James Nelson James Nelson

NEW YORK CITY—In my last blog, I wrote about the untapped potential in New York City co-ops. Many of these opportunities apply to not-for-profits (NFP) as well. In the case of monetizing development value, this potential may be far greater. And as the title of the article suggests, they could also benefit by having new or improved upon space.

When considering unused air rights, an NFP’s use does not count against remaining residential rights, like a residential co-op’s would. In some zoning distinctions, the community facility FAR (floor area ratio) might be much higher than its residential ones. Floor area ratio is the total square feet of a building divided by the total square feet of the lot the building sits on. For example, in a C6-1 zone, the community facility FAR is 6.0, while the residential is 3.44. Here, an NFP looking for a new or expanded facility could use up to 2.56 of FAR to build for their own use, and then sell off all of the residential rights to either a neighboring property, or to a developer who would build a new building. In many cases, this could also involve the NFP receiving a community facility condo at little or no cost.

In one case, my firm represented the Tenth Church of Christ Scientists at 171-73 MacDougal Street. Back in the 1960s, the church had renovated their ground and second floors while essentially abandoning the above floors. In an architectural statement at the time, they bricked over a beautiful Romanesque Revival façade and left a small light well in the middle of the first few floors. The above floors had high ceilings, arched windows, and most importantly, views of Washington Square Park. When they did this, there was certainly no condo market to speak of, so this space was just an expense to heat and maintain.

About 40 years later, the church’s space was in need of renovation. They also wanted to establish an endowment for their mission. We proposed selling off the previously abandoned floors to a residential developer while they kept the lower floors. Ultimately, we found a developer who paid them over $5,000,000 (in 2007). The developer renovated and gave back to the church a community facility condo on the lower level, ground floor, and half the second floor where they were able to maintain a double height ceiling.

Of course, this was easier said than done. I was lucky to work with a great congregation who selected a sub-committee to oversee the process. We ended up touring dozens of developers through the space. Many speculated their time and money on showing them various plans on how their church could be reconfigured. Most suggested making the lower level useable and having flex space so that the worship space could be expanded when needed, but not take up an entire floor since it would be used only a couple of times a week.

The structure of the transaction was as important as the sale price. One thing an NFP, or any seller for that matter, who is looking to retain a condo unit in a building once completed, is not to subordinate their interest in that space while under completion. The nightmare scenario would be for a developer to get foreclosed on, and then the property is never able to be delivered. In the case of MacDougal Street, the closing actually took close to year, as we waited for a condominium plan to be in place so that the church would retain a fee interest while the work was being done.

This is not simple for a ground up development. Although there have been “fees above a plain” created as condos in order to give title to unused air rights, it is difficult to finance this type of structure. Many have looked to ground leases, which convert to condominiums once complete. The idea would be that the seller still owns the fee, and that if the developer were to be foreclosed on, the bank or developer stepping into their shoes would have to complete the project and still deliver the condominium back to seller. Unfortunately, this structure is also becoming very difficult to finance in the current construction loan market, because the lender would likely ask for the land to be subordinated as well. Meaning that in a foreclosure, the ground lease too, would be wiped out.

In a transaction I am currently working on, the solution for that remote possibility would be for the developer to give a guarantee on the condominium space being forfeited.

If I had to change one thing about the way we approached the MacDougal Street transaction, I would have had the church first plan what they wanted to see in a new renovated space. It ended up working out, but for months we saw several different proposals where developers suggested different configurations and sales structures. Thus, it was very tough to compare these proposals on an apples to apples to basis. With a new church assignment I am working on, we are first meeting with architects and space planners so that we can find out what best works for them. Then, when we go to market, we can ask for the developers to bid on buying the site and returning to them a community facility space to their specs at no cost. There are hundreds if not thousands of other NFPs out there who could benefit from this structure to modernize their space and create an endowment to keep their mission alive and well.