Selling air: A short primer on the benefits and process of selling and buying development rights

If one came across a deal on eBay that promoted "bundles of air for sale, get them while they last, prime locations still available," one could not help but laugh and wonder whether the economy had not taken a serious turn for the desperate. And if the upset price were quoted at $200 per s/f, the hysterical laughter would be ear-splitting. Yet, the market for the sale of "air," in the form of development rights that are attached to every parcel of land, is real and active. At a time when the city of New York has devalued certain properties through downzonings and tightening interpretations of the building and zoning codes, the ability to obtain revenue from air rights of an underdeveloped parcel or substantially enlarge a development by purchasing air rights, is both desirable and necessary. I have engaged in both ends of the transfer of such development rights for many years in connection with large and small developments and assemblages of parcels, and offer the following as a short primer on the process and benefits of such transfers. Despite its common nomenclature, the sale of air rights does not really involve the sale or purchase of anything. Rather, through a mechanism known as a zoning lot merger, the seller and buyer of such rights agree to merge their respective lots into one "zoning lot" and distribute the combined development rights in accordance with the sales agreement so that the contracted amount of development rights can be used by the buyer for its new or enlarged building. The "zoning lot" is a fictitious creation that views the combined lots as one lot for purposes of calculating zoning criteria, such as floor area, open space, and unit count. The merger procedure requires that both parcels be contiguous for at least 10 feet. An example here would be helpful. If Seller owns a 5,000 s/f parcel that has a building on it that contains 20,000 s/f of floor area and the zoning district for the parcel allows a maximum floor area to build of 30,000 s/f, then there is 10,000 s/f of floor area that is undeveloped and could be built in the air space above the existing building. (For purposes of this article it is presumed that all other zoning criteria, such as building envelope, open space and density are met.) Say Buyer owns a 10,000 s/f adjacent lot in the same zoning district on which he intends to construct a new building built to the maximum permitted floor area of 60,000 s/f. If Seller and Buyer merged their lots, a total of 90,000 s/f could be developed on the enlarged zoning lot. Since Seller's lot contains 20,000 s/f, 70,000 s/f. could be built on the Buyer's lot. The 10,000 s/f of rights to build in the air space above Seller's parcel has been effectively transferred to Buyer. Under the sales contract, Buyer would pay Seller an agreed upon purchase price in return for executing the documents necessary to merge the lots and allowing the Buyer to utilize those excess air rights in connection with his new development. In practice, the merger of lots is accomplished by the parties executing a declaration that the parcels are to be treated as one zoning lot, which declaration is recorded against both parcels. Also, if there is a mortgage on either parcel, the mortgagee and any other "party-in-interest" must execute a waiver of declaration. This waiver ensures that the party-in-interest is aware of the merger of the parcels and accepts the consequences of such merger. The waiver is also recorded against the affected parcel. As a merged zoning lot either party could file an application for the construction of a new building or the enlargement of an existing building utilizing all the available development rights on the merged zoning lot. To avoid this "first come, first served" unfairness, a document called a Zoning Lot Development Agreement (ZLDA) is executed at the closing of the air rights purchase agreement and is recorded against both parcels. The ZLDA defines the respective rights of the parties as to how the development rights of the merged zoning lot are to be treated and typically identifies the number of square feet of floor area that can be used in the Buyer's new building and those retained by the Seller. So the next time you see a series of low rise buildings in an up-and-coming neighborhood of New York City and wonder why they have not been torn down and redeveloped, just look around for a tall tower. And if you find one nearby, most likely the owner of the low-rise buildings sold "air" to the developer of the tower. Marvin Mitzner, Esq., is a partner at Blank Rome LLP, New York, N.Y.