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:   𝑀𝑎𝑟𝑘𝑒𝑡
 𝑉𝑎𝑙𝑢𝑒 = 𝑁𝑒𝑡

 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔  𝐼𝑛𝑐𝑜𝑚𝑒
  𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛
 𝑅𝑎𝑡𝑒

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:   𝑀𝑎𝑟𝑘𝑒𝑡
 𝑉𝑎𝑙𝑢𝑒!"# = 𝑁𝑒𝑡

 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔  𝐼𝑛𝑐𝑜𝑚𝑒  (𝑒𝑥𝑐𝑙𝑢𝑑𝑖𝑛𝑔  𝑡𝑎𝑥)
  𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛
 𝑅𝑎𝑡𝑒!"# 𝑇𝑎𝑥𝑒𝑠

=   𝑀𝑎𝑟𝑘𝑒𝑡  𝑉𝑎𝑙𝑢𝑒!"#  ×𝐴𝑠𝑠𝑒𝑠𝑠𝑚𝑒𝑛𝑡  𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒  ×𝑇𝑎𝑥  𝑅𝑎𝑡𝑒  
 Using  Department  of  Finance’s  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  building’s  Net  
Operating  Income  (NOI).  Using  this  NOI  we  then  calculate  the  building’s  market  value  with  the  following  
formula:   𝑀𝑎𝑟𝑘𝑒𝑡
 𝑉𝑎𝑙𝑢𝑒 = 𝑁𝑒𝑡

 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔  𝐼𝑛𝑐𝑜𝑚𝑒
  𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛
 𝑅𝑎𝑡𝑒

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  

1    

 

 

NA  

 

 

6%              

 

 

19.157%  

2  

 

 

14.64%    

 

45%    

 

 

 

12.855%  

4  

 

 

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.     𝑀𝑎𝑟𝑘𝑒𝑡
 𝑉𝑎𝑙𝑢𝑒!"# = 𝑁𝑒𝑡

 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔  𝐼𝑛𝑐𝑜𝑚𝑒  (𝑒𝑥𝑐𝑙𝑢𝑑𝑖𝑛𝑔  𝑡𝑎𝑥)
  𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛
 𝑅𝑎𝑡𝑒!"# 𝑇𝑎𝑥𝑒𝑠

=   𝑀𝑎𝑟𝑘𝑒𝑡  𝑉𝑎𝑙𝑢𝑒!"#  ×𝐴𝑠𝑠𝑒𝑠𝑠𝑚𝑒𝑛𝑡  𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒  ×𝑇𝑎𝑥  𝑅𝑎𝑡𝑒  
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.  

                                                                                                                       
i

 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  resolution’s  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