Assessing the City’s $100,000,000 Offer by Valuing the CitiStorage Property Based on Recent Industrial Property Sales in Brooklyn & Queens
Friends of Bushwick Inlet Park and the Open Space Alliance for North Brooklyn have taken a close look at the recent heavy industrial real estate market in Brooklyn and Queens to see how the City’s $100,000,000 offer for the CitiStorage property stacks up. The analysis below reveals that the City’s offer is close to the target range of the fair market price. As a result, we expect that the parties will either negotiate a transaction or accept a neutral third party determination on price either through eminent domain or binding arbitration.
To arrive at this conclusion, we made certain assumptions, including that the reasonable worst case scenario would be limited to an M3-1 valuation due to both the effect of the seminal U.S. Supreme Court case in United States v. Miller, 317 U.S. 369 (1943), and the recent June 5, 2016 marketing brochure for the property issued on the owner’s behalf through the real estate brokerage firm Cushman & Wakefield. Therefore, we looked at every industrial real estate sale in Brooklyn and Queens for the past three years (2013, 2014 and 2015) and broke out the heavy industrial (M3-1) transactions to analyze them. We have also assumed that the Citistorage site contains 588,000 buildable square feet of space (as per the as-of-right square footage listed in the Cushman & Wakefield offering brochure). That figure excludes the public property in the form of sidewalks and demapped streets surrounding the CitiStorage property. Finally, since there are very few of these transactions, we believe that a three-year averaging method gives a fairer picture of the market. The conclusion using this methodology is that property is worth $78 to $197 per buildable square foot, or a total purchase price of $46,000,000 to $116,000,000.
Our process broke down the prior transactions into four groups: (1) overbuilt properties with older industrial buildings that exceed current (FAR 2.0) zoning; (2) large properties (lot sizes greater than 75,000 square feet but not overbuilt); (3) smaller properties (lot sizes less than 75,000 square feet); and, (4) properties that should be excluded from the analysis because of the effect of the Miller case. Specifically, Miller prevents using valuation comparables for properties affected by the 2005 Greenpoint/Williamsburg rezoning.
The overbuilt sites are not ground-up developments like CitiStorage. Rather, the overbuilt sites have older, larger industrial buildings predating the 1960 zoning laws. These properties were presumably bought for their adaptive reuse because their existing structures exceed currently allowable FAR. For our analysis, anything with a built FAR of 2.25 or higher fell into this category. This group of properties does have a very high average of $280 per buildable square foot, reflecting the additional grandfathered FAR in the existing buildings. If you look at the price per square foot for the buildings themselves, however, the average drops to $198 a foot. Applying this analysis to the overbuilt sites, the CitiStorage property is worth approximately $116,00,000 – more than the City’s offer but not outside the realm of framing a negotiated sale.
Large Sites v. Small Sites:
Looking at non-overbuilt large and small sites, comparable industrial land sales in the past three years start to work in the City’s favor. The large site/small site distinction is important because the CitiStorage property is potentially a 588,000 square foot development, whereas many heavy industrial properties are small lots of 5,000 or 10,000 square feet. The massive scale of development on the CitiStorage site means more risk. Using a large site metric over 150,000 buildable square feet, the median price paid per property is $78 per buildable square feet. This puts the value of the property based on comparable sales at around $46,000,000, far below the City’s $100,000,000 offer. Looking at small sites (less than 150,000 buildable square feet), the average price per buildable square foot is $130, or approximately $76,500,000. Because of the small number of transactions, and to err on the side of caution, we used the higher value of the mean vs. median for the above valuations.
