Scotsman Guide - February 2009 Commercial Edition

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.

Conformance status

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

“Unresolved zoning issues often can push back closings; lead

to insufficient
title coverage,
decreased
value of
assets and
higher costs;
or result in
the denial of
funding.”

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.

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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 cassie@zoning-info.com. Visit www.zoning-info.com.