All the world’s a stage, and all the buyers and sellers merely players.
The Department of City Planning is proposing to hike a levy the city assesses on deals in which developers buy air rights from theaters in the Times Square area.
The idea is to pump more money into a special fund that supports the theater industry, but critics say the new policy could produce a deleterious shift in the market.
“I think there will be less transactions, [that’s] my guess,” said Jeffrey Tick, co-owner of The Helen Hayes Theatre On West 44th Street who recently sold his air rights to the Hakimian Organization and Extell Development.
The city currently assesses an additional cost of $17.60 for each square foot transferred. But under the new policy, that figure could jump – depending on the deal – to upwards of $100 per square foot.
“I think their intent was to get more money for the fund, but it seems like to go from $17 to $100, there is a lot of room in between those numbers,” Tick added.
The city’s policy goes back to 1998 when – in a move designed to help the theater industry stay afloat amid skyrocketing real estate prices – it created a special mechanism allowing them to transfer air rights within a larger area beyond the arms-length deals they would normally be restricted to.
The freedom to move the rights so freely has made them quite valuable to developers such as Boston Properties, which added nearly 160,000 square feet of theater air rights to its 1 million-square-foot office building at 250 West 55th Street, or Algin Management, which bought almost 60,000 square feet of rights for its proposed 59-story tower at the site of the former Roseland Ballroom.
Air rights experts said that, like brokerage fees, buyers and sellers negotiate who pays the fund contribution when the deal closes.
“If someone’s going to pay $600 a foot, then the brokerage fee and everything else brings it to $650,” said Bob Shapiro of the City Center Real Estate, a brokerage specializing in air rights. “Either he buys it for $600 and pays the broker’s fee, or he pays a fixed $650 and the fee gets passed onto [the seller], who pays it.”
“That’s the way these things fall. It’s a negotiated thing dependent on the fair-market value of [the theater air rights],” he said.
In exchange for the increased value it created, the city levied an extra assessment on the transactions that in turn bankrolls the nonprofit Theater Subdstrict Fund. Over the years the deals have generated $8.6 million worth of contributions, which the fund uses to support theaters and audience development.
As it stands now, the city charges a rate of $17.60 for each square foot of development rights transferred, which it says works out to a contribution averaging somewhere between 4 percent and 9 percent of the total purchase price.
Under City Planning’s proposal, the assessment would change from a per-square-foot charge to an overall rate of 20 percent of the total purchase price, which could significantly push up the costs on these deals.
In the case of Extell’s recent purchase, for example, the developer bought 42,378 square feet of air rights from Tick’s Helen Hayes Theater earlier this month for 1710 Broadway, the site that the company is proposing to develop into a condominium tower with partner C&K Properties.
On top of the $20.1 million purchase price, Extell paid the required fund contribution of $745,852, which brings the blended cost to roughly $493 per square foot.
Under the new proposal, however, the deal would require a contribution of slightly more than $4 million, or $95 per square foot. That would push the blended price of the deal up to $570 per square foot.
While the setup is designed to help the theater industry, it could receive pushback from those it’s intended to benefit.
That’s what happened late last year, when an ad hoc committee unveiled a proposal to rezone Midtown East. The report included a proposal for a 20-to-40 percent levy on sales of air rights for landmarked properties, in order to help fund transportation and infrastructure improvements.
After the proposal was made public, representatives from St. Patrick’s Cathedral, St. Bartholomew’s Church and Central Synagogue released a joint statement supporting the plan, but criticizing the size of the levy.
“Any assessment associated with the transfer of development rights which may be considered by the City Planning Commission going forward should be sized so that it does not undermine the intent of the transfer provision as originally envisioned by the Steering Committee: to provide relief from the high cost of maintaining landmark buildings and to assist in their overall preservation,” the churches said in the statement.
Cushman & Wakefield’s Bob Knakal said the proposal’s effect will depend on how strong the market is for air rights.
“If the guys who own those rights ask a little more, they may not be able to sell them. Maybe they do,” Knakal said. “Air rights always come down to who wants the transaction to happen more.”