The Miller sites are those properties in North Brooklyn that have benefited from the 2005 rezoning either by being within the rezoning area or in close proximity to it. In Miller, the U.S. Supreme Court traced the history of fair market value standard for eminent domain purposes. The Court found that value was to be determined as of the date of acquisition, with the qualification, however, that any increment due to the initiation of the project should be disregarded in certain cases. To determine exclusion or inclusion, the Supreme Court wrote that the test was whether the property at issue was within the scope of the project from the time that the Government committed to the project. As the Miller Court wrote (and paraphrasing to apply to CitiStorage):
The question then is whether [CitiStorage’s] lands were probably within the scope of the project [creating Bushwick Inlet Park as the central mitigation of the 2005 Rezoning] from the time the Government was committed to it. If [CitiStorage was] not, but w[as] merely adjacent land[ ], the subsequent enlargement of the project to include them aught not deprive [CitiStorage] of the value added in the meantime by the proximity of the improvement. If, on the other hand, [CitiStorage was contemplated as part of Bushwick Inlet Park at the time of the 2005 rezoning], the [City] ought not to pay any increase in value arising from the known fact that the lands probably would be condemned. The owners ought not to gain by speculating on probable increase in value due to the Government’s activities.
Miller, 317 U.S. at 377. The CitiStorage property was within the scope of the park mapping when the rezoning was passed in 2005. Therefore, its valuation in an eminent domain proceeding should be based on 2016 values for M3-1 property, excluding comparables whose price is influenced by the 2005 rezoning or in the follow up rezoning actions. CitiStorage effectively acknowledged its valuation constraints under Miller by marketing the property through Cushman & Wakefield as of June 5, 2015 solely for M3-1 uses.
Comparable sales within this area that should be excluded from any valuation analysis are 206 Kent (anticipated as a future Trader Joe’s) and 340 Wythe Avenue (an M3-1 site on Wythe and South 2nd, next to the Esquire building), either because they are within the rezoning area or directly impacted by it. For example, the 340 Wythe Avenue is adjacent to the rezoning area. It has benefited from the robust economic benefits from being rezoned. It has highest sale price in the whole data set at $434 per buildable square foot. That is the exact type of valuation benefit that Miller prevents.
We note that the City has successfully litigated two eminent domain cases involving open space where judges have used Miller to roll back higher zonings. In those cases, the properties were valued at their pre-rezoning land use designations (e.g. M3-1) even though the surrounding areas were rezoned for higher and more profitable uses. See City of New York (Fifth Amended Brooklyn Ctr. Urban Renewal Area, Phase 2, 41 Misc. 3d 1212(A); 980 N.Y.S.2d 275; 2013 N.Y. Misc. LEXIS 4540; 2013 NY Slip Op 51657(U); 2013 WL 5615047 (Sup. Ct., Kings, 2013) (“property should not be valued as if it had been rezoned ′because the rezoning was a necessary and integrated element of a comprehensive plan to redevelop the area . . ..’”) (quoting City of New York v. Zahav LLC, 106 A.D.3d 418, 963 N.Y.S.2d 866 (1st Dept. 2013). See also M.O. Associates, L.P. v. Queens W. Dev. Corp., 289 A.D.2d 335 (2d Dept. 2001); City of New York (No. 7 Subway Extension – Hudson Yards Rezoning & Dev. Program, 33 Misc3d 1202(A), 938 N.Y.S.2d 225, 2011 N.Y. Misc. LEXIS 4800, 2011 Slip Op 51759(U) (Sup. Ct., NY, 2011).
Based upon the foregoing analysis, the value of the CitiStorage property should fall within the range of $46 million to $116 million. That makes the City’s $100,000,000 offer an excellent starting place for the parties to negotiate a resolution to this important matter. We welcome public comment and critique after reviewing our assumptions, methodology and analysis. Friends of Bushwick Inlet Park and the Open Space Alliance for North Brooklyn are comprised of concerned citizens who expect the parties (both the City and CitiStorage owner Norman Brodsky) to work in good faith with each other. Applying the appropriate legal standards and recent land sales, North Brooklyn is closer than ever to realizing the creation of a large waterfront park that is thirty years in the making. Failure at this critical juncture is not acceptable.