Get in the Zone
Continued from Page 19
Types of conformance
Properties must comply with the governing municipality’s zoning codes or land-use
ordinances. Zoning compliance, in terms of
commercial loans, is measured according
to the current zoning code, regardless of a
property’s age. This is because the current
code applies if the property had to be reconstructed today.
Two principal items make up zoning compliance: the property use and its improvements or physical characteristics.
Property-use conformance examines all
uses that operate on the premises. A by-right
or as-of-right use typically is always permitted
without any supplementary approvals. Other
uses only are permitted by conditional-use
permit, special-use permit, use variance or
special exception. For these uses to operate
in the applicable zoning district, the property-owner or tenant must go through the jurisdiction’s application procedures, as well as a
hearing process to receive the required permit
or approval. These approvals are usually subject to discussion, opposition or rejection.
The property-improvement compliance
establishes whether the improvements (e.g.,
buildings, parking or green space) that exist
comply with all of the zoning code’s physical
requirements. The requirements that apply to
a property and its zoning district vary greatly
among jurisdictions. They often include: lot
size, lot width, lot depth, frontage, building
coverage, impervious surface coverage, open
space, floor-area ratio, density, buffers, building height, setbacks and parking.
A property may have multiple zoning districts, overlays or applicable specific plans,
and each may have separate use and improvement requirements. There are also documents beyond the zoning code that may place
additional restrictions upon a property.
For instance, an approved site plan can
become a governing document in the case
of a planned-unit development. The jurisdiction may also place approved variances, waivers, exceptions, stipulations or conditions on
properties. Most of these items will run with
the land and must be considered when reviewing zoning compliance.
Three potential zoning conformances result
from the various zoning requirements: legal-conforming, legal-nonconforming and illegal-nonconforming.
If a property or its use meets all zoning
requirements with no deficiencies it is considered legal-conforming.
Legal-nonconforming status occurs when
the property originally conformed to the local ordinances but when because of circumstances beyond the property-owner’s control,
it no longer complies with the code.
Legal nonconformities can arise in numerous ways. The most common is when zoning
requirements have been amended after the
property’s development. Another common
way is if a portion of the property is taken
by condemnation or if it has been rezoned or
annexed into a different jurisdiction.
Nonconforming status — sometimes
called illegal nonconforming — is when the
or result in
the denial of
property does not comply with one or more
of the requirements when it actually should
be in compliance. A property may be nonconforming since its inception if the municipality
overlooked something, measured incorrectly
or even ignored a deficiency when signing off
on the approvals for the project. These signatures of municipality officials or certificates of
occupancy will not memorialize the deficiencies for the life of the property or run with the
land like a variance would.
Nonconformities also can arise if the
property-owner, tenant or anyone else makes
changes to the property that cause it to fall
out of compliance. Poor property upkeep also
can lead to nonconformities.
Because law and ordinance issues are
specifically excluded from title-policy coverage, lenders and title insurers will want assurance that the property conforms to the local
zoning requirements. If a property is ever destroyed, lenders want to know whether it can
be constructed back to its current state or
if any part of it would have to be changed,
relocated or sacrificed. They will often look at
how much of the property’s income-producing
portion would be impacted by being unable to
reconstruct the existing improvements.
Each zoning code has different restrictions
on whether a property can be rebuilt with existing deficiencies. Most zoning ordinances
require a property to be reconstructed in full
conformity with current ordinances after a
certain percentage of the property or building
is destroyed or damaged. This usually ranges
from 50 percent to 100 percent. This means
that if the property is damaged or destroyed
more than the governing percentage, it cannot
be rebuilt with any of the current legal nonconformities. It can only be rebuilt in conformance with all current zoning requirements.
If destroyed less than the applicable percentage, the property usually can be reconstructed as-is. Some jurisdictions also will
place strict time-frame limitations for reconstructing the property.
Doing the due diligence
There are two types of title endorsements that
relate to zoning that the title company may
add to loan policies — one for vacant land and
one for improved property.
These items can cover the loss of an asset if the property must be brought into compliance with local ordinances. Individually
purchased law-and-ordinance insurance can
also cover costs of bringing the structure into
compliance if it is required because of a casualty for only legal-nonconforming deficiencies. Lenders may require these items before
closing if deficiencies are discovered.
