With $240 million deal, floodgates open for air rights in midtown east

Six months after the city rezoned the area surrounding Grand Central Terminal to allow for ever taller skyscrapers and the transfer of air rights from existing buildings, huge real estate deals are underway across the 78-block district called Midtown East.

The deals promise to elevate and reshape the already dense skyline of what has been the city’s premier office district, but is now being challenged by a future forest of soaring glass towers in the rapidly emerging Hudson Yards development on the Far West Side.

The deals will allow the sellers of those air rights — a peculiarly New York institution in which value is assigned to the space between a roof and the tallest permissible building height — to reap a fortune in a city where real estate is king. The city, which gets a portion of the proceeds from air rights sales, will also benefit.

JP Morgan announced on Feb. 21 that it would demolish its headquarters on Park Avenue, between 47th and 48th streets, to build a 1,200-foot-tall skyscraper that, experts say, could cost as much as $4 billion.

To build the new headquarters, which will rise nearly 500 feet higher than its current 700-foot, 52-story building, Chase is buying about 680,000 square feet of air rights from Grand Central’s owners, the executives said.

Developers have their eye on at least four other well-known buildings in the district that they could demolish and then employ air rights to make way for new skyscrapers, according to real estate developers and city officials.

Those buildings are the Grand Hyatt New York hotel, next to Grand Central on 42nd Street; the Roosevelt Hotel on 45th Street between Madison and Vanderbilt avenues; the Pfizer World Headquarters on 42nd Street near Second Avenue; and the Metropolitan Transportation Authority headquarters on Madison Avenue.

“Through the east midtown rezoning, Chase’s new headquarters has re-established midtown as a competitor to Hudson Yards for corporate tenants,” said M. Myers Mermel, chief executive of TenantWise, a real estate advisory firm. “This marks the beginning a new wave of redevelopment in this area. It’s kind of a surprise it actually worked.”

The $3.1 billion One Vanderbilt project, a 1,401-foot skyscraper next to Grand Central, is already under construction thanks to a related rezoning and 525,000 square feet of air rights.

To add four floors atop their modest 16-story building at 405 Park Ave., the owners — Deutsche Bank Asset Management and MRP Realty — have turned to St. Patrick’s Cathedral to buy 30,000 square feet of air rights in a deal that could top $11.5 million, according to records filed with the city’s planning department and local officials.

The Chase deals will generate more than $42 million for the city to improve the district’s streets, sidewalks and pedestrian plazas. St. Patrick’s, St. Bart’s and other landmarks will also reap millions of dollars to maintain and preserve their buildings.

More than six years ago, powerful real estate forces in New York pushed for the rezoning of what is now called Midtown East. They argued that the existing zoning often prevented property owners from replacing an aging set of office buildings with the kind of tall towers that companies were now seeking.

They also feared that a corporate migration to new oversized towers on the Far West Side would undermine the value of their properties.

In 2012, the administration of Michael Bloomberg began the process of “upzoning” the area around Grand Central to encourage development of the kind of towers now found in London, Shanghai and Hong Kong.

But local community boards complained that new towers would overwhelm an already crowded district, while the owners of Grand Central, as well as landmarks like St. Patrick’s, successfully sought the right to transfer air rights across a broader swath of midtown.

Air rights, also called transferable development rights, represent the difference between an existing building and the largest structure permitted under local zoning. Los Angeles and other cities also use air rights in their zoning code, but nowhere in the world are they used as extensively as in New York.

Grand Central, for instance, has more than 1.3 million square feet of air rights, while St. Patrick’s has about 1.2 million. The increasing use of air rights in development in recent years has produced a generation of super towers, like the residential towers along Billionaire’s Row, a stretch of 57th Street known for a $100 million penthouse.

To build taller under the Midtown East zoning plan, developers have to buy air rights within the district. Anyone selling air rights for projects there have to pay a minimum of $61.49 a square foot, or 20 percent of the sale price of air rights, whichever is greater, to fund either transit or streetside improvements.

Real estate executives complained that the requirement would hobble new construction. But no one expected Chase to suddenly move to tear down its 57-year-old headquarters, even though the bank was clearly looking for a new home.

To build a tower that would accommodate most of its employees, who are currently spread across multiple buildings on the East Side, the bank eventually went to the owners of Grand Central, TF Cornerstone, a real estate company run by K. Thomas and Fred Elghanayan, and MSD Capital, an investment firm controlled by Michael Dell of Dell Technologies.

The value of the air rights they control has been hotly debated. Andrew Penson, an investor who has a small stake in the property, has argued in the past that the rights were worth $880 per square foot. But developers and the city said that number was too high for office development. The Real Estate Board of New York argued that air rights were worth between $200 and $325 per square foot.

The bank, however, has since worked out a deal to buy about 680,000 square feet, for more than $350 per square foot, according to real estate and banking executives. St. Patrick’s is asking $385 a square foot for its air rights.

Dell was well known to Chase, which was the lead bank in his $67 billion acquisition of the tech giant EMC. Jamie Dimon, JP Morgan’s chief executive, personally assured EMC that Dell would have the money for the deal.

Dell and his partners stand to make more than $100 million. They must, however, set aside 5 percent of the proceeds to maintain Grand Central.

This article originally appeared in The New York Times.

With $240 million deal, floodgates open for air rights in midtown east

The owners of Grand Central Terminal are selling air rights for about $240 million to JPMorgan Chase so the bank can build its new midtown Manhattan headquarters, according to executives who have been briefed on the deal.

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