Common law holds that once person owns a piece of land “it is theirs all the way to Heaven.” In a modern development environment, however, the transfer of air rights—fee simple title to a three dimensional space located at a precisely defined location—between owners is becoming increasingly common. Today we will take a brief look into the uses of air rights in development and how they are transferred.
While air rights in New York and Chicago have made headlines for years, air rights also play an important role in economic development in North Carolina. In particular, as communities of all sizes see value in creating a mix of uses in their downtown environments developers have sought to maximize value and lower risk through increasingly complex vertical ownership structures. Key reasons for separate ownership of a mixed use building from include:
- The part is often greater than the sum: separate ownership means that developers may be able to charge a premium on a use that is fetching high prices without having to saddle the buyer with use that is underperforming or they may not be familiar with managing.
- More available of financing: Few banks are able to underwrite a complex mixed-use project, separating uses vertically into separate projects opens the development up to a wider pool of capital more comfortable with single-use developments.
- Public Private Partnerships: Municipalities often prefer to be treated differently than the private portion of a P3, as well as wishing to capitalize on public investments by integrating a wholly private use above or surrounding a public building, increasing revenue and subsidizing public dollars.
Once a developer seeks to divide ownership of a vertical development, what options are available to structure the division of air rights, and what may they consider when deciding?
Considerations When Using Air Rights
Air rights transfers are complex legal transactions. Three of the most common types of transactions that allow development are leasing air rights, and condominium-ize and vertical subdivision of air.
Air right leases, much like ground leases, do not transfer ownership of the developable area, but the structures built in that space are owned by the grantee while the lease is in force. Sale structures of air rights offer the benefits of ownership to the developer, but at the cost of increased complexity, legal expenditures, and possible unintended consequences.
Condominium statutes passed by most states, including North Carolina, enable an owner to make a “declaration,” formally dividing the air into separate units, often according to use while the “common elements” (shared facilities such as garages, roofs, and hallways) owned, undivided, by the all owners of individual units. The regulated nature of a condominium declaration may make it easier to secure financing for this unique type of development.
However, the process’ highly regulated nature imposes burdens as well. It must meet all statutory requirements of the enabling legislation to be legal. Because legislation in many states is designed to protect consumers of residential condos, the process is often cumbersome for commercial development, for example requiring extensive bylaws and governance structures written with multiple residential owners in mind. Moreover, shared ownership of common elements may not be in the interest of owners who do not want to be liable for common elements.
Despite these limitations, condominium structuring of air rights has a long history and is gaining acceptance across the country. One new trend is the formation of large “mega units” that contain whole portions of a building that are granted the power to further subdivide into more finite uses and owners. Similarly, other states, such as Colorado, Nevada, and Minnesota have laws like the Uniform Common Interest Ownership Act which offer an alternative to the condominium. By allowing the Planned Unit Development process in vertical space, the spaces are dividing with documentation much like a condominium declaration, but with common elements are owned by an association, rather than the separate owners of spaces, alleviating some of the issues of condominium treatment of air rights.
Platted air space subdivision offers another vehicle to transfer ownership of air rights. Similarly conceived as two dimensional subdivision, this approach to conveyance usually requires detailed plats referenced to a parcel of ground below or city datum as set out in local subdivision ordinances.
In contrast to the common elements in condominium structure, vertical subdivisions are independent and self-contained, meaning that engineering and access requirements must be separately negotiated with great care. These agreements are often included in reciprocal easement agreements (REA) between the owners which may contain provisions similar to a condominium declaration, but, as a result of negotiation rather than statute, are less stringently regulated. Solutions range from separate support, access, and utilities, to a more shared arrangements.
While structuring the conveyance of air rights is a fundamental step in realizing air right development, it is only a piece of the issues that arise in these complex deals. Assigning fair value in areas with no comparable transactions, the use of air rights as tax preferred conservation easements, and issues with title insurance are all nuances in air right development finance that must be the subject of future blog posts.
Peter Gorman is a Master’s candidate in the UNC-Chapel Hill Department of City and Regional Planning specializing in Economic Development and a Community Revitalization Fellow with the Development Finance Initiative.