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[Straight From MacCrate] Air Rights in New York City Where’s the Market Hence Where’s the Value?

Jim MacCrate, MAI, CRE, ASA [1] has his own firm, MacCrate Associates [2], but has worn many hats as a Director at PricewaterhouseCoopers in New York City and Chief Appraiser at European American Bank. He is a prolific writer on valuation issues [3] and teaches a number of the real estate appraisal classes through the Appraisal Institute and New York University. I have had the pleasure of taking a number of courses taught by Jim.
…Jonathan Miller

By James R. MacCrate MAI, CRE, ASA [2]

Appraisers are often confronted with an extremely difficult task in New York City and that is to estimate the market value of the excess development rights or air rights [4] associated with an improved parcel of real estate. Point estimates of value are provided by appraisers that may far exceed the potential value contributed by the air rights as of the date of valuation. In fact, in most instances these excess development rights have little or no value as of the date of value, and more importantly, if these rights possess any value there is no exact point estimate of value for a variety of reasons.

In order to have value, in the basic courses of the Appraisal Institute [5] state four factors influence value:

  1. Utility
  2. Scarcity
  3. DEMAND
  4. Effective purchasing power.

In order to have adequate demand to create a market in which to estimate value, there must be a number of buyers that are interested in the excess development rights. But, generally, this is not the case. In most locations in New York City, there must a “receiving site” nearby that meets the exact specifications of the New York City regulations to qualify to acquire and benefit from receiving the additional development rights. A market is required in order to estimate market value.

A market is defined by the Dictionary of Real Estate Appraisal [6] as:

  1. A set of arrangements in which many buyers and sellers are brought together through the price mechanism.
  2. A gathering of people for the buying and selling of things; by extension, the people gathered for this purpose.

The restrictions placed on the transfer of air rights or excess development rights are limited by the New York City regulations. In most instances, the demand for excess developments rights is limited, if they exist at all. Therefore, there is no market as defined by the Appraisal Institute [5]. So, I pose a question as to how can real estate appraisers give added value to a parcel of real estate when there is no market as defined above for air rights or excess developments rights?

Appraisers often, incorrectly, add additional value when in fact there is no market or demand. What’s worse is that financial institutions lend on the higher value that includes a speculative assumption that a market exists for these rights when, in fact, there is no market. Improperly trained review appraisers and loan underwriters fail to catch this situation. (Oh well, we are bailing out the financial institutions).

In the Appraisal Journal, October 1982 [7], an article appeared “Valuing Real Estate under Conditions of Bilateral Monopoly [8]” which addresses many of these issues. In most instances, only one potential buyer exists and possibly several potential sellers, if any and this is known as “monopsony [9].” This is a classic bilateral-monopoly problem where both the added value to the receiving parcel (buyer) and the diminution in value to the seller can only be estimated after negotiation between the two parties involved. The appraiser does not know the value of the excess development rights to the seller as of the date of the appraisal unless those rights have been sold. And, just because the rights may be sold and under contract does not mean that the price paid represents market value.

Assuming that the owners of the excess development rights and the “receiving site” are well informed or well advised, and acting in what they consider their own best interests, individual specific values for the excess development rights or air rights can be determined that establishes the negotiating range between the parties. The final transaction price is determined by the negotiating skills of the two parties to protect their own interests.