Transferring a Landmark’s Development Rights Across the Street

February 9, 2017Law360

New York City real estate owners and developers often ask me about transferring unused development rights from an individual landmark to a site across the street, through a 74-79 special permit issued by the city planning commission (CPC). These development rights transfers can be lucrative for both seller and purchaser, however, they’re quite rare. There have only been five recorded 74-79 special permit applications in the past 30 years, four of which were ultimately approved.

One factor contributing to this sparse transactional history is a lack of supply. 74-79 special permits require an underdeveloped sending site that has been designated an individual landmark by the New York City Landmarks Preservation Commission. There are fewer than 1,400 individual landmarks in all of New York City, and not all of those qualify as underdeveloped. Another factor is the inherent uncertainty of the approval process. 74-79 special permit transfers are not “as-of-right.” They must go through the formal Uniform Land Use Review Procedure, which includes discretionary review by the local community board, borough president, CPC, and ultimately the city council. This can take between 18 and 24 months, from preliminary outreach to final approval.

Why then would a seller and purchaser go down such a road? Part of the reason is that a 74-79 special permit provides both parties with enhanced benefits, as compared with other potentially available transferrable development rights (TDR) mechanisms.

Background: Zoning Floor Area and TDRs
New York City regulates development intensity, in part by limiting the square-footage of zoning floor area (ZFA) available to any given site on an as-of-right basis. A site’s maximum ZFA depends on the size of the applicable zoning lot. However, ZFA can be exceeded by leveraging the city’s Inclusionary Housing Program, which is available in certain districts and provides up to a 20 percent ZFA bonus if qualifying affordable housing is created. It can also be exceeded by transferring development rights from another lot, via one of the following TDR mechanisms:

  • Zoning lot merger: In this most commonly used mechanism, adjacent lots (with consent from owners, lenders and other interested parties) are combined into a single, enlarged zoning lot, yielding an aggregate maximum ZFA from the individual lots. Unused ZFA can then be reallocated to a specific development site in the newly combined zoning lot.
  • Special district transfer: The Theater Subdistrict of the Special Midtown District, the South Street Seaport Subdistrict of the Special Lower Manhattan District, the Special Coney Island District, the Special West Chelsea District and the Special Hudson Yards District have enhanced tools that allow developers to move ZFA from one site to another. Each special district has different requirements for a transfer, and in certain cases those transfers can be made to a site down the street, or even across the street.
  • Large-scale development plans: These plans typically involve the combination of multiple lots into a new larger unit; however developers must go through the city’s Uniform Land Use Review Procedure (ULURP) to obtain discretionary approval.

74-79 Special Permits
74-79 special permits are much rarer than any of the above options, and the process for obtaining them is inherently uncertain. However, in certain situations it can be a powerful tool that provides enhanced benefits to both the purchaser and the seller.

Besides gaining ZFA, a developer who consummates a 74-79 transfer to a residential development can receive increased flexibility with respect to height and setback requirements; a reduction in density requirements and added flexibility with minimum open space requirements, among other benefits. A seller, on the other hand, gets the added benefit of a continuing maintenance program, implemented to preserve the landmarked sending site.

Transacting parties should also keep in mind the following:

  • The 74-79 special permit is not available in a historic district (including individual landmark buildings which, if not for being located in a historic district, would otherwise be eligible sending sites). However that does not preclude the use of a “standard,” as-of-right zoning lot merger that includes a property in a historic district.
  • 74-79 special permits limit the total floor area of the receiving development site to not more than 20 percent more than the basic maximum permitted floor area that would typically be permitted.
  • The 74-79 special permit can be available where the individual landmark building is a conduit/bridge for the pass-through of unused development rights from an adjacent lot through zoning lot merger, including across the street.
  • As of January 2017, a new mechanism involving individual landmarks, similar to the area-wide transfers available within certain special districts, is currently proposed as part of the city’s “Greater East Midtown” rezoning initiative, which is now making its way through the public review process.

Pursuing a 74-79 special permit can result in a win-win for both parties; however, given the inherent uncertainty of the approval process, such transactions involve certain risks. A well-drafted agreement should provide for crucial protections, including milestone deadlines for the 74-79 special permit process; and consequences, such as termination rights, self-help remedies, price reductions and cost reimbursement for failure to perform.