Getting in the zone for development right transfers.

In this red-hot real estate market, suitable development sites are a rare commodity in New York. Those that remain may be problematic--so small that zoning laws prohibit a building large enough to amortize sky-high construction and acquisition costs. In this situation, transfers of development rights are a valuable development tool--as they are for any property owner who wants to increase the size of a building beyond what the zoning permits.

Development rights are the right, established by New York's Zoning Resolution, to develop a parcel of land with a certain amount of floor area and, sometimes, dwelling units. The most basic control on development rights is "floor area ratio" (FAR): the amount of floor area allowed on a zoning lot expressed as a multiple of the lot area. For example, a permitted FAR of six for a zoning lot of 5,000 s/f would allow a building of 30,000 s/f.

Transfers of development rights are a useful tool when an underbuilt lot--a lot that does not use all of its permitted FAR--can transfer that development potential to another lot. The seller of the development rights obtains value for unutilized development potential on his/her property and the buyer is able to build a larger building. In New York City, that transfer can occur in three ways: (1) as-of-right in a private transaction between property owners, without any public approvals, (2) where the site is a designated New York City landmark, across a street or intersection with an approval from the City Planning Commission, and (3) in certain zoning districts--for example the Grand Central subdistrict of the Special Midtown zoning district or the Special South Street Seaport subdistrict of the Special Lower Manhattan District. This article addresses as-of-right transfers.

The basic development unit in New York is the zoning lot. Zoning lots that abut each other with a minimum of 10 feet of contiguity can be merged to create a new zoning lot. Once the new zoning lot is created, the development rights on one part of that lot may be moved to another part, i.e., from the underbuilt parcel to the new (or to be enlarged) building on another parcel on the lot. This is a transfer of development rights (TDR). For example, let's say that two abutting parcels, each 10,000 s/f in area, have a permitted FAR of 10. One is vacant; one is developed with a 40,000 s/f building that cannot be enlarged because it cannot support the extra load, and cannot be demolished because it has tenants under long-term leases. But it does have 60,000 s/f of development rights available for transfer. Combine the two parcels into one zoning lot and the 60,000 s/f can be transferred for incorporation in the new building, so long as the development on the combined zoning lot complies with all zoning requirements.

A sale/purchase of development rights is a private business transaction. The price, usually based on dollars per s/f of transferred development rights, is the result of a negotiation between the buyer and the seller. Prices can vary greatly, depending on the location of the land, the availability or unavailability of development rights from multiple abutting sites and the permitted floor area. Brokers are the best source of information on the going rates for development rights in a particular area.

Pursuant to procedures established after a 1977 amendment to the Zoning Resolution, the zoning lots are merged by having the owners of the two (or more) lots execute a "declaration of zoning lot restrictions" declaring them to be one lot. The declaration is recorded with the City Register, and a certified copy presented to the Department of Buildings when a work permit is sought. When the new (or enlarged) building is completed, the certificates of occupancy of both buildings must be amended to reflect the amount by which the floor area of the transferee parcel has been increased and the transferor parcel has been decreased.

Although not required by law, virtually all development rights transfers are also accompanied by a zoning lot development agreement, which is strongly recommended for all parties to the zoning lot merger. The ZLDA contains provisions setting forth the rights and obligations of each party on the common zoning lot. A typical ZLDA will include provisions requiring, for example, that the separate ownership parcels continue to he separate tax lots, that the developer of the larger building has an easement over the existing building and that the parties cooperate in seeking permits or discretionary approvals such as variances.