Nowhere to Go But Up—But How Do We Get There?
By John C. Phillips
John C. Phillips is of counsel with the Newark, New Jersey, firm of Sill Cummis & Gross P.C.
Pinelands, Highlands, CAFRA, wetlands, Category 1 stream corridors, 300 foot buffers, Green Acres acquisition and bond issues, endangered species habitat, zero net fill, steep slopes, 10 acre lots, farmland preservation, scenic corridors, and the list goes on and on. These are all areas of increasing restriction and prohibition on development throughout New Jersey, each further limiting potential development and re-development sites. Where then are the buildings of tomorrow to appear? Certainly, many sites can be redeveloped and the old replaced with the new on a one-to-one basis, albeit perhaps with different uses, but where shall we put the 150,000 units of Affordable Housing (upper case) of which the governor speaks? Where do we put the many thousands of units of affordable housing (lower case) that New Jersey’s workforce needs to be able to remain in the state? With the available land area for development reduced because of increasing environmental restrictions and regulations there is only one way to go and that is UP. This is particularly true for residential, office, and mixed uses. But what rules apply and how do lawyers proceed?
Centuries ago the Dutch allegedly purchased the entire island of Manhattan for $24 in trinkets, roughly $1 per square mile. Over the next several hundred years as every available square foot was developed, the value of land rose to huge multiples of a $1 per square inch , and the five boroughs began to rise many stories above the ground. With the advent of steel construction the ability to go higher and higher grew exponentially, and people began to recognize the value of the vacant air above structures, which were too valuable to raze and replace. Necessity created the practice of creating vertical development parcels and transferring development rights from the air above one parcel to the air above another.
The concept of “air rights”1 constituting an interest in property was confirmed by the U.S. Supreme Court as early as 1922.2 In 1930, the Merchandise Mart, then the world’s largest building, opened in the air rights over the Chicago & Northwestern Railroad tracks in Chicago.3 Additional projects were subsequently built over other Illinois railyards. In New York City, the use of fee simple air rights and the evolution of law surrounding that concept has grown through the years from the construction of the Pan Am Building in the air space above Grand Central Terminal,4 through the decision of the Supreme Court in Penn Central,5 which specifically addressed the legislative support for the concept and the active market in the sale and transfer of such rights in the city, to today’s sale of air rights above Manhattan’s West Side rail yards.
Surprisingly, a concept found so valuable just across the Hudson River has not experienced much use or recognition in New Jersey.6 Certainly that is about to change, but New Jersey does not enjoy the long history of use and abundance of precedent and guidance that New York law has created in that state. It is now time for those rules to be established so that all development projects move forward with confidence.
As the age of the airplane arrived in New Jersey the legislature adopted the Uniform State Law for Aeronautics.7 Intended to regulate air travel, that Act indirectly codified ownership of rights in air space by providing:
The ownership of space above the lands and waters of this state is declared to be vested in the several owners of the surface beneath, subject to the right of flight described in Section 6:2-6 of this title.8
A direct and explicit codification of the nature of this ownership was reflected in legislation adopted in 1938,9 which has remained unchanged since.
Estates, rights and interests in areas above the surface of the ground, whether or not contiguous thereto, may be validly created in persons or corporations other than the owner or owners of the land below such areas, and shall be deemed to be estates, rights and interests in land.10
The alienability of such rights was also recognized in that legislation:
Estates, rights and interests in such area shall pass by descent and distribution in the same manner as estates, rights and interests in land and may be held, enjoyed, possessed, aliened, conveyed, exchanged, transferred, assigned, demised, released, charged, mortgaged or otherwise encumbered, devised and bequeathed in the same manner, upon the same conditions and for the same uses and purposes as estates, rights and interests in land, and shall be in all other respects dealt with and treated as estates, rights and interests in land.11
The ability to divide ownership of a single parcel of land without the necessity of a formal subdivision was recognized by the New Jersey legislature through specific enactments. The 1963 Horizontal Property Act12 was followed by the 1969 Condominium Act13 and the 1987 Cooperative Recording Act of New Jersey.14 Although each of these allows the creation of multiple ownership rights over a single plot of land, each relates to property ownership with some element of common ownership of a portion of the ground itself. A specific reference in the Municipal Land Use Law 15 (MLUL) precludes different treatment of condominium and cooperative structures and uses for development purposes because of these forms of ownership.
