The New York County Supreme Court in CB Frontier v. Wilmington Trust, N.A., 2018 N.Y. Misc. LEXIS 3613 (Sup. Ct. N.Y. Cty. Aug. 20, 2018) recently held that an inclusionary housing floor area ratio (FAR) bonus, which enables developers to build more square footage than zoning regulations would ordinarily allow, “exists only for [the developer’s] benefit, independent of the Property,” was not related to the mortgaged property, and therefore was not the lender’s collateral for the mortgage on the Property. Id. at *1, *11. The Supreme Court’s decision to grant summary judgment holding that the FAR bonus was not collateral under the mortgage surprised many in the commercial real estate community. While the decision has been appealed to the Appellate Division, the current decision raises areas of concern for lenders, and could lead borrowers (and lenders) to more closely scrutinize their existing loan documents to see if they will support a claim that a FAR bonus is not collateral under the mortgage.
Origin of the FAR Bonus Dispute
CB Frontier developed and owns two residential apartment buildings (the Property) in the Murray Hill section of New York City. The Property is comprised of 91 units, 19 of which are affordable housing units constructed pursuant to a regulatory agreement between CB Frontier and the New York City Department of Housing Preservation and Development (HPD). Under the regulatory agreement, HPD agreed to provide a 3.5 FAR bonus, which resulted in a bonus of 50,810 square feet. CB Frontier used 9,475 square feet of the FAR bonus on the Property and sold 15,977 square feet to a neighboring property owner on Feb. 17, 2016. After that sale, CB Frontier retained 25,358 square feet of FAR bonus.
