New York City—On a rocky hillside overlooking Morningside Park, AvalonBay Communities, Inc., seems to have found the perfect place for a 20-story high-rise, just a few feet away from Broadway and Columbia University, with sweeping views of the townhouses of Harlem and Central Park.

The company didn’t have to bid against condominium developers for the land because it never went up for sale. This corner of Morningside Drive and Cathedral Parkway is owned by the Episcopal Church.

Workers are digging out a corner of the 11.3-acre campus of the Cathedral Church of Saint John the Divine. AvalonBay will pay “several million” dollars a year for 99 years to rent the site, according to Fred Harris, senior vice president for development for the real estate investment trust (REIT).

“The condo guys were bidding very high prices for land,” Harris said, referring to the tight competition for parcels throughout the city. “That’s one of the reasons we were looking for ground lease opportunities.”

When it opens its 296 apartments in the beginning of 2009, the 20-story building will stand just slightly lower than the top of the church. None of the church buildings will be altered by the construction.

Work on the massive cathedral began in 1892, and the nave of the building was completed just before World War II. Rusted scaffolding still clings to the unfinished south tower, where construction stopped in the 1990s. The north tower is also incomplete. The church reportedly has $20 million in deferred maintenance and has run in the red on its annual budgets by $1 million a year.

Layers of complexity

Finding land is just the first of many barriers to building in Manhattan. It will cost about $121 million to develop the high-rise, or roughly $400,000 per apartment. That’s wildly expensive by any measure, especially considering it doesn’t include the ground lease payments on the land.

To help get a tax abatement and to meet the goals of the church, AvalonBay agreed to reserve 20 percent of the apartments for residents earning no more than 50 percent of the area median income under the city’s 80/20 program. These apartments will rent for an average of $12 a square foot, compared to rents averaging $48 a square foot in the rest of the building.

The city also provided a low-interest $100 million loan funded with tax-exempt bonds issued by the New York City Housing Development Corp. AvalonBay will pay the remaining $21 million of the $121 million development cost with its own equity.

The tax-exempt bonds come with a reservation of 4 percent low-income housing tax credits that could be sold to equity investors for as much as $75,000 per unit. But selling them would require AvalonBay to split the ownership of the project with the other investors, probably through a condominium structure. Instead, the REIT may develop the building without the tax credits, Harris said.