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What Are Air Rights and Why Are They So Important in CRE?

Air rights are a legal concept that covers the vertical space above the Earth. So, when you own a piece of land or a building, you can technically use and develop the space above it without interference from other parties.

The concept of air rights is encoded in the Latin phrase: “Cujus est solum ejus est usque ad coelum et ad inferos.” When translated, this states: “Whoever owns the soil, it is theirs up to Heaven and down to Hell.” This phrasing first appeared in medieval Roman law in the 13th century and it then moved into English common law in the mid-18th century.

The air rights concept was later popularized in the U.S. in the late-18th century in a court decision involving two stolen barrels of herrings, which were buried 15 feet under the accused’s yard. Then, in the early 1900s, the definition of vertical space was amended to include “within range of actual occupation” to make way for the increased volumes of air traffic hitting our skies.

Nowadays, air rights reportedly refer to the “right to control, occupy, or use the vertical space (air space) above a property, subject to necessary and reasonable use by neighbor(s) and others (such as aircraft).”

What do Air Rights Mean for Commercial Real Estate?

When you buy a building, you gain rights over the land beneath and the empty space above the building.

Air rights–sometimes known as Transferable Development Rights–can be bought, sold, and leased. They can also act as a financial incentive when selling a property and can be sold to adjacent properties.

This is an important attribute for property developers because this vertical space may have real development potential. For example, if you buy a single-story building but rights exist to build an additional four stories, the property could be used in future development projects.

Air rights on a property must comply with zoning laws. In other words, the right to build or develop on a property is based on formulas and calculations provided in local zoning districts.

There will be certain limits depending on the zoning district you’re in. These zoning districts each have a density restriction. These density restrictions are sometimes referred to as a Floor Area Ratio (FAR), which is the ratio of floor area to lot size.

FAR is the maximum number of square feet that can be built on a site, relative to the square footage of the lot. This FAR value depends on the use of the building, whether the building offers a specific benefit or service to the public and, of course, its zoning district.

Let’s look at a quick example. If you have a 20,000-square-foot lot with a FAR of 1.0, the floor area cannot exceed 20,000 square feet. If you have 10,000-square-foot with a FAR of 5.0, you cannot exceed 50,000 square feet, and so on.

This square footage doesn’t all have to be built on one floor. For example, if you have 10,000 square feet and a FAR of 1.0, you could add two floors of 5,000 square feet each.

How Are Air Rights Transferred?

There are three main ways to transfer your air rights:

  • Zoning lot mergers: If your property shares at least 10 feet of its lot line with your neighbor, you can purchase the air rights of that adjacent property.
  • Special purpose district transfers: To preserve areas that serve a specific purpose or have a unique set of characteristics, air rights can be transferred between sites that are not contiguous.
  • Landmark transfers: Under the Landmark Preservation Law, some buildings can even transfer their air rights across the street and, in some cases, even a few blocks away.

How Much Are Air Rights Worth?

Of course, this depends on your location. In London, some organizations estimate the space above London’s public buildings could translate into roughly £74 billion ($55.5 billion) of real estate value. That’s based on an estimated 140,000 potential new homes and an average house price of £534,785 ($401,089).

In 2017, the average pricing for office air rights reached a record $315 per square foot in New York City. So, Google could have made a savvy move with its recent $2.4 billion purchase of the iconic Chelsea Market, which also includes unused air rights that allow for a 300,000-square-foot expansion.

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