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Testimony of the Real Estate Board of New York before the New York City Council Theater Subdistrict Fund Text Amendment
January 24, 2017
The Real Estate Board of New York (REBNY) is a trade association with over 17,000 members comprised of owners, brokers, managers, lenders and other real estate professionals active in New York City.
REBNY strongly supports the purpose of the Theater Subdistrict. The relief provided to theater owners in the form of larger area to transfer their development rights is necessary to ease the burden of very restrictive land use controls placed on them by the City. These controls mandate continued theater use as well as the inability to effectively use their unused development rights on their site.
While we are supportive of the proposal to streamline the administrative process for the transfer of development rights, we have very serious concerns about the introduction of the concept of a floor price and the proposed percentage used to determine the contribution to the fund detailed in the Theater Subdistrict Text Amendment.
Over the past ten years, the City Planning Commission has adjusted the dollar per square foot contribution rate twice: going from $10 to $14.91 in 2006 and raising it again in 2011 to the current rate of $17.60.
For more than 20 years, this has been a successful and efficient program whose contributions continue to adequately finance the purpose of the Theatre Fund without unduly stripping the theaters of the financial relief needed to maintain their buildings.
This new proposal is a radical departure from this very successful mechanism and would undermine the planning purpose for which this was established and which we support. We see no compelling reason for this change.
The Text Amendment recommends that the contribution amount be established at the higher of: twenty percent of the transferred development rights sales price or twenty percent of the psf of a “floor price”— established by a market study valuation equal to $347 psf and adjusted every three to five years.
Based on the floor, the minimum contribution for future sales would be approximately $70, nearly a 400 percent increase in the contribution. Needless to say, we believe this minimum increase is onerous, excessive, and unfair. In a weakening market, the actual percentage of a sale could exceed twenty percent.
Further, the City’s proposal to adjust the floor price in a declining market is inadequate and impractical and does not offer a meaningful measure of relief to theater owners. The process will likely delay any transaction by more than a year and may not accurately reflect declining values following an economic downturn. If a seller agrees to a price which in their judgment is fair and reasonable and acceptable to them, why should they have to pay the city to perform a market study to defend their pricing?
Based on our analysis, we can find no sales evidence that establishes 20 percent as the intended percentage of the sale price of transferred development rights when the City established this program.
By establishing a fixed amount, it would appear that the City decided that a fairer and more practical approach was necessary to encourage transactions. A fixed dollar amount is predictable in advance and would not harm those properties burdened by the requirement to preserve these theaters and their use as a theater.
This radical change would substantively transform the selling of air rights in the Theater Subdistrict. In contrast, the adjustments of the fixed price were simply a market update which established an equitable contribution among all owners over time. The proposed changes impose an inequitable burden on all future transactions which is likely to freeze activity which is not good for sellers, buyers, or the City
A reason to establish the transfer mechanism in the theatre district was the inadequacy of the zoning mechanisms in place to provide relief from the burdens of landmark designation.
In too many cases, the original rules for landmark transfers provided relief in theory and not in practice. It provided relief to some owners but not to others. In the circumstances where a transfer occurred there was no direct financial contribution required, though a plan for continuing maintenance of the landmark was required.
A similar problem had confronted Grand Central Terminal whose abundant unused development rights had very limited potential receiving sites. The establishment of the Grand Central Subdistrict expanded the mechanism for transferring development rights and introduced a five percent contribution toward the maintenance of the terminal. This is the percentage that should be our guide.
The floor price will be a serious deterrent to transactions and undermine the planning issues that this mechanism was intended to address. In a real estate market weaker than when this market based price was established, this contribution minimum, as a percentage, would rise and render the cost of a transfer almost confiscatory.
REBNY examined 2,349 parcels in the Subdistrict to see how much the values of the parcels have increased from 2011, the last time the contribution fund was adjusted, and 2016. According to Department of Finance records, the total market value of the parcels in 2016 is $25,396,950,423; this is a 47 percent increase from 2011, when the total value of all the properties was $17,244,463,433.
As an alternative to the City’s proposal, we recommend the current contribution fund amount of $17.60 be adjusted by 47 percent, the same amount the market values of all the properties in the Subdistrict have increased since 2011, which would result in a fixed contribution amount of $25.87 psf.
However, if a more supple mechanism that can capture a rising market or a high priced sale is preferred, we propose a percentage of between 7-9 percent. This percentage is based on the fixed price increase of $25.87 if it were converted to a percentage of these recent sales.
This fixed amount or this percentage will continue to fund the program no less than before, and would create a self-adjusting price which would eliminate the need for continued updating as is needed with a fixed amount. It would also not be a deterrent to sales activity
REBNY firmly opposes both the “floor price” and the drastic increase in the proposed Text Amendment.
Lastly, whatever the changes adopted, the new amendment should allow for a grace period for contracts entered into before the effective date of the change and closed within one year of the effective date, with any substantial increase in the rate phased in over five year period.