Education

Making Money Out Of Thin Air: Your Guide to Air Rights in Real Estate

By Matt Picheny

Magicians can make things appear from what seems to be nothing.

While making money out of thin air may sound like some grand illusion, it’s actually quite possible to do just that.

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When Donald Trump needed more square footage to build his tower in midtown Manhattan, he bought the air — unused development space — above the famous jewelry store, Tiffany & Co. You don’t need to share his politics (or name your daughter Tiffany) to do the same.

Details of such a transaction can be quite complex and it actually took me two chapters of my book (Backstage Guide to Real Estate) to give a real-world example of how I pulled off such a real estate “trick”.

Let’s go over the basics of exactly what these Air Rights are and how you might be able to benefit from them even if development isn’t in your plans.

What Are Air Rights?

Air rights is the informal name for any developmental rights attributed to a parcel of land that has not been used. This is additional square footage allocated to your lot which could be developed. Air rights exist in some cities but not in others, so the Donald may have been fine in New York, but there are some cities that offer no air rights at all.

Note that we’re talking here about developable space. That doesn’t mean you need to develop it yourself — you might be able to sell your air rights to a neighbor. We will get into that in a moment. 

The amount of developable space on any given lot is determined by the Zoning for the property.

Zoning Matters

It all comes down to zoning. The individual rules for each zone, and information about which zone each lot is located in, can be found by contacting the city. In New York City, they have a ZoLa (Zoning and Land Use) website, which can be found here: https://zola.planning.nyc.gov

We won’t go into the specifics of zoning but, in short, they determine what can be done on a lot. For example, can it be used for residential or commercial purposes? Is it for a single-family or multi-family space? How tall can it be? Etc.

FAR – Floor Area Ratio

FAR is short for Floor Area Ratio, which determines how much square footage a building can have as a ratio to the square footage of the lot. Essentially, the smaller the building’s footprint in relation to the land it sits on, the higher you can build.

The FAR of a property is dictated by its zoning. Say, for example, your property is in a zone that has a FAR of 3.0.

Let’s assume your lot is 1,500 square feet. That means you have 1,500 × 3.0 = 4,500 square feet of usable space.

If your current property on the lot takes up only 3,500 square feet, that means you still have 1,000 square feet of developable space.

With this additional square footage, you could build another floor or two on top of your property to use up this extra 1,000 square feet, so long as you follow all the requirements defined in the zoning code.

Selling Air Rights

Just because you have the right to develop on your lot, that doesn’t mean you should. Sure, doing so might make your property more valuable for future sale. But the time, effort, and expense of doing that work might not suit your circumstances.

But instead of doing nothing with your air rights, you could consider selling them to a neighbor. This means negotiating a price for the right for that neighbor to own the square feet that you aren’t using.

The way this is done is by combining the two adjacent lots which are joined solely for zoning purposes – not for any other purposes. They gain your square footage of developable space but the lots are still separate for all other purposes. You still retain all legal rights, it doesn’t give your neighbor rights to your property.

For example, they wouldn’t be able to build a structure that stretches over their property line and sits on top of yours. You could work out an arrangement that allows them to do that, but simply purchasing your air rights does not allow this.

Air rights can be valuable and developing more usable square footage on your property can be lucrative but if you definitely don’t want to develop on your own lot, and don’t mind giving them away forever, selling your air rights to a motivated neighbor could make you a handsome return.

Assembling Air Rights

It’s possible to assemble a large number of air rights by making development agreements with multiple properties but they must be contiguous. An exception has been made for the air rights above Broadway Theaters which are allowed to be sold to non-contiguous lots, but those lots must be in the same general vicinity of the theatre.

In most cases, there are a couple of caveats to keep in mind:

  • Selling air rights like this in NYC requires an unbroken chain because all of the lots must be combined into one contiguous lot for zoning purposes. If any one of the property owners were to refuse to sell their air rights, that chain could not continue.
  • Though the assemblage could theoretically sweep across an entire block, in practice the developer buying those rights would be limited by the zoning regulations for their lot, which include height restrictions and setback requirements. In other words, there are only so many air rights that it would make sense for them to buy — anything more than what the zoning allows would be unusable.

Technically, it may be possible to get an exception to the zoning regulations, by appealing to the Zoning board, but that’s beyond our scope here. A truly motivated developer will find a way!

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The information provided on this website is not advice and does not purport to be a substitute for professional adviceYou should seek out the services of professionals who are experts in the fields of investment, legal, and accounting concerning your specific situation. The author disclaims any responsibility or any liability, loss, or risk, personal or otherwise, which is incurred as a consequence, directly or indirectly, of the use and application of any contents of this website.