Air Rights Saga Continues for New York’s Grand Central Terminal

Mary Ann Hallenborg, Esq., author of Real Estate Due Diligence, writes about the recent lawsuits surrounding this New York landmark.

Undeveloped land has become a scarce resource in many gateway cities around the world. One consequence has been a rise in the development of “super-tall” buildings, particularly in midtown Manhattan. To make tall towers a reality, real estate developers lock down buildable land and then purchase unused “air rights”—technically, transferable development rights (TDRs)—from nearby sites. Air rights transfers allow larger structures to be constructed on the receiving parcel than otherwise would be permitted as-of-right under applicable zoning rules.

Historic and landmark sites are popular sources of excess TDRs because preservation laws restrict the sites’ future development. Recently, the owner of one of New York City’s most iconic landmarks, Grand Central Terminal, filed a $1.1 billion lawsuit against the City contending that a rezoning plan that allowed a private real estate developer to construct a super-tall structure building opposite the Terminal—without buying the Terminal’s air rights—was an unlawful “taking” of its property rights. (Compl., Midtown Ventures v. City of New York, Case No. 1:15-cv-07647(N.Y.S.D. 9/28/15)) The case presents a number of fascinating property and constitutional law issues that will unfold as the case progresses through the legal system.

Background: Grand Central Terminal I

The New York City Landmarks Preservation Commission designated Grand Central Terminal a “landmark” in 1967. The designation was intended to preserve the historic and architectural value of the French beaux-arts style railroad terminal, completed in 1913, from future demolition or fundamental alteration. Thereafter, the terminal’s owner, Penn Central, sought to unlock the full value of the Terminal’s central business district location. It submitted three separate proposals to develop a 50-story office building over the Terminal to the Landmarks Preservation Commission. While the midtown zoning district permitted 50-story buildings, the Commission rejected the designs as architecturally inappropriate.

Penn Central sued the City, claiming that the application of the landmark law to the Terminal constituted an uncompensated “taking” of private property in violation of the 5th and 14th Amendments to the US Constitution. The case reached the US Supreme Court in 1978. The Court ruled that the application of the landmark law to the Terminal did not constitute an unconstitutional taking. The landmark designation did not restrict Penn Central’s ability to continue using the property as a commuter rail terminal or to obtain a reasonable return on its investment. And, although the landmark designation restricted the owner’s control over the Terminal, the Court observed that the designation also served “to enhance Penn Central’s economic position” by allowing the landmark owner to transfer its unused development rights to a number of nearby parcels. (Penn Central Transp. Co. v. New York City, 438 U.S. 104 (1978)). Those TDRs are at the heart of the current dispute.

The Current Dispute: Grand Central Terminal II

In 2006, Midtown TDR Ventures (Midtown) purchased the Terminal and its 1.2 million square feet of unused TDRs, hoping to sell the air rights to nearby sites along Vanderbilt Avenue that appeared poised for re-development. In 2011, the real estate investment trust SL Green completed the assemblage of a prime full-block development site known as One Vanderbilt directly across from the Terminal, where it planned to construct a super-tall office building. But instead of purchasing Midtown’s TDRs, SL Green was able to receive all of the development rights it needed from the City, under a 2015 Vanderbilt Corridor rezoning that offered “bonus” development rights of up to 15.0 F.A.R. in exchange for public improvements made to the area. SL Green committed to making $220 million in public improvements and has received approval to construct a 65-story office building.

On September 28, 2015, Midtown filed suit against the City and SL Green seeking $1.1 billion in damages. The Complaint claims that the 2015 Rezoning granted SL Green a development rights windfall to the financial detriment of the Terminal which no longer had a ready market for its TDRs. Only time will tell how the latest Grand Central Terminal saga will play out, but the case promises to shed light on the extent to which the City has any duty to protect the value of air rights over landmark structures. 

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