In any real estate deal there are so many issues to consider and manage to make sure that every step of the transaction goes smoothly. You likely know about the larger aspects-performing your due diligence of the property, tenants, finances, title, etc.—but something as seemingly insignificant as zoning could play a major role in the viability of your deal.
What is Zoning?
Zoning is a set of rules and regulations that dictate how a parcel of land can be used. Zoning helps communities set and maintain property values and ensure proper and safe use of its real estate. Zoning can fall into a few categories—land use or ordinance based requirements.
Land use categories include:
Bulk ordinance requirements can include:
- Building type
- Location of utility lines
- Size/height of buildings
- Parking considerations
- Types of improvements allowed
- Setback requirements
Existing zoning codes may affect the property’s value for both the seller and the buyer so the first step in any commercial deal should be conducting thorough due diligence on the property.
Why is Zoning Important to My Deal?
Zoning is a key element in all commercial real estate deals, both big and small. The zoning of your property can determine how you can use the existing building and land as well as the type and extent of improvements that can be made to the site. It can also dictate whether, in the event of a catastrophic loss like a fire, the property can be built back to its existing use. Adding stories or square footage to a building or changing its use from residential to commercial isn’t easy. Getting the zoning changed on a property is a very difficult and work intensive process and, in the end, your desired result isn’t guaranteed.
This is why a Zoning Report is often required in order to secure financing. A zoning report takes local zoning records, codes and other information into consideration as part of the overall pre-purchase review. Land surveys, such as ALTA surveys, boundary surveys, and topographic surveys may also be reviewed as part of a zoning report. Building code can also effect zoning in terms of utility and infrastructure improvements that are allowed or may be required to get a building up to current code for the buyer’s anticipated use. The report can also inform buyers and lenders as to whether or not a property meets local zoning requirements and if the proposed or planned uses violate zoning codes. In addition to researching the local municipality’s zoning code, information is also obtained regarding the building’s past and present violations of any building or fire code sections. It is important to know any correctable violation prior to sale/purchase/refinance. These violations can be minor and easily resolved, but at times there are some major infractions that should be corrected. Along with fire and building, it is necessary to check with the public works department to determine if there are any planned easement or roadway projects that could impact the subject property.
A qualified professional can assist with conducting a zoning analysis and compiling all of the findings into a zoning report that can be used to educate the buyer, seller, and lender on the current use of the property and what improvements or changes can be done within the local zoning laws. There are many levels of zoning reports including a transactional report, which is more streamlined, or a pre-development report, which is more like a feasibility study. Making sure that you know all of the rules, regulations, and procedures associated with zoning reports will ensure that this seemingly small line item in your real estate transaction doesn’t become a big problem.
To learn more about zoning reports, click here.
To read more about zoning, click here.