The city now has until the end of 2018 to decide whether NYU's Bleecker St. site should become a school.
Parents want NYU to extend a year-end deadline for a new public school on Bleecker Street.
The panel overturned a lower court decision blocking some parts of the university's plan.
A rally was held in a green space threatened by the university ahead of a court hearing on the plan.
The working group's plan outlines development at the site despite neighbors' opposition.
Elected officials, community advocates and actor John Leguizamo held a press conference on Friday.
The City Council's land-use committee approved a modified expansion plan for New York University.
More than 100 angry NYU neighbors packed into a basement room at Judson Memorial Church Monday night.
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