19

Nov 2014
MEMORANDUM
From: James Lloyd, Land Use Division
To:

Catherine Zinnel, Office of Council Member Brad Lander

Subj:

Valued added from rezoning

Background
At present there are ongoing discussions as to whether the Gowanus neighborhood should be rezoned,
and, if it is, how best to recapture any added value that a rezoning might generate. While planners and
policy makers are well aware that a rezoning from manufacturing to residential creates value in the form
of sharply increased rents and property values, there exists a need to quantify these increased values in
order to judge the difference in value created through a rezoning process.
A simple analysis would be to compare recent sales prices per square foot of residential property and
compare this to recent sales prices per square foot of industrial property, divide by square feet of parcel
area in each case, and use the quotients to determine the difference in land value generated by a
residential rezoning.
However, such an analysis would be complicated by the fact that property values are determined by
both present and future rents, and speculation that a rezoning might occur can skew present values to
the point that recent sales may reflect property owners already capitalizing on a potential future land
use change. Present sales prices are therefore unreliable as base values given this problem.
In this memorandum, we present two analyses; our first analysis is based on rent difference between
industrial and residential, and our second analysis is based on sales price difference between industrial
and residential. As a general disclaimer, all potential zoning districts and floor-area-ratios (FARs) are
used for analysis purposes only.

Enhanced rents
Increased rents
Industrial rents are currently approximately $17/square footi, though this depends on the square
footage available. Generally, larger floor plates (~50,000 square feet) would rent for closer to $12 a
square foot, while much smaller spaces would rent for $17 a square foot or slightly higher. Residential
rents are vastly in excess of this. Local residential rents for new build construction are in the
neighborhood of $54 per square foot of floor areaii. Based on a scenario in which a larger space is
subdivided into smaller spaces in order to achieve full occupancy and higher rents, we will assume $17 a
square foot of rentable spaceiii.

Increased FAR
*As a disclaimer, this analysis assumes a change from M1-2 to R8A for illustrative purposes. The analysis
can be performed assuming any potential residential FAR, with resulting rents and land values or
decreased accordingly.
A rezoning from M1-2 to R8A would change potential Floor Area Ratio (FAR) from 2.0 to 6.0.
Total increase in potential rent per square foot of land
Given a 25,000 square foot lot, an existing industrial building with an FAR of 2.0 would be 50,000 square
feet. Subtracting 25% of the floor area as unusable common space for hallway, loading dock, etc.iv, the
remaining floor area (37,500 square feet) could generate $637,500 of rent annually, or $12.75 per
square feet of floor area, or $25.50 per square foot of lot area.
Were this lot rezoned to R8A, the industrial building demolished, and a residential building constructed
in its place, rents would increase dramatically. As discussed above, residential rents in this area are
around $54/square foot. For a new building on this lot, 25,000 square feet of lot area would yield
150,000 square feet of floor area, which would yield $8.1 million in annual rent, or $324 per square foot
of lot area. An increase from $25.50 per square foot of lot area to $324 per square foot of lot area
represents an increase in rent by a factor of 12.7. Even if zoning changed but FAR stayed constant (e.g.
from M1-2 to R6B), the potential rent would still be $108/square foot of lot area, which is more than
four times the potential industrial rent.
Enhanced sales prices
Residential
The residential real estate market is very strong in New York City at the moment, and in particular in the
neighborhoods bordering Gowanus. Condos are selling in Carroll Gardens for $1000 per square foot of
saleable floor area (excluding common areas)v. Our example parcel is 25,000 square feet in size, which
yields 150,000 square feet in floor area, minus 20% for common areas, which yields 120,000 square feet
of saleable square feet. This square footage would yield a total sales price for the building of $120
million, or $4800 per square foot of lot area.
Industrial
In Gowanus, sales prices for industrial buildings appear to have been highly skewed by speculation that
the neighborhood will be rezoned to residential use. To determine the value of an industrial building
based on rents, rather than speculation, we use net operating income and capitalization rates to back
into a market value with the following formula:
=

As before, given a 25,000 square foot lot, an existing industrial building with an FAR of 2.0 would be
50,000 square feet. Subtracting 25% of the floor area as unusable common space, the remaining floor
area (37,500 square feet) could generate $637,500 of rent annually. Subtracting 25% of rent for
operating expenses (excluding taxes)vi, this building will yield $478,125 in net revenue. Assuming that
the owner cannot qualify for tax abatements, taxes need to be calculated as well. We use the following
formulae to determine taxes:
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( )

!"#

= !"#
Using Department of Finances mean industrial capitalization rate of 15.18%vii, an assessment of 45%
given that this is a tax class 4 building, and a tax rate of 10.684%viii, this building would owe $151,431 in
taxes. This tax bill diminishes the revenue to $326,694, which at this point represents the buildings Net
Operating Income (NOI). Using this NOI we then calculate the buildings market value with the following
formula:
=

