foot. If they charge more than it, the landlord must contribute 20 percent of the deal’s proceeds.

Even if landlords charge $250 per square foot for, say, 500,000 square feet of air rights, they still stand to make $94.3 million. Robert Shapiro of City Center Real Estate, a broker who specializes in air-rights transactions, said air rights are “like found money, manna from heaven,” in that they provide money for development space that couldn’t be used on the seller’s property anyway.

Still, if the market changes, landlords might have a hard time selling these rights.

“If the world changes, and the development rights drop to $60 to $80 per square foot, you could get wiped out,” he said.

The air rights are one way that developers can build larger buildings in their district under the rezoning. For buildings in a designated transit-improvement district, developers must take on specific infrastructure projects in order to build beyond the current floor area ratio (FAR) allowed in the area.

How to price air rights has been a major source of contention over the last several months as the rezoning proposal made its way through the land use review process. The Real Estate Board of New York and Archdiocese of New York — a large landowner in the district — objected to an earlier suggested contribution of $78.60, which put the floor price at $393 per square foot. Last week, the City Council’s land use committee approved a reduction of the price, but REBNY and the Archdiocese still weren’t happy.

“This will negatively impact the city’s ability to raise money for public realm improvements and landmarks’ ability to fund preservation efforts,” a representative for the Archdiocese said in a statement.

The three appraisals conducted to determine the going rate for air rights all suggested different methods to determine the appropriate price. An earlier version of the city’s appraisal included land sales and properties in Hudson Yards without accounting for tax breaks in the neighborhood.

The city’s latest analysis excludes both, looking solely at nine air rights sales from office buildings in 2015. Only one of those sales occurred in Midtown East, at 12 East 53rd Street, where air rights sold for $335.99 per square foot, according to the city’s analysis. The sales prices for the nine deals ranged from $303.51 to $745.05 per square foot.

Barring a major upset, the City Council will likely vote to rezone Midtown East next week. The following are The Real Deal‘s calculations of landlords’ possible profits on sales, based on estimated air rights available. The calculations do not account for real estate transfer taxes and other fees and are intended to give a general picture of air rights and potential profits to be made from their sale:

Grand Central Terminal
Estimated air rights: 1.2M sf
Cost at floor: $368.9M
City cut: $73.8M
Landlord cut: $295.1M

St. Patrick’s Cathedral
Estimated air rights: 1.1M sf
Cost at floor: $338.2M
City cut: $67.6M
Landlord cut: $270.6 million

St. Bartholomew’s Church
Estimated air rights: 580,000 sf
Cost at floor: $178.3M
City cut: $35.7M
Landlord cut: $142.6M

Lever House
Estimated air rights: 340,000 sf
Cost at floor: $104.5M
City cut: $20.9M
Landlord cut: $83.6M

Central Synagogue
Estimated air rights: 200,000 sf
Cost at floor: $61.5M
City cut: $12.3M
Landlord cut: $49.2M

Minnie E. Young House
Estimated air rights: 40,000 sf
Cost at floor: $12.3M
City cut: $2.5M
Landlord cut: $9.8M

William H. and Ada S. Moore House
Estimated air rights: 34,000 sf
Cost at floor: $10.5M
City cut: $2.1M
Landlord cut: $8.4M

Fisk-Harkness House
Estimated air rights: 32,000 sf
Cost at floor: $9.8M
City cut: $2M
Landlord cut: $7.9M

Hampton Shops
Estimated air rights: 32,000 sf
Cost at floor: $9.8M
City cut: $2M
Landlord cut: $7.9M

Martin Erdmann Residence
Estimated air rights: 27,000 sf
Cost at floor: $8.3M
City cut: $1.7M
Landlord cut: $6.6M

William and Helen Martin Murphy Ziegler
Estimated air rights: 24,000 sf
Cost at floor: $7.4M
City cut: $1.5M
Landlord cut: $5.9M

John Pierce Residence
Estimated air rights: 20,000 sf
Cost at floor: $6.1M
City cut: $1.2M
Landlord cut: $4.9M

Mary Hale Cunningham House
Estimated air rights: 17,000
Cost at floor: $5.2M
City cut: $1M
Landlord cut: $4.2M