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Sky’s the Limit: The Case for Selling Air Rights

Lower taxes and debt, increased revenue for the city, and a much better use of space in already dense environments: Selling air rights and encouraging upward growth seem like no-brainers, but NIMBY resistance and philosophical barriers remain.
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A view of the MetLife Building and Grand Central Terminal when the building was known as the Pan Am Building. (Photo: Stikshift/Wikimedia Commons)

A view of the MetLife Building and Grand Central Terminal when the building was known as the Pan Am Building. (Photo: Stikshift/Wikimedia Commons)

MARTA, the regional transit service in Atlanta, Georgia, would not be anyone's initial idea of a solvent government agency. Operating without state funding, it runs four rail lines and numerous buses across a sprawling, automobile-oriented region, carrying with it a reputation for tardiness and mismanagement. Just several years ago, it was running $25-30 million annual deficits but has turned around its finances under new leadership, and is expected to produce future surpluses. How? The new-found money will come partly because of changes like digitizing some services and lessening the use of outside consultants. But the real money will come from applying an esoteric practice onto its transit stations: selling air rights.

The agency plans in the next few years to sell the spaces above five existing transit centers to developers. Presently, high-rises in Atlanta neighborhoods like Midtown and Buckhead—where some projects are planned—are valued well into the hundreds of millions of dollars, and allowing similar growth above MARTA’s facilities could produce huge windfalls. The idea that a struggling agency could reverse its fortunes through such common sense deals begs the question of why more don't do it, especially in this era of service cuts and increased public debt.

Air rights deals are a way that governments maximize the value of their land, representing a “value capture financing mechanism in which a public agency is compensated by a private company for the cost of an investment,” writes transportation specialist Pamela Friedman. They typically occur when public authorities, looking either to build new ground-level facilities or renovate old ones, deregulate and sell the space above for new housing or office construction. Developers then bid for the right to build atop those spaces, generally with cash, or by funding public improvements.

Allowing high-rise construction above transit facilities makes particular sense both because of the new revenue, and because it concentrates people near a service that thrives on urban density.

Such deals in the United States are sometimes allowed, like in Atlanta, above transit centers. Perhaps the most famous example occurred in New York City in 1962, when the Pan Am building went over Grand Central Terminal. Buildings have also been constructed over Chicago's numerous railways. A 1980s land sale around one of Dallas' proposed new rail lines produced $450,000 in revenue for the regional transportation agency DART. And since the 1980s, the Massachusetts Bay Transportation Authority has negotiated sales for space above several Boston terminals, earning $20 million, for example, on a North Station project.

Allowing high-rise construction above transit facilities makes particular sense both because of the new revenue, and because it concentrates people near a service that thrives on urban density. Building five structures above Atlanta's stations, for example, will offer thousands of people immediate access to MARTA, bolstering a system whose ridership declined over the previous decade.

But really, these deals benefit other public facilities—and the urbanization process in general. Many facilities, including libraries, city halls, recreation centers, schools, and convention halls, are located in downtown areas, where increasing density and walkability are common goals. Such goals would be advanced if these typically low-slung, single-use facilities were instead incorporated into mixed-use projects.

Unfortunately, air rights deals remain rare, as municipalities nationwide often make inefficient use of even prime real estate. Recently, in my 44,000-person hometown of Charlottesville, Virginia, several new public works were built downtown, including a homeless shelter and transit hub. Combined, the two projects cost $12 million in local, state, and federal money. Both were built as single-use facilities of only a few stories, despite being located near taller private condos that rose in response to citywide growth. The condos’ units often sell in the mid six figures, and $4.15 million was recently offered for a downtown lot that would house a new six-story building. These market trends suggest that if Charlottesville's government had organized air rights sales above its public structures, it would have substantially helped with funding. Yet Charlottesville's redevelopment approach reflects that of other cities, where public buildings are funded with large upfront payments and long-term debt, but without thought on how expenses could be radically reduced.

Of course, in small towns like Charlottesville, the debate about air rights sales revolves not only around money, but building scale, traffic impacts, and other quality-of-life matters. However, there are several big cities—and probably numerous smaller ones—where the added construction should not be an issue. Cities like Seattle, Los Angeles, San Francisco, Boston, and New York are already dense, with advanced infrastructure and services in place. Because of high demand, they suffer from housing shortages and could use the added units. And their complex governments are prone to accruing debt, making handy the potential revenue. Moreover, because these cities are some of America's hottest real estate markets, their air rights sales would earn massive sums. The net worth of condo projects in Charlottesville, or even Atlanta, are miniscule compared to, say, the 61-story, $1-billion Transbay Tower in San Francisco.

Considering all this, there is little reason that public facilities built within dense downtown areas should not be part of larger projects. But they seldom are: over the last decade, fancy central libraries, for example, were built in Seattle, Phoenix, Memphis, and other cities. All of them are expensive, stand-alone structures of under a dozen stories—just like countless other public works.

Ultimately, the forces that prevent better use of public properties are the same as those that prevent this for private ones. NIMBY resistance has discouraged large-scale construction around the U.S., from little Charlottesville to high-rise Manhattan. Zoning regulations are also prohibitive, and difficult to overturn. But the main barrier is philosophical: local governments aren't typically run like businesses, and there is a stigma against doing this. Thus, there is little pressure for officials to maximize the value of public assets, even if it would mean lower taxes and debt. Making air rights sales a mainstream practice would be one step toward a more pragmatic approach to municipal finances.