Are air rights something that I should consider?

[Erin Wicomb]

When considering investing in a commercial property, air rights are definitely something investors should consider for future expansion of their properties. 

WHAT ARE AIR RIGHTS?

What does it mean when someone refers to ‘air rights’? Air rights are defined as the ‘right to control, occupy, or use the vertical space (air space) above a property, subject to necessary and reasonable use by neighbors and others (such as aircraft).’

Generally, owning property includes the right to use and develop that space above ground without interference. Similar to mineral and surface rights, air rights can be purchased, leased, sold, or transferred.

As you can probably guess, the origin of air rights comes from New York where the real estate market is hot and land is scarce. Lower Manhattan was largely developed in the 1960’s due to air rights allowing developers to build upward.

As demonstrated in New York, air rights have the potential to help foster urban development and shape a city. On the other hand, they can be used as a defensive tactic to keep adjacent properties from developing their real estate higher. This can help protect views and/or access to natural light.

HOW DO AIR RIGHTS ADD VALUE?

Now that we understand the fundamentals of air rights, how can they add value for real estate investors?

Air rights can have enormous value as they potentially lead to future development on the property. Future developments can generate rent and income and lead to future cash flows.

Think about a one-story building that is sold, but also has air rights to develop five stories. There are four stories of future development and revenue to take into account when valuing the air rights.

Knowing the potential value of air rights, they can be a price kicker when a property is sold. As a property owner, this is something to take into account when acquiring or selling property.

When acquiring, you want to analyze the development potential of the existing air rights. When selling, you want to make sure the value of the air rights is priced in.

Investors of air rights have a hard time securing a mortgage due to the lack of collateral. In the event of foreclosure, banks don’t have a tangible asset to receive in return.

That makes it tough to determine a value for air rights. It’s difficult to value something that doesn’t yet exist.

What do you guys think about this? Are air rights something worth considering in terms of larger, urbanized properties?