Charles Mulligan and Sara Ehrentreu

Zoning compliance reports are a critical component of commercial real estate due diligence. While the costlier, on-site assessments like environmental site assessments or property condition reports tend to grab the spotlight, the zoning compliance report provides a fundamental picture of whether your target acquisition or development conforms to local law—sometimes revealing make-or-break intelligence about your deal. Despite this fact, many CRE players have misconceptions or limited understanding about zoning compliance reports. Here are six things you should know about zoning due diligence.

1. A zoning compliance report does not determine feasibility of planned/future use. The report evaluates the compliance of the current conditions at a site.  While a zoning compliance report can advise if a proposed use is permitted in the Subject's zoning district, it is outside the scope of the report to determine exactly what could be developed on-site.  A feasibility study should be completed by a local engineering firm or land use attorney in those cases. Remember that even if your plan meets zoning codes, it may be denied due to other factors, such as objections from city residents or planning commissions.
2. New construction does not always mean conforming construction. There are a number of reasons why new construction may not conform to zoning codes, even when the developer observed appropriate plan check and permitting processes. For example, depending on the scope of a project, plans may take months or even years to be approved, and construction may take further years to complete. In that time, the municipality may adopt new requirements that were not in place when development approval was attained, rendering the newly constructed building non-compliant. A zoning compliance report is useful for identifying and closing gaps like these.
3. The site address may not be the address reflected on the Certificate of Occupancy: Often, the site address of a property and the address indicated on the Certificate of Occupancy may differ. This can occur as the result of the property being issued its permits at one address, sometimes an access drive, and ultimately operating at another address. When this occurs, it's important to determine if a material concern and must be addressed with the municipality to help resolve, or if it's immaterial. The zoning compliance report can help bring to light these differences.
4. The Role of Local Government: A zoning verification letter, issued by a city or municipal planning department, states the zoning of a property and often provides historical data such as entitlements, variances, and violations at the site. Cities and municipalities all charge different fees and have different turnaround times to issue a zoning letter. We have seen fees as high as $1,000 for a zoning letter, and turnaround times up to 60 business days. It may be tempting to skip the zoning letter in the interest of time or cost saving, but the letter is important. The zoning letter may also include any entitlements approved for the site, which may not come up in a basic records request and provide greater clarity around apparent discrepancies or deficiencies
5. To Survey or Not to Survey: The most thorough, accurate zoning report comes in conjunction with the review of a current ALTA survey. We can work with supplemental research and aerial images, and there are situations where schedules and budgets dictate that approach, but for best results, order both the ALTA Survey and the zoning report.
6. Cities with Limited or Non-Existent Zoning Laws: In cities like Houston, where they don't regulate property use via zoning, a zoning compliance report is still prudent, as the municipality may enforce certain requirements such as parking and build-to lines.  A zoning compliance report is the only due diligence process that will address those compliance issues.