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Testimony of the Real Estate Board of New York Before the City Planning Commission, in Support of the Greater East Midtown Rezoning
April 26, 2017
The Real Estate Board of New York (REBNY) is a trade association with over 17,000 members comprised of owners, builders, residential and commercial brokers, managers, lenders, and other real estate professionals active in New York City.
The East Midtown business district is a tremendous driver of economic activity and employment, and is critical to the City’s tax base and economy. According to the City, East Midtown accounts for 10 percent of the real property taxes, or $2.4 billion in fiscal year 2017.
The Greater East Midtown rezoning plan emerged after a year-long collaborative process among key community stakeholders. The goals of the Greater East Midtown rezoning were to revitalize an aging office stock, provide public realm improvements, and fund the continuing maintenance and operation of our treasured landmarks.
REBNY supports the City’s Greater East Midtown zoning proposal.
In order for this vision to be realized, new development must occur. As such, we have concerns that the plan may be too restrictive given the high cost of redeveloping existing sites. We propose modifications to the plan which preserve and promote its goals without inhibiting new development.
The concept of a floor price to establish a minimum contribution to the improvement fund is an obstacle to new development. The City’s floor of $393 per square foot would result in a minimum contribution of $78.60. This contribution amount would result in a 44 percent contribution of the Transferred Development Rights (TDR) based on REBNY’s analysis of TDR sales in the Landauer Market Study prepared for the City. This effective contribution rate is well above the City’s recommended twenty percent contribution for public realm improvements and would be a deterrent to transactions and new development. However, REBNY does acknowledge the need to determine the contribution amount for overbuilt floor area, but this amount must be based on a realistic valuation of TDRs.
The $393 per square foot (PSF) floor price, established by the City is flawed in three important ways: 1) the valuation relies on land sales to approximate TDR value instead of studying actual TDR sales; 2) the Landauer Market Study applied inflated and unwarranted growth rates despite market evidence to the contrary; and 3) half of the land sales that were used to determine the current floor price are systematically overvalued as a result of a failure to account for significant economic benefits available to sites within Hudson Yards.
TDR sales provide a far more appropriate and accurate view of the value of TDRs in Greater East Midtown. There is no market evidence in the Landauer Market Study to support the upward price adjustments it applied to land sales to approximate TDR values. In fact, their study found that the value of TDRs over the eleven years reviewed is generally flat, if not declining.
Therefore, any upward price adjustments would be inappropriate to apply to TDR values. Using the TDR transactions for office and hotel use cited in the Landauer Market Study, and applying the City’s methodology of taking the lower quartile of the ten most recent sales, the value of TDRs is approximately $179 psf.
A REBNY analysis of land sales in Hudson Yards, which is integral to the City’s floor price, lends further support for establishing a lower contribution price for overbuilt floor area in East Midtown. The Hudson Yards sales used in the Landauer Market Study were effectively overvalued and systematically misapplied since they did not factor in the significant economic benefits available to development sites in Hudson Yards. In these sites, developers were able to procure additional development rights, both by purchasing them from the Eastern Rail Yards and by contributing to the District Improvement Fund, for a far lower price per square foot than the cost of land. Additionally, the available tax benefits, estimated at roughly $70 psf, should have been considered. When all of these relevant economic factors are taken into account, the true value of development rights for a Hudson Yards site drops to $178 psf.
It is also important to note that while $393 psf is intended to represent the floor of the market, the Landauer Market Study does not list a single transaction of office TDRs that meets that price.
The City’s proposal that would allow an applicant to commission the City to prepare a new appraisal is simply impractical given the volatility of the TDR market and the time it would take to complete this assignment. Additionally, given the overstatement of the value of air rights in the initial market survey, there are no assurances that even the new results would match the buyer and seller’s assessment of the market value of development rights. Instead of guessing TDR value, the City should allow the market to determine the fair market value and collect 20 percent of the sales price for public realm improvements.
Another fundamental issue that threatens the viability of the rezoning proposal is the constraints on what constitutes a qualifying site for new development. While we support the goal of creating new Class A commercial office space on the avenues, it is important to note that as-of-right development on midblock sites or through the enlargement of existing buildings would accomplish many of the goals of this rezoning at a lower cost and a more rapid pace. Such projects can offer equally appealing development opportunities as new construction that fronts on the avenues, but have lower opportunity costs. As a result, midblock development and enlargements would generate the funds needed for public realm improvements sooner.
We strongly encourage the City to develop guidelines that would allow for the as-of-right development of mid-block sites even when they do not have wide street frontage. (We have proposed that through-block sites with at least 75 feet of cleared frontage on both streets be considered a qualifying site.) Buildings such as these often times are underutilized and functionally obsolete, and thus would be less expensive to acquire than avenue-fronting buildings. Flexible guidelines should also be proposed to allow for the as-of-right enlargement of existing buildings.
In regards to split lots, we strongly recommend that a provision that was included in the text certified on January 3, 2017 be restored to the current Greater East Midtown text. This initial text contained a provision in 81-612 which permitted a zoning lot having 50% or more within the East Midtown Subdistrict to be deemed entirely within the Subdistrict.
The inclusion of the east side of Third Avenue, an overwhelmingly commercial corridor, provides less expensive new development opportunities now and in the future. This important corridor should remain in the plan.
Currently, the proposed zoning change requires post 1961 overbuilt buildings to buy back the overbuilt floor area by buying development rights from a landmark, while pre-1961 overbuilt buildings will buy back their overbuilt floor area by paying 20 percent of the floor price to the City. There is no planning rationale for treating overbuilt buildings differently strictly based on the date it was constructed. We ask that the City treat overbuilt buildings equitably and remove this unnecessary distinction. Likewise, we recommend that pre-1982 overbuilt buildings be covered by the damage and destruction provisions that are applicable to buildings constructed under the 1916 Zoning Resolution.
The proposed hotel special permit in the Greater East Midtown rezoning proposal is a dramatic departure from current land use regulations and a significant barrier to new hotel development. This new requirement will place an enormous burden on current plans to convert existing commercial space for hotel use and seems incongruous with the recent moratorium which impedes the elimination of hotel rooms for other uses. We would recommend a discussion to develop a provision of the rezoning plan that would achieve the intended goals of the special permit without imposing a special permit for hotel conversion projects underway which would likely be abandoned if they were required to go through a special permit process.
The City should be commended for the introduction of a public concourse special permit to address the community’s and the Steering Committee’s concern over a lack of open space in the area. This special permit would provide the development community with a meaningful incentive of a 3 FAR bonus in exchange for meaningful public open space, while retaining a public review process that will give the community and elected officials the opportunity to tailor new development to create the open space desired.
In regards to other proposed public realm improvements, we strongly recommend that any future changes, particularly regarding street closures and changes to traffic patterns, be made with extensive consultation and input from adjacent or impacted property owners and stakeholders.
The built conditions and market of East Midtown is an environment that is challenging and costly for new development. As a mature market area with virtually no vacant sites, new development opportunities will occur slowly over time, and only when the leasing circumstances in individual buildings and market conditions in the area combine to make new development economically feasible. Therefore, we believe the aforementioned modifications are necessary to ensure that the rezoning achieves its stated goals.
East Midtown is a key job center in NYC. Its building stock, however, is aging and outdated; many buildings lack the slab-to-slab clearances and design efficiency that today’s tenants require. This rezoning proposal is needed in order to create opportunities for updated workspaces that will continue to attract companies and employers, while also funding much needed transit infrastructure and public realm improvements. It is our hope that the City Planning Commission will consider the issues we raised and put forth the strongest plan possible to ensure that East Midtown remains the world’s premier office district.