Property Group Partners Capitol Crossing in Washington, D.C. MA MB MC MD ME ZQ ZR ZS ZT ZU
David Tuchmann admits that he has a unique challenge: building land where none exists.
Tuchmann, who works for real estate developer Akridge in Washington, heads the company’s development of Burnham Place, a planned 3 million square foot unit development over the railroad tracks of Union Station in the nation’s capital.
That’s where “air rights” come in.
Simply put, it’s selling the right to build over land that has to be created, well, out of thin air. Akridge paid the U.S. government just $10 million for the air rights back in 2002 (the deal closed in 2006) to build over a complex 14-acre maze of railroad tracks and platforms just north of the famous Beaux Arts train station, which opened in 1907 and was designed by Daniel Burnham, the architect of the 1893 Chicago World’s Fair.
The price for the air works out to just $3.33 cents a square foot. While that may sound cheap, as commercial property values go, keep in mind that the land, which in air rights projects is known as a “deck,” hasn’t been built yet.
“What’s so challenging is building that replica of land and the construction cost of the deck,” Tuchmann, the company’s vice president of development says. Moreover, there’s no bank financing available for air since unlike a typical mortgage, there’s no land or a building as collateral if the borrower defaults.
“You can’t hand a bank the key to something that’s not there,” says Tuchmann. So to build the deck, which may cost hundreds of millions, the company has had to raise its own capital before beginning construction on the initial stages of the project in 2016 with the air rights decking coming in 2018.
The history of air-rights projects is generally date back to the mid-1960s in New York, says Lance Brown, president of the American Institute of Architects (AIA) New York chapter, with much of lower Manhattan being constructed with both the use of air rights and landfill.
“If it’s done right, it can knit a city together,” he said. Air rights, he said, can also be used defensively to protect adjacent properties from building higher than their present height, helping to protect views and preserve access to natural light.HYNY Hudson Yards, viewed from the High Line. MA MB MC MD ME ZG ZH ZQ ZR ZS ZT ZU
Currently, one of the biggest air rights projects in the world is New York City’s 28-acre Hudson Yards development, a 17 million square foot project, the biggest construction effort since Rockefeller Center. The $20 billion project, broke ground in December 2012 and began in March plating over the two giant open pits looking down on the railroad lines of Amtrak, Long Island Railroad and New Jersey Transit on Manhattan’s West Side between 10th and 12th Avenues and West 30th to 34th Street.
The decking of concrete and steel will weigh more than 35,000 tons, or approximately the weight of a World War II aircraft carrier, with 300 caissons, up to five feet in diameter and drilled as much as 80 feet deep underground, to support the weight of the deck. Even more challenging, as with Burnham Place in D.C., dozens of rail lines must be kept operational during the construction.HYNY View of Hudson Yards, looking south. MA MB MC MD ME ZG ZH ZQ ZR ZS ZT ZU
“Hudson Yards is a unique project because the complex is being built above the tracks, which are MTA property,” said Daniel Levy, president of City Realty, a New York realty firm, who estimates the cost of the decking to be more than $720 million. “So in addition to being the largest private development in the United States, it would have been completely impossible without the transfer of air rights from the MTA.” Hudson Yards, which is being built in stages, will deliver the first portion in 2015 and the eastern half in 2018, the developers say.Property Group Partners Capitol Crossing MA MB MC MD ME ZQ ZR ZS ZT ZU
Back in Washington, Jeffrey Sussman and Robert Braunohler of Property Group Partners are set to break ground on another air rights project, Capitol Crossing, a 2.2 million square foot development just a few hundred yards down Massachusetts Avenue from Akridge’s Burnham Place. The $1.5 billion project will plate over the trench that is now I-395 in D.C., otherwise known as the Center Leg Freeway. Air rights are critical in the District of Columbia, says Braunohler, PGP’s regional vice president, as most structures are limited by the city and Congress to just 130 feet in height.
“As these cities run out of land, you’re going to have to do something,” Sussman, PGP’s president said.
Ironically, the lack of land makes the enormous initial costs of building over air like Capitol Crossing viable, Braunohler said. “The land values in D.C. are astronomical. There isn’t enough supply,” he said. But the same can’t be said for all cities. “In Cleveland and Atlanta, the numbers wouldn’t work,” he said.
Another question both project managers have to confront: When the land is built, what are the property taxes?
Sussman says to minimize the expensive costs of building land from thin air, there has to be some relief from property taxes. “During the period of construction there should be no real estate taxes,” he said.
Neither PGP’s Sussman or Braunohler or Akridge’s Tuchmann will say who the financial backers of their projects are, but Tuchmann says of Burnham Place that once the deck is built, “bank financing will become very viable.”
For Robin-Eve Jasper, who heads the NoMa Business Improvement District, one of several public-private partnerships in Washington formed to attract retail and commercial development and improve the city’s streetscapes, the Burnham Place project isn’t just another development, it’s doing just what Lance Brown of the AIA says air rights projects should do.
“It connects the neighborhood, both east and west,” which has been separated by the rail lines, Jasper, the BID’s president said. “Having elevated retail, public space, offices and housing together will be very important.”
As for potential tenants, she won’t reveal who they might be, but she says, “all they want to know is when it’s going to be delivered.”
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Daniel Goldstein is a personal-finance and real-estate reporter for MarketWatch.
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