Money From Thin Air - Developing Urban Air Rights

Prime commercial land is limited. Prices per squarepermitted on your 20,000 square foot parcel is
foot can be astronomical. Demand for efficiency to240,000 square feet. You are utilizing only 38,000
maximize return is growing. No wonder developerssquare feet which means, from a zoning standpoint
and property owners are looking to the sky, withat least, you are underutilizing your parcel to the
varying degrees of success, to capture all the valueextent of 202,000 square feet.
they can from each urban parcel.Suppose you were able to reconfigure your
Owners and developers, and people in general, areproposed project to free up 1000 to 1200 square
conditioned to think of potential development sites asfeet per floor in return for recovering half (or more)
flat surfaces with essentially two dimensions: northof your total land cost. If this were possible, your
south and east/west. They see only the surface ofrestaurant/banquet/entertainment complex may be
the land, and envision the building they will constructreduced in size to 36,000 square feet instead of
for the particular purpose they have in mind; a bank,38,000 square feet, but your development cost for
a drugstore, a restaurant, a strip mall, a parkingthe project would be reduced $2,000,000 or more.
garage, an office building. If the parcel is larger thanAlmost free money.
they need, they may envision subdividing the parcelHow could this work?
to make two or more lots. In most cases, however,Scenario No. 1: With the hypothetical facts presented,
they think primarily in terms of land coverage for theit is certainly within the realm of possibilities to
type of building they need. They visualize only themarket and sell the "air space" above your proposed
two dimensional space depicted on their Site Plan orrestaurant/banquet/entertainment complex for
Plat of Survey.development of offices and/or condominiums. As
In 30 out of 50 states, including all Mid-Westernmentioned, under the applicable zoning classification,
states, the "Rectangular Survey System" is in effect.202,000 square feet remains available for
The Rectangular Survey System was adopted indevelopment on your site. With prevailing land values
1785 to meet the needs of the Federal Governmentof $225 per square foot (represented by your
as it faced the challenge of dividing vast areas ofpurchase price of $4,500,000 for a 20,000 square
undeveloped land lying west of the original 13foot parcel), a condominium/office developer may
colonies. The system, developed under the directionwell view your "air space parcel" as a bargain at
of Thomas Jefferson, essentially divides the United$2,000,000 ($100 per square foot - measured in two
States into rectangles, measured in relation to linesdimensions for 20,000 square feet) since it would still
known as Meridians and Base Lines .enable construction of 202,000 square feet of floor
Development lots are instinctively viewed as thearea above the second floor.
two-dimensional surface of land visually representingObviously, to make the "air space" usable, adequate
a potential development parcel. Descriptions of ameans of access and support must be planned, which
parcel typically refer to "a parcel of land X feet by Ywill require detailed planning for design and
feet" located in relation to an intersection or otherconstruction of both the ground level parcel and the
identifiable landmark."air space" parcel (which do not necessarily need to
Once a parcel is "developed", or designated forbe constructed at the same time, although
development, by construction of improvements onsimultaneous construction may be more efficient and
the land, it is natural to think of the parcel as beingpractical) and creation of legally sufficient easements
unavailable for further development (unless theof support, and easements for ingress and egress,
existing improvements are to be demolished).utilities, loading and unloading, mail delivery, a street
Classic examples of this are single story commerciallevel lobby, elevators, standpipes, etc., as well as
buildings at prime commercial locations, a multi-deckdrafting of development specific covenants running
parking garage or mid-rise building in a downtownwith the land to promote non-interference and
development area, railroad tracks or spurs cuttingcompatibility of use of each parcel. The necessity for
across valuable urban land and, in some cases,easements of support, and easements (or
roadways and alleys.conveyance of fee parcels) for a street level lobby,
Each of these situations represent, potentially,mail delivery areas, and loading and unloading areas, is
underutilization of valuable real estate. Finding a waythe reason slight reduction in size of the proposed
to develop the "air" above these existing or plannedrestaurant/banquet/entertainment complex is
improvements maximizes the economic utility ofsuggested in the premise to Scenario No. 1 - to free
these parcels and can be like creating "money fromup space for these purposes.
thin air."While sale of an "air rights parcel" will require added
The practice of finding ways to utilize the "spaceexpense for engineering (much of which will likely be
above" is often referred to as "air rightsundertaken by the proposed developer of the air
development". Air rights development requiresrights parcel) and attorneys fees to negotiate and
thinking in three dimensions, and requires seriousdraft a workable declaration of easements,
design consideration and legal planning but, when landcovenants and restrictions to legally facilitate the
values are at a premium and zoning permits, thedevelopment and use of each parcel, the economic
economic return may be dramatic.advantage of being able to sell the air rights parcel
Though often overlooked, virtually all of Chicago'smay more than justify the added effort and
downtown business district is a "city in the air".development expense involved.
