Translate “Space” to Money

Discussions are underway toward moving the Metropolitan Highway that runs right above the Nihonbashi River underground. According to the press, the parties involved in the project have an idea for financing the construction work—they intend to sell the air rights to adjacent lots. Air rights is a right to use space above the land that it pertains to, and allows the property’s owner to transfer, or sell, portions of unused floor area ratio to other buildings. Under the Japanese Building Standards Act, unused floor area ratio can be transferred to redevelopment projects in adjacent lots, and the property under redevelopment which acquired that floor area ratio can add it to its “as-of-right” floor area ratio. Owners of the existing building who sold the floor area ratio can earn a sum of money from the sales. A well-known example of this is the Tokyo Station building’s restoration project. In order to fund the restoration work of roughly 50 billion yen, Tokyo Station sold its air rights to six neighboring buildings, including the Shin-Marunouchi Building and GranTokyo.

Shigekazu Kamiyama of the JLL Japan Strategic Consulting and Valuation Team says that the team has been working on simulations for the value of floor area ratio when it is transferred, and appraisals of real estate properties which underwent transfers of floor area ratio. “In highly commercial zones in central Tokyo where skyscrapers stand side by side, there should already be a high demand for unused floor area ratio. Many should want to buy it from low-use land nearby—which is not filled with buildings and used effectively—and make use of it. However, I think there are many landowners who are not aware of the fact that their low-use land has potential value—namely, in the air rights,” guesses Kamiyama. “Owners of low-use land such as individual landowners and general companies are exploring ways to maximize the value of their assets, and there may be more cases of these property owners seizing the opportunity of development projects that take place next to or near their properties and transfer some of their land’s floor area ratio to them.”

Floor area ratio is evaluated, in principle, by appraising the value of land before and after the transfer of the floor area ratio, and determining the value of the transferred floor area ratio on the basis of the difference in value before and after the transfer. Typically, the difference in the value of the land before and after the transfer is multiplied by a certain percentage to determine the value of the transferred floor area ratio. Kamiyama says, “Although it depends on the ways in which the floor area ratio is transferred, rights assigned as a result of a transfer in floor area ratio can be weaker compared to ownership or other rights to the land, or it can be impermanent. They are not something traded on the market every day. In some cases, a certain reduction in value is required, when they are regarded as less marketable than other assets.” It is also necessary to assess the difference in the value of land before and after a transfer of floor area ratio, not only for the land of the transferee but also for the land of the transferor, and consider how much of a financial disadvantage the seller of the floor area ratio would incur as a result of the transfer.

However, it is also true that there are few cases in which the transfer of floor area ratio is actually possible. In the example of Tokyo Station mentioned above, floor area ratio was transferred by using the “Special Case Floor Area Ratio Application Zone” system. The Special Case Floor Area Ratio Application Zone system was established in 2000. Under this new system, a portion of the floor area ratio of a property can be transferred to multiple construction premises that are not adjacent to the property as long as they are within the same district. In reality, however, the only area in the country that has been designated a Special Case Floor Area Ratio Application Zone is the Otemachi, Marunouchi, and Yurakucho areas. Although the Japanese Ministry of Land, Infrastructure, Transport and Tourism encourages proactive application of this system, it requires an approval of a city plan by the local government for an area to be designated as a Special Case Floor Area Ratio Application Zone, and there have been no new applications.

In addition, under the “Specific Zoning District” system, floor area ratio can be transferred between land within the same zoning district, or multiple adjacent districts. Still, this system also requires an approval of a city plan, and it takes significant effort and time to go through the application processes.

If you wish to transfer floor area ratio without waiting for an approval of a city plan, you can use the “Comprehensive Design System for a Condominium Complex” or “Combination Building Design System.” In Japan, only one building is allowed to be built on one lot under the Building Standards Act in principle. Even when you combine adjacent lots and develop multiple structures on them, each structure and lot must meet certain specifications on floor area ratio, setback regulations, obligations for a land lot to face the road, and so on. The Comprehensive Design System for a Condominium Complex relaxes these requirements. If a specified government agency checks a development’s specifications against a certain set of standards and finds no problem in them, that development can use multiple land lots as one lot, and only has to meet the above standards. Since the multiple lots are regarded as a single lot, the floor area ratio can be transferred among the lots, too. On the other hand, under the Combination Building Design System, you can not only combine lots on which new structures are going to be built, but also adjacent lots which already have structures on them, into a single lot. These systems release you from the need to have your development areas designated in a city plan, and your projects only have to be approved by a specified government agency. Therefore, it is rather easy to apply these systems, but floor area ratio can only be transferred to adjacent lots.

Still, “It is worth considering if you can transfer floor area ratio or not, though the scope for applications is limited,” says Kamiyama. In a large-scale redevelopment project undertaken by a major developer, transferring floor area ratio increases floor area, and pushes up rent per tsubo as well. (A tsubo is a unit of area equivalent to approximately 3.3 square meters.) If you own a low-rise building and have no plans for rebuilding it in the future, by transferring unused floor area ratio to a large-scale redevelopment, you can achieve a higher value in your floor area ratio compared to when you use it on your own land. You can even use the proceeds from its sales to repair or revamp your own property. “In addition to existing buildings, there’re a lot of land whose floor area ratio is not fully used, for example land lots used for schools, temples, cemeteries, or other semi-permanent structures. They have a high chance of turning the air rights into money,” points out Kamiyama.

It is becoming more important to maximize the value of the asset you own by evaluating and understanding the potential value of your land—including its unused floor area ratio—in view of making the most of your property, even if you don’t sell the floor area ratio. When you look into the value of your property, why don’t you take advantage of the knowledge and experience of the pros in real estate appraisal?