Suppose you owned real property on the corner of 14th Street and Broadway in Manhattan and you are having a nice, friendly lunch meeting with the owner of the adjoining property. You have a five-story building on your property and he has a 10-story building right next to you. At the lunch meeting, he proposes to buy the air space that exists on top of your existing building for a million dollars, but you tell him that he is crazy. No… not crazy for offering a million dollars!! Crazy for offering too little.
Obviously, space is at a premium in New York City. The value of real property, amongst other things, is dependent upon what kind of building is on the property. All else being equal, a 15-story building near the corner of 14th Street and Broadway in Manhattan will be worth a lot more than a 10-story building.
In our fictional scenario, the real reason why the neighbor is having lunch with you is because he wants to build a bigger building on his property, but is not able to because he has used up all his development rights, which is referred to as floor area ratio or FAR for short, under the applicable zoning. Thus, he is coming to you so that the excess FAR on your property may be purchased and “transferred” to his property. To be clear, he is not asking to build on top of your property, but rather, merely wants to use the excess FAR on your property so that he can build on top of his existing 10-story building. You are about to retire and you never really had plans to build anything higher so you negotiate and agree to sell the excess FAR to your good neighbor for $5,000,000! This is not a bad deal for the neighbor since transferrable development rights may sell for close to or in excess of the value of the vacant land itself. Now, how do you get this deal done?
Transferring Unused Floor Area Ratio (FAR)
Since 1961, the current New York City Zoning Resolution (“Zoning Resolution”) allows for unused FAR to be transferred from a property to an adjoining property. There are two main procedural steps which must be taken in order for the excess FAR to be transferred.
First, the two properties must be joined for zoning purposes. To that end, all of the “parties in interest” under the Zoning Resolution must either join in the Declaration of Single Zoning Lot Restrictions (“Declaration”) or the Waiver of Declaration of Single Zoning Lot Restrictions (“Waiver”). In order to identify said parties in interest, a title company will prepare what is called the Zoning Certification. In our fictional example, the two fee owners and the mortgagees of the two respective properties are the parties in interest. The two fee owners will likely join in the Declaration and the two mortgagees will likely join in the Waivers.
After the first step is taken, the two properties will have been merged for zoning purposes and, as such, excess FAR may now be transferred from one property to the other. To that end, a Zoning Lot Development Agreement (“ZLDA”) will be executed between the two fee owners. This will set forth that the excess development rights are being transferred from your property to the neighbor’s property. This transaction is taxed as a regular sale of real property so you will wind up paying $131,250 for the New York City Real Property Tax or NYCRPT (2.625% on the $5,000,000 consideration) and $20,000 for the TP-584 to comply with the filing requirements of the real estate transfer tax (0.4% on the $5,000,000 consideration). This is unless you are able to convince your good neighbor that he should pay the taxes. The ZLDA will often contain an easement of light and air and negative covenants not to build over the transferring parcel. This does not faze you as you are staring at $5,000,000 and this will do wonders towards your retirement.
Title Issues for Transferring Unused Floor Area Ratio (FAR)
As we said, a title company will prepare the Zoning Certification and review the Declaration, Waiver and ZLDA. For the kind of consideration that the neighbor is paying, chances are that he will have ZLDA insured via the New York City “Development Rights” Endorsement. This endorsement will insure the purchaser of the development rights that all of the parties in interest have joined in, waived or subordinated their interest to the Declaration and further insures that the ZLDA is a valid agreement upon parties in interest and is effective to transfer floor area development rights.