When considering investing in a commercial property, air rights are definitely something investors should consider for future expansion of their properties.
WHAT ARE AIR RIGHTS?
What does it mean when someone refers to ‘air rights’? Air rights are defined as the ‘right to control, occupy, or use the vertical space (air space) above a property, subject to necessary and reasonable use by neighbors and others (such as aircraft).’
Generally, owning property includes the right to use and develop that space above ground without interference. Similar to mineral and surface rights, air rights can be purchased, leased, sold, or transferred.
As you can probably guess, the origin of air rights comes from New York where the real estate market is hot and land is scarce. Lower Manhattan was largely developed in the 1960’s due to air rights allowing developers to build upward.
As demonstrated in New York, air rights have the potential to help foster urban development and shape a city. On the other hand, they can be used as a defensive tactic to keep adjacent properties from developing their real estate higher. This can help protect views and/or access to natural light.
HOW DO AIR RIGHTS ADD VALUE?
Now that we understand the fundamentals of air rights, how can they add value for real estate investors?
Air rights can have enormous value as they potentially lead to future development on the property. Future developments can generate rent and income and lead to future cash flows.
Think about a one-story building that is sold, but also has air rights to develop five stories. There are four stories of future development and revenue to take into account when valuing the air rights.
Knowing the potential value of air rights, they can be a price kicker when a property is sold. As a property owner, this is something to take into account when acquiring or selling property.
When acquiring, you want to analyze the development potential of the existing air rights. When selling, you want to make sure the value of the air rights is priced in.
Investors of air rights have a hard time securing a mortgage due to the lack of collateral. In the event of foreclosure, banks don’t have a tangible asset to receive in return.
That makes it tough to determine a value for air rights. It’s difficult to value something that doesn’t yet exist.
What do you guys think about this? Are air rights something worth considering in terms of larger, urbanized properties?
Not sure where you get the definition "Air rights are defined as the ‘right to control, occupy, or use the vertical space (air space) above a property, subject to necessary and reasonable use by neighbors and others (such as aircraft)." Only FAA has the easement to trespass your airspace, neighbors/drones or any other entities need an easement. Air rights can be sold or leased.
Does remind me of the movie 'Burlesque', where 'air rights' saved the day ;-)
I've never heard of air rights being an issue outside of NYC. Below are two articles. The first one is how Trump bought enough air rights to build trump tower as tall as he did. The second discusses air rights in general. Not sure this is an issue in San Diego.
I just read the entire Trump article and there is only one sentence on air rights. Basically NYC had a rule that buildings can only be so many stories. If someone doesn't use all of their stories, you can sell them to a contiguous neighbor. Trump went around secretly buying air rights from several contiguous neighbors. He was then able to build a 58 story building. It gets better.... He was limited to stories but there was no verbiage on how tall a story is. So he made each floor two "stories" so to speak.
This came up for me went I looked into putting a WIFI/Cellular tower on the roof. Turned out we were too close to San Jose airport.
me thinks city and county zoning also plays a large part in how high you can go with a building
having air rights alone do you NO good if the building can say only be 3 stories..
but I like these obscure areas of the industry.. we made millions buying and selling Timber rights and timber deeds.
@Erin Wicomb great post. I supported a little work in this matter when at one of the larger law firms. Your synopsis is good, but I'm going to take it back one step to simple Real Estate Law (not a lawyer, so I'd welcome elaboration/correction from any Counselors out there.)
My understanding is that generally when you purchase a property, you purchase rights that extend from the mantle of the earth to the stratus of the sky. Of course, these matters at/near the mantel or stratus aren't usually used or taken advantage of, but you often see limitations in Zoning for vertical surfaces (e.g., you may OWN it, but you can't build it that high.) And as @Chet Mazur noted, concerns about FAA and resultant matters are also out there and can limit your rights from a public safety perspective. You will also find very explicit limitations and exclusions in your Deed, depending on your locale, for Oil, gas, and mineral rights that had been previously disposed by prior owners. Whether or not you can add a well for water, for example, may be determined by your interest in those subterranean matters.
The Air Rights matter that I was involved in was a case of air rights disposed-of by the DOT for development over a highway in suburban Boston. It was a hell of a transaction, first considering that the entity in question was a public entity and as a result, RFPs (etc.) were required, and then after all that, consider the engineering challenges of developing and constructing a structure over one of the busiest highways in the Commonwealth. I wouldn't recommend just anyone try to do this, but like @Jay Hinrichs , I am always interested in these most challenging, highly complex areas of real estate.
Finally, the places you'll see these rights most commonly alluded to are right outside the front door-- for most of us, at least: above-ground utility easements-- e.g., those on transmission towers or telephone poles-- usually carry explicit statements of air rights within the docs both for the utility companies and adverse to your future development.
The Trump Tower comments were also interesting-- I've seen matters like this come into play in Texas, when someone sells their Impervious Surface Rights to a neighbor. Point is, as you've said, rights are rights, even if they're not developed, and unless they're squashed by a particular police power, they likely have value to someone.
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