New York City—Even in a slow economy, it's hard to find prime sites in big cities, as many of the best blocks are already spoken for. To overcome these hurdles, developers in one of the most expensive cities in the world have formed partnerships with local institutions.

Phoenix Realty Group, a real estate investment and development firm with offices in Manhattan, formed an alliance with a local church, while developer World-Wide Holdings forged a deal with the state board of education to revamp a couple of rundown public schools in exchange for the right to create a mixed-use development on part of the school grounds.

The island of Manhattan stretches across 23 square miles in the most densely developed county in the nation. Almost every square foot already has something built on it. To create new apartments, builders must often find ways to share space with existing landowners.

“Churches are a great source of sites,” said Keith Rosenthal, president of Phoenix.

Sensitivity was the key to Phoenix's partnership with Bethel Gospel Assembly, according to Rosenthal. Bethel owned the land—an entire city block on Fifth Avenue overlooking Marcus Garvey Park in New York City—that Phoenix, along with local developers Uptown Partners, LLC, and Artemis Construction, is turning into a development called Fifth on the Park.

The development partners were careful to make sure the church had good legal representation and got everything it wanted from the deal, including a new sanctuary and a steady stream of income to support its missionary work.

Their reward: a site in a prime location.

Bethel had bought the four-story former James Fennimore Cooper Junior High School at auction in 1982 for $300,000, when the city was practically giving away land in the East Harlem neighborhood, and had used the school to provide both church services and social services to the neighborhood. About a third of the block was taken up by the former school's playground, where a new mixed-use tower is now rising.

When it's finished in August 2009, Fifth on the Park will include a new sanctuary for the Bethel Gospel Assembly with room to seat 1,800. The tower will include 162 condominiums, 47 rental apartments, and a 117-space underground garage.

The ownership of Fifth on the Park was broken into three big pieces. The church owns the first slice, made up of rental apartments that will provide income to the church. The second portion of the property is also owned by the church and includes space for the sanctuary, with its more than 40-foothigh ceilings. The third ownership piece contains the individual condos, which are selling quickly even in a slow real estate market.

And Bethel was careful to protect its own interests every step of the way. For example, when the construction lender for the tower, Citigroup, needed the church to surrender title of its playground to the development partnership so that it could serve as collateral forthe $143 million project's financing, the developers provided extensive guarantees to the church that Bethel would eventually receive its sanctuary and the promised apartments.

The church sold the former playground to the development partnership at an undisclosed, below-market rate in exchange for the sanctuary and 47 apartments. The church also surrendered the air rights to build upward over the land occupied by the former school. Under local zoning rules, keeping part of the block low-rise allowed the developers to build their tower higher to reach 30 stories.

The sales office opened in the fall of 2007. By August 2008, 95 of the 162 condos had sold at prices averaging more than $800 per square foot. “That's much higher than the pro forma estimates,” said Rosenthal.

Developers go back to school

Sixty blocks due south, one of New York City's largest landlords had another prime corner near the heart of Midtown Manhattan.

The New York Board of Education ran two crumbling, crowded public schools in dire need of repair. With little money in its capital budget compared to the needs of the system, but millions of dollars of value locked up in the 1.5 acres of land under the schools, the city put out a request for proposals to developers.

This September, construction is planned to start on the first phase of 250 East 57th Street, a mixed-use highrise that will eventually include a redeveloped High School of Art and Design with room for 1,400 students and an enlarged new Public School 59 (P.S. 59), expanded from 400 to 730 students.

But wait, there's more: The 59-story tower will also include 170,000 square feet of retail space in the first phase and 320 apartments and condominiums in later phases. Developer World- Wide Holdings (also known as World- Wide Group) will keep both schools running, including P.S. 59, whose old building is being demolished to make room for the tower, during the construction period.

Until the first floors of the tower are finished, including the new P.S. 59, the school's students and teachers will relocate just a few blocks away to a temporary school located in the converted annex of the Manhattan Eye, Ear, and Throat Hospital on 63rd Street. After a six-month search to find the building, World-Wide paid $30 million using acquisition financing from Bank of America, refurbished the old hospital annex with city capital money, and signed a contract leasing it to the city for 20 years. After the new P.S. 59 is finished, the city plans to use the building as a community school.

The city set the terms for the development of the tower, refusing to let go of the land under the project. Instead, World-Wide signed a 75-year ground lease for the space it is developing over the schools. The lease will be renegotiated at the end of its term.

World-Wide also had to leap more bureaucratic hurdles than it would have needed to if it were developing privately owned land. “We would not have had to do a 250-page environmental assessment,” said Terry Stanley, director of development for World- Wide, based in New York City.

Despite the challenges and the fact that construction work is just beginning, the retail space at the new building is already a success. This August, Whole Foods signed a 25-year lease for 47,000 square feet on the ground floor of the new tower. The space is scheduled to open in 2012.