Zoning due diligence, always a necessary process in every commercial real estate transaction, is now more important than ever.
Zoning due diligence has become a necessary process in every real estate investment transaction. A zoning report is a very inexpensive investment when compared to the cost of the transaction. The purpose of the report is to meticulously detail the allowances and restrictions within branded municipal codes that divide geographic areas, referred to as zones. Any development or acquisition needs to adhere to these codes to be considered legally compliant. Lenders, insurers, and buyers need to minimize their risk and ensure their investment is smart, safe and profitable before executing a transaction.
Lenders generally require a property to follow zoning ordinances before they will issue a loan. Certain states, such as New Jersey, make zoning reports compulsory before a commercial property can be purchased. In the event that a property becomes legally nonconforming, commonly referred to as “grandfathered,” lenders require a certain damage and reconstruction threshold percentage to again minimize the risk to their investment. Especially for longer-term occupants and investors, liability is the single greatest threat to property, either if a jurisdiction or zoning law changes, or if specific property designation changes. It is in the client’s best interest to protect their property by choosing a due diligence advisor that can provide insight and meticulous zoning reports, involving a team of professional planners, civil engineers, and legal professionals.
With zoning codes and commercial real estate development ordinances changing rapidly, a zoning report provides assurance to a lender and/or investor that the current and future use of the property will comply with local laws. It will also protect the property owner against future actionable liabilities based on compliance or municipal or neighborhood changes. Executing these reports in a timely manner has heightened importance due to new changes in how this information is used for ALTA surveys. In the adaption of the 2016 ALTA/NSPS minimum standard detail requirements, the reporting of zoning information on the survey changed, specifically in the Table A items 6(a) and 6(b).
When item 6(a) is included, the surveyor will list the current zoning classification, setback requirements, the height and floor space area restrictions and parking requirements on the face of the survey. But for a surveyor to do this, they must be provided with a zoning report or zoning letter from the client. Previously, it was left open to interpretation where this information came from. When item 6(b) is included, the surveyor will graphically depict the building setback requirements, if the zoning setback requirements are set forth in a zoning report or letter provided to the surveyor by the client, and those requirements do not require an interpretation by the surveyor.
Zoning items should include:
- Table of current zoning municipal requirements
- Copy of current certificate(s) of occupancy
- Conforming status as provided by municipality
- Zoning verification or zoning compliance letter
- Notice of outstanding code violations of record (zoning, building or fire)
- Copy of zoning map or applicable map portion
- Adjacent property zoning designations
- Notice of applicable variances/special permits/exceptions/conditions
- Municipal zoning code sections for permitted uses, height, setback, lot area, minimum parking and right to rebuild in the event of casualty
- Comparison of current zoning code requirements to as-built survey conditions and notice of any nonconforming characteristics observed.
In order to conduct this report, due diligence consultants also need the following information from our clients:
- Property address
- Parcel number
- Current Use
- Prior Survey
- Offering memorandum
- Turnaround time
It may be necessary for the surveyor to qualify or expand upon the description of the aforementioned items (for example, in reference to ALTA Item 6(b), there may be a need for an interpretation of a restriction). The surveyor cannot make a certification on the basis of an interpretation or opinion of another party.
New ALTA survey changes requiring zoning reports directly from clients requesting the survey will encourage synergy between due diligence components, but it’s a trend that makes a lot of sense. ALTA land surveys are often ordered together with zoning reports. Furthermore, if you need zoning for lender approval, chances are good that you probably also need a Phase I Environmental Site Assessment, a Property Condition Assessment, and possibly even geotechnical investigations for new development land. Obtaining all of this information from the same trusted knowledgeable professional consultants provides meticulous, streamlined due diligence assessments, while avoiding delays and unnecessary additional costs along the way.
By: Timothy Kidd (GlobeSt)
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