None of the referenced acts, however, contemplate or discuss ownership limited solely to a volume of air space or structures in such space16 and few New Jersey cases have dealt with the issue. The process by which such volumes of developable air can be created is not set forth specifically in any statute or decision.17 In light of the probability that air rights will soon become the new frontier of development in New Jersey some process and procedural rules must be established to allow certainty in performance, marketability, and insurability in transfer. At a minimum, it would appear the specific recognition of the creation of air rights parcels within the strictures of the MLUL18 must occur.
In Hyde v. Somerset Air Service, Inc.,19 the court expressed the modern New Jersey limitation on the ancient doctrine of ownership from the center of the earth to the heavens20 and limited effective ownership to “as much of the super-adjacent space above the ground as can he occupy and utilize in connection with his land.”21
This recitation was confirmed by the New Jersey Supreme Court in Jersey City Chapter of the Property Owners Protective Ass’n v. Jersey City22 while discussing the ability of the city to declare air space blighted. The supreme court acknowledged that land “generally includes the space above, as well as the subsurface at least to its usable extent.”23 The court then went on to note instances since the 1930s when air space above railroad tracks had been separately conveyed for productive development but made no mention of the manner in which those conveyances had been legitimized.
In 1990, Hartz Mountain Industries purchased the air rights over a portion of the PATH/Conrail tracks in Jersey City. The deed conveyed “all those certain air rights consisting of all that volume of space” above an area described by metes and bounds and starting 68 feet above the level of the tracks.24 When the city tax assessor placed a value on that transfer and assessed municipal real estate taxes against the parcel, Hartz contended that the air rights conveyed could not be taxed until actual development occurred in that volume of air.
The Tax Court disagreed, citing to N.J. Stat. Ann.
§ 46:3-19 through 21, which mandates that air rights and/or air space be construed as interests in land. The court went on to state:
Additional support for the notion that airspace can be the subject of a local property tax assessment may be found in the New Jersey Supreme Court’s opinion in Jersey City Chapter of the Property Owner’s Protective Ass’n v. City Council of Jersey City [citation omitted] in which the issue before the court was whether airspace could be blighted. . . . [In that case the court stated]:
Since the early thirties there have been instances in which the space above railroad tracks has been separately conveyed for highly productive development. The conveyed space had been generally viewed as real property. “The air itself is not real property and is not conveyed; airspace, however, is real property when described in three dimensions with reference to a specific locus.” . . . When in 1938 the Legislature expressly recognized that separate interests in the space above land may be validly created, it appropriately declared that such separate interests shall be deemed to be “interests in land.”25
The fact that such rights exist and have been recognized by both the legislature and the courts does not address, however, how those rights may be developed. Clearly, “air rights” can be sold separately from the underlying fee. But what is the proper process to create this transferable and developable interest in land? What procedure is necessary to actually put such air rights to use for a purpose or owner not related to the underlying fee? One experienced prerogative writ jurist has suggested in an unreported decision26 that subdivision approval might be necessary to create such rights and memorialize the transfer by deed. This seems to be consistent with other development practices now in use.
Under the MLUL, a subdivision is defined as “the division of a lot, tract or parcel of land into two or more lots, tracts or parcels or other divisions of land. ” [Emphasis added.]27 “ Lot” means a designated parcel, tract, or area of land established by plat or otherwise. Air rights have been determined by the U.S. Supreme Court to be interests in land and the New Jersey statutes have determined that air rights are “estates, rights and interests in land.” It seems to follow that the creation of an air rights parcel as an “other division of land” requires a subdivision secured pursuant to the MLUL since the creation of an air rights parcel is not one of those divisions excluded from the definition of “subdivison” under N.J. Stat. Ann. § 40:55D-8. In addition, it would seem that bulk standards applicable to the underlying land will be applicable to the exterior borders of the volume of air space being conveyed or developed.
