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Money out of thin air: Appraising air rights Jun 10, 2013

William Wilgus, the first person to figure out that property owners could sell the right to develop the space above their lots, coined the phrase “taking wealth from the air.” Empty space generating income — an exciting idea. Of course, Wilgus wasn’t an appraiser. It’s easy to say you can sell the sky, but what’s a fair price? How do you value it?

Valuing air rights was an interesting challenge when we did an appraisal on a mixed-use skyscraper back in 1998. This case is also noteworthy because the property was the subject of a U.S. Supreme Court case, in which our appraisal was used as evidence. Here’s an overview of air rights issues and how they’re appraised.

How Air Rights Issues Arise

Wherever there are skyscrapers, there will be air rights issues. They commonly arise when an entity wants to own only specific floors of a proposed building or when an entity wants to develop a property and desires to maximize value of the development envelope.

Chicago saw an air rights controversy back in 2009, when the Fourth Presbyterian Church tried to sell the air rights to one of its lots. The church wanted to build a 1,700-foot skyscraper and retain the rights to the first six floors. The value of the 600-odd feet above the church’s offices? A staggering $25 million. However, the deal never went through, as it was blocked by an alderman.

In a successful air rights case, New York City gave Forest City Ratner Company (FCRC) air rights in downtown Brooklyn in exchange for the cost of a new subway station. The structure, which just opened, is composed of the subway station on the bottom and the Barclay Center arena on top. FCRC ended up paying $76 million for its air rights.

How to Value the Sky

Our most notable air rights appraisal focused on a skyscraper in the Chicago Central Business District (CBD). The first two floors were retail, the next dozen or so were a parking garage, and the upper floors were office space. An investor requested the appraisal, since he was only interested in the office space at the top of the building.

We used both the income approach and the sales comparison approach to determine the value of the upper floors. The income approach was relatively straightforward, but the sales comparison approach brought air rights into the mix. The property was developed in the 1980s, and as such, the cost approach was deemed the least reliable and thus not utilized.

In any sale, an investor is purchasing a bundle of rights. In most of our improved comparables, that bundle included more than just air rights. To compensate, we calculated the value of the land by itself and subtracted it from the comparables’ sale prices. This yielded an adjustment between 10% and 22% downward.

In other words, in this instance, the value of air rights above a piece of property in the CBD was worth about 78% to 90% of the total. That makes sense: with the Chicago CBD so crowded, most of the value of an empty piece of land would come from the multiple floors a developer would construct. In order to recognize the number of floors that can be developed, land value in densely developed areas is typically addressed as price per square foot of developable floor area (FAR). On a comparative basis, what is being sought is a value per square foot of developable area ($/sf of FAR).

Supreme Court Validation

This appraisal was entered as evidence in a Supreme Court case about bankruptcy law. Our value was compared with the value provided by two other appraisers, a good test of how accurate we were. The verdict? All the appraisals were within $5 million, with IRR’s Chicago Metro office’s value right around the middle. This was a good sign that our value, and hence the underlying approach we used, wasn’t pulled out of thin air.

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