When the owners of Macy’s Plaza decided to sell their four-acre retail/commercial/hotel complex in downtown Los Angeles (CA), they took an approach that is growing in favor in mixed-use developments. They subdivided the retail/commercial/hotel property into three separate uses in order to take each piece to market separately.

Known as an airspace subdivision, this approach to subdividing property can enhance the value, and thus the marketability, of a project — making the parts worth substantially more than the whole.

Adding Value
In an airspace, or three-dimensional subdivision, the property is divided into three instead of two-dimensional lots. Essentially a building is sliced up along its vertical height. Each three-dimensional lot may be bought, sold, and financed just like a conventional lot.
The saga of Macy’s Plaza, built in the early 70s, is an excellent illustration of an airspace subdivision increasing project value. In large mixed-use buildings, investors may discount the value of the property — a hotel buyer may want just the hotel property and an office investor likely is only interested in the office component.

Although it might be easy to package the commercial and retail together, the three uses combined lessened the price the property could command. Subdividing the uses gave potential buyers the flexibility to purchase the whole property or just the 26-story hotel, the 33-story office tower or the 349,109 square foot retail portion. In particular, subdividing the uses made the hotel component more attractive as a stand-alone property. While a hotel may be a real estate investment, it is also a business with a very different cash flow operation from commercial/retail uses.

The office/retail was sold to one owner in March 2005. Interesting enough, that owner then bought the hotel a couple of months later, but at a much higher price. By spinning off the hotel as a separate use, the sellers increased the depth of the market. The eventual owner bid for the hotel against four other bidders and ended up paying full market value because of the competition. This would not have been the case if the entire property had sold as a single entity.

While the Macy’s Plaza property is all under one owner once again, it is still subdivided to allow the pieces to be sold separately in the future. The airspace subdivision approach basically brings more investor interest and more competition to the property, and that potential remains today.

In addition to creating greater value when selling a property, an airspace subdivision offers building owners the opportunity to pull out equity and gives large tenants the option of separate ownership. If a building’s financial status is upside down, it can lessen some of the loan burden. From a city’s point of view, the sale of commercial parcels within a building can result in reassessment at market value, with local agencies benefiting from increased property values.

Added Flexibility
Another significant advantage of an airspace subdivision is added flexibility in terms of the rights and responsibilities in how a building is governed. For example, in a residential/retail building the retail can remain outside the purview of the homeowner’s association with regard to rules and regulations, parking, and common spaces.

Because there are no common areas, an air space subdivision is not a condominium project for purposes of California’s Subdivision Map Act or other related regulatory controls. Legal agreements recorded with the subdivision define how the lots and uses will function once individual components are sold.

This approach also allocates more fairly the costs of operating the building. Certain uses have different requirements for operation. For instance, a homeowner’s association does not want to incur the cost of staffing a hotel loading dock 24 hours a day.

Valuable in Adaptive Reuse
Airspace subdivisions are gaining popularity in the adaptive reuse projects that are a major trend in Los Angeles as older commercial areas of the city are being revitalized and transformed into urban residential neighborhoods.

1100 Wilshire, a 36-story office building located just west of downtown, is a case in point. Vacant for 17 years, the underutilized commercial structure is being remodeled to house 267 condos on 22 floors with 22,000 square feet of commercial floor area on the lobby and mezzanine levels for neighborhood, serving retail and restaurant uses. Separate airspace lots will facilitate independent financing and/or sale of the residential and commercial components of the project, as well as allow further subdivision into condominiums.

Spreading to Smaller Cities
Nearly 20 years ago, Psomas processed the first airspace subdivision in the region: the California Plaza in downtown Los Angeles. Since that time, Psomas has prepared dozens of airspace subdivision maps for approval in the Los Angeles region. Today the City of Los Angeles is very familiar and quite comfortable with airspace subdivisions and their complex mapping requirements. The approach also has been used in other large cities.

Yet this is still largely a big city phenomenon and a new and unfamiliar concept for smaller cities. The Towers on Capitol Mall in Sacramento (CA) is breaking new ground for this city of less than  two million residents, both literally and figuratively. The state capitol is witnessing its first airspace subdivision with the construction of two separate 58-story luxury towers in the heart of the city. The 765 luxury condos, a 60,000 square-foot high-end restaurant/retail component, a state-of-the art fitness center/spa and a 276-room InterContinental Hotel and Resort have each been subdivided for separate ownership.

Mixed-use buildings are becoming more common in urban and suburban communities as valuable land becomes increasingly scarce and as support for this type of project grows in municipalities both large and small. Given this trend, airspace subdivisions will likely become the norm for mixed-use projects, whether in the adaptive reuse of an underutilized office building or for a luxurious new high-rise.  SLDT