Zoning-compliance guidelines vary greatly
among lenders. The responsibility of obtaining
proof of compliance may be left in the hands
of the borrower, broker, council, lender or even
the title company. Different lenders may also
require different assurances to be comfortable with a property’s conformance status.
Brokers can help their clients with due
diligence on property compliance. There are
four typical ways to do so: by contacting the
municipality’s zoning officials; by conducting a
self-review; by working with an attorney; or by
hiring a third-party zoning-compliance vendor.
1. Contacting the municipality: Some lenders or borrowers attempt to do zoning research for loans via zoning-letter acquisitions.
Getting a timely zoning letter that contains the
information you need from a municipality official can be exhausting, however. Not only do
you risk having officials be unresponsive and
uncooperative, but the letter you receive also
may miss some vital information.
When jurisdictions prepare zoning letters,
for instance, they may indicate the property
is conforming, but they often base that on
the fact that no violations, complaints or non-conforming issues have been brought to their
attention. They usually do not have a survey
of the property, and they often have not inspected the site recently to compare conformance with current code requirements.
For example, officials may be unaware that
code requirements changed for lot coverage
since the property was constructed or before
they began working for the municipality. Therefore, they do not visit to measure the current lot
coverage. They may still indicate that the property complies, however, because they assume
it conformed to all requirements at the time of
construction and there are no violations on file.
Unfortunately, this neglects the fact that
something in the code or at the property could
have changed, which may cause undiscovered
deficiencies, potentially inadequate coverage
for the property and ultimately, problems for
everyone down the road.
2. Doing a self-review: Lenders or borrowers also may conduct a self-review of zoning codes. The accuracy of these analyses
depends on the zoning knowledge of the person researching the information, the depth of
the review and the amount of time spent digging up the facts. The review often does not
include any additional information, such as
backup documentation, statement of requirements and current measurements, or rebuildability provisions.
There may also be requirements in the ordinances that can be easy to overlook. For
instance, the city of Houston has “no zoning,”
which is true in that it does not have zoning
districts. This does not mean, however, that
people can build what they want and where
they want within Houston’s city limits. The
city does have detailed provisions in its city
code that regulate items such as setbacks,
lot width, open space and parking just as a
regular zoning ordinance would. Many other
municipalities also follow this no-zoning trend
but have incorporated land-use or land-man-agement codes that contain almost identical
requirements as normal zoning codes.
3. Obtaining an attorney opinion letter:
Usually accurate, but less detailed, an attorney’s formal zoning opinion is another option
many lenders and borrowers use. Many attorneys who practice zoning or land-use law will
review a property for its current zoning compliance. These opinions often can be time-consuming and expensive, however.
In addition, many attorneys only will review
compliance on local properties or municipalities of which they are most familiar. This can
be inconvenient for multisite transactions or
when you need more than one analysis.
4. Getting a zoning report: Another option is
a zoning-compliance report by third-party vendors that specialize in zoning due-diligence
research. These zoning companies independently verify the property’s current zoning and
also provide the backup documentation. With
this information at hand, they analyze the current requirements applicable to that zoning
district and property in comparison to what
actually exists on the site by using an American Land Title Association survey. They then
determine the property’s zoning conformance,
deficiencies and rebuildability.
Zoning reports can also be beneficial for
borrowers or brokers before they even locate
a prospective lender. Lenders often will be impressed if they do not have to facilitate this
portion of the due-diligence process. Borrowers
also can include the independent zoning report
as a part of the loan-proposal package to demonstrate the property’s zoning conformance.
■ ■ ■
Knowledge of zoning compliance is becoming as crucial and informative to a commercial loan transaction as a survey, appraisal,
property-condition report or environmental
assessment. It helps all parties involved in
the transaction determine if the subject property fully complies with zoning requirements
and whether there will be any current or future
repercussions of any deficiencies.
Brokers who are informed of these matters can help keep the assets’ value, meet
closing deadlines and decrease liabilities for
their clients and lenders.
Cassie Phelps is the senior zoning analyst for Zoning-Info Inc.
The company, founded by Donna and Joseph Lankford, has prepared more than 17,000 zoning-compliance reports nationwide
since 2000. Zoning-Info is the sole provider of the live zoning
report, a system that allows users to place orders, view documents, check the status of orders and even watch the zoning
report as it is being prepared live. Contact (405) 525-2998 or
email@example.com. Visit www.zoning-info.com.