Clearly, it is now possible for the owner of a parcel of land to file a master deed to create a condominium consisting of two units: one unit including the ground and a sufficient distance above it and the other a unit existing at some level above the ground. This action would not require subdivision approval and would be governed by the Condominium Act.28 These “units” could then be developed and each would have to comply with the use requirements of the zoning ordinance. Given the interrelationship of ownership interests through the common elements (however defined), the bulk standards of the zoning ordinance are easily applied to the structure as a whole.
In some cases, however, it may not be possible to use a condominium structure. Recent projects in the City of New Brunswick have moved forward with air space estates created by “Deeds of Apportionment” because restrictions on the use of tax-exempt bond financing by one or more of the parties precludes common interest ownership, which might constitute “private activity” use of a portion of the financing thereby jeopardizing the tax-exempt status of that financing. New Brunswick now grants “subdivision approval,” at the time of site plan approval, to create the air rights parcel through deed. The practice, however, does not appear to be officially recognized in the city subdivision regulations.
Between the required subdivision ordinance contents listed in N.J. Stat. Ann. § 40:55D-38 and the discretionary contents outlined in N.J. Stat. Ann. § 40:55D-40, there is more than adequate authority for a municipality to provide a lawful process and procedure to create “vertical subdivisions” in the subdivision section of its land development ordinance.
Such provisions need only provide that an air rights parcel be described in a specified manner and be subject to specifically indentified bulk standards. Unless specific reasons to the contrary exist, the ordinance need only state that any development of the air rights parcel shall be subject to all required yards and building lines extended vertically from those applicable to the parcel at ground level. Building coverage can be regulated by projection downward and floor area ratio (FAR), lot coverage, parking requirements, and similar regulations satisfied by providing that they shall be calculated as the sum of all vertical parcels or separately by parcel with or without a limit to the number of vertical parcels created. Height regulations may remain unchanged simply by providing that the permitted building height be calculated from the base of the ground lot to the top of any building within that lot envelope or by providing minimum and/or maximum vertical dimensions for each air rights parcel.
The changes needed to bring recognition of vertical subdivisions into current zoning ordinances are not complicated or difficult but they must be made to legitimize a technique that will be used with increasing frequency in New Jersey and very likely elsewhere in the country. Without such changes, can the creation of air rights parcels be classified as a lawful subdivision or is it something else, neither fish nor fowl, and therefore difficult to finance and for which title insurance and therefore marketability are problematic? Municipalities anxious to go vertical should act now to provide the legal framework for that process.
If a community desires to allow “vertical subdivisions” in a noncondominium context, it should amend its local ordinances to define an “air rights estate” and provide that it is to be created through the existing subdivision procedures in the ordinance.29 Distinctions between major and minor subdivisions may continue to exist and need not be modified to permit the introduction of air rights estates except, perhaps, to the extent necessary to recognize that an air rights lot does not necessarily have “frontage on an improved street” in the traditional sense. The ordinance should provide that such “lack of frontage” does not change a minor subdivision into a major one.
With such a simple modification to existing ordinances the now uncommon and somewhat esoteric air rights development can assume a prominent place in the ever challenging New Jersey development world.
Endnotes
1. This article relates to fee simple ownership attendant to air rights in contrast to the creation of leasehold estates, which clearly do not require lawful subdivision and do not rely on fee simple ownership.
2. Portsmouth Harbor Land & Hotel Co. v. United States, 260 U.S. 327 (1922).
3. See Herbert Becker, Jr., Subdividing the Air, Lawyers Title News, April 1969. Mr. Becker was the originator of the plan to create the fee estate for the Merchandise Mart and wrote extensively at that time regarding the concept. This article summarizes his earlier thoughts. A special thanks to Bruce Egan of Suburban Title Examiners in Westfield, New Jersey, who is the designated “keeper” of the extraordinary collection of title related materials compiled by the late Robert Hartlaub, former state manager and consultant to Lawyers Title Insurance, for providing some of Bob’s materials including the referenced article.