People tend to think of streets and street levelScenario No. 2. Assume the same hypothetical facts
entrances to buildings in the downtown Chicagoas in Scenario No. 1, except that instead of being the
"loop" as being at "ground level". This is simply notowner of the parcel referred to in Scenario No. 1 (the
the case. Most of what is thought of in the Chicago"Entertainment Parcel"), you own or wish to develop
Loop as being at "ground level" is located 12 to 22a parcel adjacent to the Entertainment Parcel.
feet above the earth's surface. This explains the vastPerhaps the Entertainment Parcel has already been
network of "lower" streets and passageways indeveloped with the restaurant/banquet
downtown Chicago, such as "Lower Wacker Drive",entertainment complex referred to in Scenario No. 1.
"Lower Dearborn Street", "Lower State Street", etc.Assume your parcel (the "High Rise Parcel") is 40,000
which most people seldom traverse. It also explainssquare feet with B6-6 zoning, and you wish to
why, in 1992, the Chicago Loop business district wasconstruct (or to sell your parcel to a developer to
virtually shut down by "the Great Loop Flood of '92",construct) a mixed-use development with first floor
but few people got wet or even saw any water asretail, five floors of office space and six floors of
office and retail buildings were closed and workersluxury condominiums. Because zoning for the High
were sent home because of "flooding".Rise Parcel allows an F.A.R. of 12, you determine a
The point of these observations is to reveal thattwelve-story, 480,000 square foot building is the
"development of air rights" is not new. Developmentmaximum you will be able to construct on your
of so-called "air rights" is little more than efficient use40,000 square foot lot
of a limited resource when use becomes economicallyIn conducting a financial analysis of your project you
feasible and beneficial.determine that the marginal cost of each floor would
"Air rights" are part of the "bundle of rights"result in you generating a substantially greater return
constituting fee simple title to real estate. The termon your investment if you were able to construct
"air rights" generally refers to the right of the owneradditional floors of office space, condominiums or
of fee simple title of a parcel of land to use theeven multi-level parking in your proposed project on
space above the land. If this right did not exist, itthe High Rise Parcel. Still, you are faced with the
would not be possible to construct improvements onmaximum F.A.R. of 12 for the High Rise Parcel as
the land, such as a home, fence or other structureestablished by the hypothetical Zoning Ordinance.
above the surface of the land. While the ancientIs there a solution? Perhaps.
common law doctrine that "ownership of landOnce again, using the Chicago Zoning Ordinance as an
extends to the periphery of the universe" has beenexample, a "Zoning Lot" is defined as follows: "A
limited to accommodate the modern world realities of'zoning lot or lots' is a single tract of land located
air-travel, the fundamental concept that landwithin a single block, which (at the time of filing for a
ownership includes the right to use and occupy thebuilding permit) is designated by its owner or
airspace above the surface of the land is welldeveloper as a tract to be used, developed, or built
established.upon as a unit, under single ownership or control.
As one of the bundle of property rights comprisingTherefore, 'zoning lot or lots' may or may not
fee simple title to real estate, "air rights" may also becoincide with a lot of record".
"unbundled" and alienated separate from other rightsOne solution is that the owner of the High Rise Parcel
in the bundle. Conceptually, from a legal standpoint,might acquire the "air rights" over the Entertainment
the separation and transfer of so-called "air rights" isParcel (by purchasing from the owner of the
not materially different from subdividing andEntertainment Parcel, ". . . all of the Entertainment
transferring a lot pictured in only two dimensions.Parcel except that part thereof lying below a
Instead of subdividing and selling off, for example,horizontal plane located x feet above the Chicago
"that part of Lot 1 lying east of the west 100 feetCity Datum" or other established benchmark) and
of Lot 1" as depicted on a plat of survey, thethen designate the Entertainment Parcel as part of
transfer of air rights subdivides and transfers a parcelthe Zoning Lot to be developed and controlled by
based upon its vertical elevation. For example, onethe developer of the High Rise Parcel. The "Zoning
might subdivide and transfer "that part of Lot 1 lyingLot" would then be 60,000 square feet . Because the
above a horizontal plane located 100 feet aboveF.A.R. remains 12, the maximum floor area on the
[some benchmark elevation].total Zoning Lot is 720,000 square feet.
