A lawsuit between a developer and its lender has given rise to some very tough questions about air rights.

CB Developers has filed suit in the New York State Supreme Court against one of its lenders, LStar Capital Finance, over the air rights to CB's mixed-use building at 200 East 39th St. in Manhattan, The Real Deal reports.

At issue is around 50K SF of air rights CB received from New York City in exchange for including 19 affordable housing units in the building. CB used the maximum allowable density bonus for the site, leaving 25K SF of air rights unusable, and thus available to sell or transfer. When the developer attempted to sell nearly 4K SF of rights, LStar (which provided $48.3M to refinance the property in 2016) blocked the transaction.

The lender contends that the air rights count as collateral in its agreement with the developer, but CB filed suit to allow the sale, claiming that air rights contain no value unless sold.

“Though the development rights at issue here are termed ‘bonus rights,’ and though they allegedly may not be used on the property in its current state, the fact remains that they derive from an underlying common-law right to build upon the land,” LStar claimed in a motion to dismiss the lawsuit. The claim was denied and the state court will hear the case.

The court's decision could have a sizable effect on mortgages and air rights, such as how much value a parcel's air rights have for the purpose of debt financing and how closely such rights are tied to the purchase of land. Also at issue is a potential distinction in air rights created for affordable housing and air rights that exist due to historical properties' fit within zoning changes.

“It means developers and lenders should take a closer look at 'boilerplate' mortgage language when negotiating their rights,” CB attorney Kevin Ainsworth told TRD.