New York’s Condo Laws Can Unlock Value in Office Conversions

New York’s extensive inventory of obsolete or distressed office properties has investors and developers thinking big, as we New Yorkers tend to do. 

Big ideas, as well as continued governmental flexibility in the form of additional tax incentives and zoning reform, will be necessary to create urgently needed new housing, rebalance the office sector, and revitalize the city. As the private sector continues to seek additional legislative change, it will take more than a low basis and a big idea to maximize opportunity and get the most out of an office conversion.

The enormity of many of the ripest targets for conversion resists a single viable solution, but the prospects for any office conversion — big or small — can be turbocharged by overlaying a condominium structure onto it. This allows a developer to treat an asset as a collection of discrete, individual components, minimizing risk, enhancing value, and unlocking opportunities in unexpected ways.

Condos are more than just your grandmother’s apartment or Beyoncé’s penthouse. When a property is made into a condo, it simply means that each component, or unit, becomes a distinct piece of property. Each piece has its own block and lot, a separate tax bill and a defined allocation of square footage owned (typically in a fee, but sometimes also as a leasehold) that can be financed, net leased, or bought and sold, as if it were a stand-alone asset.

The size, layout and complexity of many underperforming office properties in the city necessitates carefully curating the best mix of repurposed uses at the developer’s disposal, whether that’s market-rate or affordable rentals, for-sale apartments, a school, a dormitory, a health care asset, a storage facility, a hotel or even just signage. Crafting each component into separate legal parcels can be a powerful tool to minimize risk and maximize return.

Consider New York’s iconic Chrysler Building: Its age, condition, landmark status and sub-
optimal configuration is a significant challenge — not just for office conversion, but also for any single use, residential or otherwise. However, a winning formula could be found in a combination of real estate uses that leverages the strengths of its various components, such as ground-floor retail on the busy street frontage, modernized offices on the wide floor plates of the podium, residential units in the airier mid-rise tower section, or a boutique hotel or restaurant in the narrow landmarked spaces in the upper floors. 

The city government’s increased flexibility creates more potential, as the City of Yes for Housing Opportunity zoning text amendment now allows some hotel uses above residential spaces, which was previously forbidden.

The implementation of a condo structure would enable multiple stakeholders to own and operate within a building, with each owner or investor focusing on their particular needs, such as the asset type or use, yield targets, preferred hold periods, risk tolerance or tax requirements for the types of investments in which they can or want to engage. 

A condo regime would also enhance the financeability of a property, as a lender could make a loan on a distinct component, such as on a multifamily or hospitality portion, as opposed to one secured by the entire property with its various uses and distinct operational risks. Extraordinary leasing flexibility can also be had with condos, including allowing not-for-profit tenants to qualify for real estate tax exemptions on leased space.

A condo structure, too, can more closely align available tax incentives and other programs with the optimal mix of uses in a building. For example, rather than dedicating 25 percent of an entire building to affordable housing using the 467m office-to-
multifamily incentive program, a smaller multifamily component within the project could be isolated to capture the ideal mix of residential use to qualify. Meanwhile, a separate portion of the building more suitable for commercial space could then be outfitted to qualify for a preferred nonresidential program, such as the Industrial and Commercial Abatement Program.

Other advantages that can be unlocked with this approach extend to nearly any benefit, requirement or condition that is tied to the particular use or square footage of the affected “property.” Local Law 97 is another example, where carbon allowances may be tied to the characteristics of a particular tax lot rather than to the entire physical structure.

This tailored approach to essentially stacking available benefits programs under one roof is made possible through a condo structure, and it can be a true force multiplier in stimulating the kinds of results the city and the real estate industry have been looking for to effect real change.

New York real estate will never get simpler to navigate — it will only ever get more complicated. Developers can do right by themselves and their partners by bringing all available tools to the table when taking on a conversion project or any present or future challenges presented to them by an ever-evolving real estate market and regulatory environment.

Condo law: Don’t leave home, or convert your office building, without it.

Jonathan H. Canter is a partner in the real estate group and co-chair of the condominiums practice at law firm Kramer Levin Naftalis & Frankel.