Last week, I wrote about a trend prevalent during 2005-2007 – the condo conversion of mostly rent regulated apartment buildings. During that time span, I also witnessed dozens of Inclusionary Air Right sales.
In 2009, when the market froze, so did the sale of these rights. The return of ground up development has revived these sales, which can still trade well into the $200s/SF, which is only a slight decline from the $300s/SF which were achieved in some cases at the peak of the market.
According to Seiden and Schein's website, which provides counsel for these transactions, the Inclusionary or “IH Program”, which is administered through the New York City Department of Housing Preservation and Development ("HPD"), grants the right to construct additional space for each square foot of qualified lower income housing constructed.
Inclusionary Air Rights can be transferred within a Community Board, or within a half-mile radius of the lower income housing created, to a property within an R10 (or equivalent which includes C1-9, C2-8, C4-6, C4-7, C6-4, through C6-9) zoning district. Properties in manufacturing districts are not eligible. The air rights will allow properties with an FAR of 10.0 to be increased to a maximum of 12.0, adding significant value.
Seiden and Schein note that IH Projects commencing on or after July 29, 2009 are subject to certain changes. Privately financed new construction and substantial rehabilitation IH Projects will receive 3.5 square feet of IAR for each square foot of affordable housing. The previous ratios of IAR bonuses for new construction and substantial rehabilitation per square foot of low income housing created or rehabilitated were: 3.7 square feet for on-site new construction, 3.2 square feet for on-site substantial rehabilitation, 4.0 square feet for off-site private site new construction, and 3.7 square feet for off-site private site substantial rehabilitation.
What has always amazed me is the relative bargain that developers have paid for these Inclusionary Air Rights which give a developer square footage which they would otherwise not have. Best of all, these rights allow for additional floors to be constructed at the top of a building where the most valuable penthouse condos can be sold.
Why then would inclusionary rights sell for a fraction of the sellout costs of these penthouse apartments? Even if a developer spends $600/SF between hard and soft costs, they would still be in for well below $1,000/SF, potentially providing a two times profit margin or more.
One of the reasons I have come to find is that there can be more supply than demand. This can happen in Community Boards where only a few R10 equivalent blocks, which are not Landmarked, exist.
Another reason is that producers of Inclusionary sometimes create an oversupply. For instance, even a 100' x 100' lot can only receive 20,000 SF of Inclusionary, so if there is a large supply, it might take a half dozen or so transactions to sell out. Typically, there are only a handful of development sites in play in each Community Board at a time.
That all being said, in some Community Boards, Inclusionary does not exist for these rights which are in demand.
There are only a handful of producers who have created these rights in the past, so there is not a lot of competition for them. Many of these producers are now approaching developers on a presale basis, so not to speculate.
With land prices reaching over $600/BSF in some neighborhoods, producers will be wise to create more inclusionary and developers should be active buyers at these affordable prices.
James P. Nelson, Partner
James Nelson began his real estate career at Massey Knakal assisting Founding Partner Robert Knakal with property sales throughout New York City. Since 1998, he has been involved in the sale of more than 200 properties and loans with an aggregate value of over $1.3 billion. With the exception of the founding partners, he has been the company's top salesperson three out of the last four years. He holds a brokerage license in New York, Connecticut, and Massachusetts; and a salesperson license in Pennsylvania. In early 2004, Mr. Nelson was named the youngest partner in the company's history. His noteworthy sales have included: 102-08 West 57th Street to Hilton Land Vacations for $63,000,000; 625 Broadway for $60,900,000; The Portman Portfolio for $55,000,000; the 99-year land lease of 10-12 Bond Street valued at over $60,000,000; the Bleecker Street Retail Portfolio for $34,000,000,which at $6,700 per-above-grade-square-foot equated to third-highest price ever paid for retail in the U.S.; and the former VillageCare Nursing Home for slightly over $33,000,000.