Can a Co-op Sell Its Air Rights to Pay for a Conversion?

What is your board actually trying to solve?

A funding problem, and it is worth naming it before the remedies get compared. Buildings arrive at us with an underlying mortgage that has to be paid off, property taxes in arrears, repairs the community has already been told it needs, and a reserve fund with nothing in it. In New York City three more arrive on a schedule of their own. Local Law 11 puts every building over six stories on a five-year facade inspection cycle, at $1,000 for every month a report goes unfiled, $5,000 for each year past the filing window, and a separate $2,000 where an unsafe condition from the last cycle went uncorrected. Local Law 97 covers buildings over 25,000 square feet and charges $268 for every metric ton of emissions above the building's annual cap, assessed again each year it stays above. Local Law 152 has the gas piping inspected every four years on a rotation by community district, and a late filing costs $5,000. All three land on the corporation as the owner of the building, and no board or shareholder vote waives any of them.

The question underneath is which route puts your building in a position to pay for what it needs.

What can we tell you about your development rights?

Less than a zoning consultant can. Whether your lot carries unused development rights, what they would fetch in your market and what a buyer would require in return are questions for a zoning analysis of your property and an appraiser your board retains. We do not publish a position on any of it, and we do not price it. Anyone who quotes your building a number for its rights before that work is done is selling you the number.

What holds for every building is the mechanism. A zoning lot is the parcel the city measures permitted floor area against: a single lot of record, or contiguous lots on one block in single ownership treated as one. A building that did not build to the limit its district allows carries the unused balance the industry calls air rights, though the Zoning Resolution's own term for it is unused floor area. That unused floor area moves to another lot as-of-right only through a zoning-lot merger, which joins adjoining lots into one by a recorded agreement binding everyone with an interest in them. Outside a merger, transfers happen only in the limited cases the Zoning Resolution names, such as historic and open-space transfers.

Is there another route to the same money?

There is, and it is the one we run. In a conversion the new condominium borrows against what the building is worth once its units are deeded, and that loan pays off the existing mortgages, the outstanding obligations including tax arrears, the deferred maintenance the city or county has required, and the replenishment of the reserve account. The borrowing is repaid through the monthly condominium fees, so no member is asked for a payment out of pocket. A full engineering study establishes what your reserves will have to hold for future capital projects, so the next number does not arrive the same way this one did.

Who decides whether the corporation sells anything?

Your shareholders, in the end, and your board's job is to bring them the options. On the conversion question your board reviews what is available and puts the matter to the owners, who decide whether they wish to convert. Development rights attach to the land, and in a cooperative the corporation holds title to the land, so selling them is the corporation selling a piece of what it owns. Whether a sale of unused floor area on its own is large enough to need a shareholder vote under the corporation statute, or is a board decision, is a question no statute or regulation answers, and it is one for your own counsel, reading your certificate of incorporation, bylaws and proprietary lease.

Does selling rights make a conversion unnecessary?

It answers a different question. Money raised once pays a bill once. A conversion changes what each shareholder holds, from stock in a corporation to a deed on real property, and with it the financing available to every unit in the building. A board weighing the two is weighing a receipt against a change in what the building is.

Your board can have the conversion side of that comparison priced without spending anything. We look at your unit count, your underlying loan obligation, your financial condition and your governing documents, and we set out the advantages and disadvantages, sample unit analyses with appraisal reports, and the costs a conversion of your property would require. There is no cost or obligation for it. Then your board is comparing two real numbers instead of one number and one rumor.