4. Completed in 1963, this building was then the largest commercial office building in the world.
5. Penn Central Transp. Co. v. New York City, 438 U.S. 104 (1978).
6. Three matters have come before New Jersey courts that have resulted in reported decisions or well-known unreported decisions addressing air rights per se: Jersey City Chapter of the Prop. Owners Protective Ass’n v. City Council of Jersey City, 259 A.2d 698 (N.J. 1969); Hartz Mt. Indust., Inc. v. City of Jersey City, 22 N.J. Tax 84 (Tax Ct. 2004), aff’d , 22 N.J. Tax 634 (N.J. Super. Ct. App. Div. 2005); PC Air Rights, LLC v. City of Hackensack, No. L-5350-05, 2006 WL 2035669 (N.J. Super. Ct. Law Div. July 20, 2006), aff’d in part, rev’d in part and remanded, No. A-0160-06T1 (Apr. 9, 2008). In addition, the New Jersey Attorney General concluded that the state highway commissioner could sell air rights over state highways and rights of way. A.G.F.O. 1960-No. 29. That opinion, however, does not address the manner in which the unit to be conveyed is to be created.
7. L. 1929, c. 311 ( N.J. Stat. Ann. § 6:2-1 et seq .).
8. N.J. Stat. Ann. § 6:2-5.
9. L. 1938, c. 370.
10. N.J. Stat. Ann. § 46:3-19.
11. N.J. Stat. Ann. § 46:3-20.
12. L. 1963, c. 168 ( N.J. Stat. Ann. § 46:8A-1 et seq .).
13. L. 1969, c. 257 ( N.J. Stat. Ann. § 46:8B-1 et seq .).
14. L. 1987, c. 381 ( N.J. Stat. Ann. § 46:8D-1 et seq .).
15. N.J. Stat. Ann. § 40:55D-58.
16. The MLUL and its predecessor statutes do not specifically limit subdivision of land in two dimensions. None contain any provisions, however, relating to a division in the third dimension. Although “projects” themselves are subject to local zoning controls, the form of ownership is not as noted above.
17. A form of “Deed for Air Space” is provided in John Celentano, 13 New Jersey Practice: Real Estate Law and Practice § 1.3. The discussion preceding the form, however, does not address the legal process to create the air space as a parcel to be conveyed separately from the land below.
18. See discussion below. N.J. Stat. Ann. § 40:55D-7 defines “subdivision” as “the division of a lot, tract, or parcel of land into two or more lots, tracts, parcels or other divisions of land for sale or development. ” [Emphasis added.]
19. Hyde v. Somerset Air Service, Inc., 61 A.2d 645 (N.J. Super. Ct. Ch. Div. 1948).
20. “Cuius est Solum, ejus est usque ad caelum et ad inferos” (whomever owns the land shall own the earth to its center and up to the heavens). See Toth v. Bigelow, 64 A.2d 62 (N.J. 1949).
21. Hyde , 61 A.2d at 645.
22. Jersey City Chapter of the Prop. Owners Protective Ass’n , 259 A.2d at 698.
23. Id. at 705, citing Philadelphia Trust, Safe Deposit & Ins. Co. v. Borough of Merchantville, 69 A. 729 (N.J. Ch. 1908), and Toth , 64 A.2d at 62.
24. Hartz Mt. Indus. , 22 N.J. Tax at 86–87.
25. Id at 90–91.
26. PC Air Rights , 2006 WL 2035669.
27. N.J. Stat. Ann. § 40:55D-7.
28. N.J. Stat. Ann. § 46:8B-1.
29. This may be accomplished through the simple expedient of inserting a provision directing that all setback, frontage, coverage, and FAR standards in the existing ordinance shall be applied to development in the air rights lot and the “lot” itself, projected onto the land below. All development on the lot at grade and all air rights lots above are to be combined for any such calculations. If the land below has proper frontage, the “lot” above would be deemed to also have such frontage. (The approving authority also must ensure adequate cross access easements and other provisions to service the air rights estate through the lot at grade.) Overlapping coverage would not be double counted, and all portions of any structure in the air rights lot would be governed by the ground level setback standards applied to the vertical extension of the lot lines. Total development, including overall heights would not exceed that allowed to the lot at grade if developed to its maximum extent.
