10/06/08

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Three floors for the price of four

A rendering of 450 West 14th Street

For sale at 446 West 14th Street: a landmarked building with nearly 15,500 square feet of space in the Meatpacking District, one of Manhattan's fastest-growing centers for high-end retail. The catch? Whoever purchases the four-story building has to remove the third floor in order to develop it.

"The air rights were sold, and the owner sold more air rights than they actually had, necessitating the removal of one of the floors in the existing building," said Robert Knakal of Massey Knakal Realty Services, which is representing Thor Equities, the seller.

In other words, when developed, the outside of the building, which is between Washington and 10th streets, will remain the same height. What will change is the number of floors inside the building, which will go from four to three.

At first blush, the situation sounds rare.

"[Most building owners] don't normally sell 100 percent of a building's air rights," said Stuart Saft, a real estate partner at the law firm Dewey & LeBoeuf. "There's no way of predicting future energy and technology needs of the building, so we always leave a sleeve of air rights, 10 or 15 feet above the building, as an envelope."

That said, it's not unheard of for a building owner to accidentally overbuild, or even to oversell his air rights. Saft recalls a situation at a building at 96th Street between Park and Lexington avenues, where the architect misunderstood the available floor area ratio and overbuilt by 12 stories. Before the developer could attain a certificate of occupancy from the city, he had to remove the top 12 floors of the building.

What's uncommon, as far as 446 West 14th Street goes, is the circumstance under which the oversell took place — namely, that it wasn't an accident.

At the time, Charles Blaichman, the developer who transferred the air rights, owned both 446 West 14th Street and the building next door, 450 West 14th Street. Initially he planned to develop the structures together, but he decided against it and sold 446 West 14th Street instead. But before he did that, he transferred 10,000 square feet of development rights from 446 West 14th Street to 450 West 14th Street.

"We were always going to transfer the ceiling and get the benefits of the air rights on top of 450," said Blaichman, explaining that since 446 West 14th Street is landmarked, "you couldn't really modify the building anyway.

"We thought [the extra 10,000 square feet] would be more valuable on top of 450," Blaichman noted.

The building has changed hands two times since. Thor Equities, the current owner of 446 West 14th Street, did not return calls for comment.

However, now, while 446 West 14th Street sits vacant, 450 West 14th Street, a 15-story building that has the elevated High Line going right through it (that's right, it straddles the High Line), is under construction. When it's finished, likely in January of 2009, it will have 100,000 square feet of rentable office space and 8,000 square feet of retail with "very high ceilings," said Blaichman. "Almost 20 feet. Because it's the bottom of the High Line, so the tracks go right over it."

"For the sake of property A, he forsakes property B," explained Luigi Rosabianca, a real estate attorney. "[The owner of 446 West 14th Street will] always be stuck with a three-story building. He has diminished the value of the property forever for the benefit of the adjacent property."

As the seller's broker Knakal pointed out, because the ceiling heights on the third and fourth floors of 446 West 14th Street are so low (a mere 8 feet apiece), it actually behooves a developer to remove a floor, creating a 16-foot ceiling height.

"Eight-foot ceiling heights are too low to warrant utilization," said Knakal. "It's not an attractive space, whether it's office or retail."

What remains to be seen is whether the next owner will go ahead and develop the building (read: spend the money to take out the third floor) or whether it will get flipped again.

"A lot of buildings are flipping down there because there is a lot of 1031 [tax deferment] money," said Karen Bellantoni, executive vice president at Robert K. Futterman & Associates.

When Thor and Massey Knakal initially put the building back on the market a little more than a month ago, it was listed at $50 million.

"We've now taken the price off the building because we're flexible on the number," said Knakal.

"Fifty million is a tough sale. It's not a substantial building, unless there are more air rights to sell, which I don't think so," said Rosabianca.

For his part, Knakal said there had been quite a bit of interest since the building went on the market.

"It's a great location, and you have to bank on what's happening in the Meatpacking District; it's one of the fastest-growing areas of the city," added Bellantoni. "There are a lot of retailers who want to be down there."