However, in this case we need to use a capitalization rate that has been determined by the local market
for industrial space. Using Northern New Jersey as a comparable market, we assume a cap rate of 6.5%ix.
This cap rate yields a market value of $5,026,055, or $100.52 per square foot of building area and
$201.04 per square foot of lot area.
Were this building to receive a complete tax abatement from the IDA, its market value would increase to
$7,355,769, or $147.12 of building area and $294.23 of lot area.
Residential v. Industrial
As seen above, a residential rezoning and construction to max FAR (6.0) would yield $4800 per square
foot of lot area, while an industrial building would yield approximately $200 per square foot of lot area,
a difference of $4600 per square foot of lot area. This change would represent a 24-fold increase in sales
price per square foot of lot area.
Change in tax assessments
Given that Gowanus lies within the 421a Geographic Exclusion Area, a parcel that changes from
industrial use to new residential construction that receives 421a will not yield any increased property tax
revenue until the end of the abatement period, or 25 years plus a four-year phase out. Were 421a
simply renewed rather than reformed or repealed, and a rezoning were to occur in Gowanus, the
property tax revenue received by the City would likely diminish.
However, were 421a reformed or repealed, the dramatic increase in property values seen above would
result in a steep increase in assessed values for tax purposes. As exposition, it is important to note that

one, two, and three family residential properties (tax class 1) are assessed at 6% of market value, while
commercial/industrial (tax class 4) and multi-family residential (tax class 2) properties are considered
revenue producing and are assessed at 45% of market value, which is determined by DOF based on
revenue stream.
Tax Class

Cap Rate (tax)

Assessment Percentage

Tax Rate

NA

6%

19.157%

14.64%

45%

12.855%

15.18%

45%

10.684%

As seen above, our 50,000 square foot industrial building owned an annual tax bill of $151,431. Were
this building demolished and a new residential building constructed in its place, eventually this buildings
tax bill would reflect its much greater value. Using a cap rate of 14.64%, that of apartment rentalsx, and
am approximate expense ratio of 40% (percent of revenue spent on non-tax operating expenses)xi,
approximately $4.9 million would remain as NOI. This NOI would translate to a market value (for tax
purposes) of $33.2 million. This, in turn, is assessed at 45% and then taxed at 12.855%xii, yielding annual
tax revenues of $1.9 million. This represents more than a 12-fold increase in tax revenue when
compared with an industrial building with an FAR of 2.0. Of course, these tax revenues would likely
phase in over a number of years given that in New York City property owners do not immediately owe
taxes based on enhanced property values.
Potential tax-exempt uses and remaining tax revenue
Given that Gowanus is an industrial neighborhood suffering from industrial displacement, it may be
desirable to mandate light industrial or commercial in part of a new development as part of a rezoning.
Similarly, affordable housing production is a major concern for policymakers at present. Were these
uses required and made tax exempt, the market value of the building would necessarily be adjusted
down, as would the rent collectable on the property.
For analysis purposes only, if 1.0 FAR of industrial space and 1.2 FAR of affordable housing were tax
exempt, that would leave an FAR of 3.8 at $54/square foot. With 25,000 square feet of parcel area, the
building would have 95,000 of taxable square feet, resulting in $3.1 million in NOI. Using the below
formulae, This NOI translates to $21 million in market value using a cap rate of 14.64%, resulting in $1.2
million in property tax revenue, obviously phased in over a number of years.
!"# =

( )

!"#

= !"#
Given that our original industrial building had an annual tax bill of ~$150,000, this represents an eight-
fold increase in property taxes even with tax abatements for industrial space and affordable housing.

GMDC, personal communication, November 2014.

http://www.nytimes.com/2014/10/05/realestate/gowanus-is-counting-on-a-
whatevecleanup.html?partner=rss&emc=rss&_r=0 [335 Carroll Street] Rents start at $3,350 for a one-bedroom,
$4,500 for a two-bedroom and $6,700 for a three-bedroom. Given the zoning resolutions requirements of 740
square feet of floor area for a one bedroom in R8A, 740 square feet of square footage generates $3,350 in rents, or
$54 per year. No floor area is required to be subtracted for common space because the individual units may be
smaller than 740 square feet.
ii

iii

GMDC, personal communication, November 2014.

Ibid.
v
http://www.nytimes.com/2014/03/16/realestate/new-roots-in-carroll-gardens.html=
iv

vi

GMDC, personal communication, November 2014.

http://www.nyc.gov/html/dof/downloads/pdf/13pdf/fy2015_additional_guidelines.pdf
viii
http://www.nyc.gov/html/dof/html/property/property_rates_rates.shtml
ix
http://www.cbre.us/o/fortlauderdale/AssetLibrary/Second%20Half%202013.pdf
x
http://www.nyc.gov/html/dof/downloads/pdf/13pdf/fy2015_additional_guidelines.pdf
xi
http://www.nyc.gov/html/dof/downloads/pdf/property/income_guidelines_fy15.pdf
Given the high rents in the surrounding neighborhoods, Manhattan apartment buildings with more than 10 units
were selected as a comparable building type for expense ratio purposes.
xii
http://www.nyc.gov/html/dof/html/property/property_rates_rates.shtml

vii