By dividing a development parcel "vertically", it isBecause 38,000 square feet has been used (or is to
often possible to "stack" uses in a mixed usebe used) for the restaurant/banquet/entertainment
development owned by more than one owner orcomplex, 682,000 square feet remains available for
developer, in the same way it is possible to subdividedevelopment on the Zoning Lot (being, in effect, the
and develop side-by-side a horizontal surfaceHigh Rise Parcel) . Therefore, instead of being able to
subdivision. In some cases, without even developingconstruct only a 480,000 square foot project on the
the open air above existing or planned improvements,High Rise Parcel, if developed alone, the developer
it is possible to sell and transfer "air rights" to anwould now be able to construct up to an additional
adjacent property owner to allow construction of a202,000 square feet (for a total of 682,000 square
taller building on an adjacent building site. Recognizingfeet) on the High Rise Parcel - or, roughly, 5 additional
this potential can result in a substantial economicfloors at 40,000 square feet each, because the High
windfall to a property owner otherwise underutilizingRise Parcel and the Entertainment Parcel, collectively,
a valuable development parcel.constitute the "Zoning Lot".
Hypothetical Facts: Suppose you are planning toOf course, if the developer does construct 682,000
acquire a 20,000 square foot parcel in a fairly typicalsquare feet of floor area on the High Rise Parcel (in
commercial zoning district that permits a wide arrayaddition to the 38,000 square feet constructed on
of permitted business and service uses includingthe Entertainment Parcel) under the foregoing
restaurants and banquet halls serving food and liquorScenario No. 2, all floor area available for development
as well as dwelling units so long as the dwelling unitsof the combined Zoning Lot pursuant to the zoning
are not below the second floor. The zoning districtordinance will have been fully utilized. As a result,
permits a floor area ratio 12:1. Your purchase price issince the Zoning Lot is fully developed as a whole, no
$4,500,000.further opportunity exists to expand the square
You believe your prospective development parcel is afootage of improvements on the Entertainment
perfect location for a restaurant/banquetParcel. If the restaurant/banquet/entertainment
entertainment complex serving food and liquor, withcomplex fails, or is destroyed or otherwise
live entertainment and dancing. You visualize a statedemolished, the replacement improvements will be
of the art venue spread out over 2 floors, withlimited to a maximum square footage of 38,000
about 19,000 square feet of usable space per floor,square feet.
for a total restaurant/banquet/entertainment venueTo avoid this outcome, parties will sometimes
of 38,000 square feet. Fortunately, adequate parkingnegotiate an "air rights transfer" that raises the
is close by and available. Demand for offices andelevation of the delimiting horizontal plane and includes
condominium housing is growing in the vicinity of youran express covenant running with the land that
parcel, which you believe will further enhance thereserves potential floor area to the transferring
chances of success of your planned business byparcel (in this case, the Entertainment Parcel).
bringing more customers through your doors.Under Scenario No. 2, the sale of "air rights" is more
Although you recognize development of offices andakin to the sale of "development rights", but the legal
condominiums in your area is a "hot" developmentprincipal is substantially the same as in Scenario No. 1.
opportunity and might also be an excellentIn each case, a property owner is selling the right to
investment, you have no interest or experience indevelop "the sky above" while retaining the ground
developing offices or condominiums and really justlevel development parcel.
want to develop and open your dream restaurant"Air rights" are valuable property rights that can be
banquet/entertainment complex. You have calculatedsold, purchased and transferred. Under the right
your costs of construction and operation, and believecircumstances, "air rights" may represent a substantial
the project is economically feasible, although youuntapped resource with great value to those who
would like to find a way to cut your costs orrecognize their potential. Since the transfer of these
otherwise increase your return on investment.property rights may not directly impair the owner's
As stated above, the permitted floor area ratiointended use of the surface level property, they
(F.A.R.) for the parcel zoned is 12; which means thatoften do represent "money from thin air".
the total square footage of the building or buildings