Commercial real estate success is dependent upon dozens of variables, but a mature understanding of local zoning ordinances is essential to serving clients and attracting new ones.
As any seasoned commercial real estate professional can attest, certain cities are more amenable to CRE success than others. From local development tax incentives to immutable geographic features, many factors come to bear upon a city’s CRE environment. Foremost among them? The particulars of local zoning ordinances.
The concept of zoning is fairly straightforward and should be familiar to anyone who has ever developed or owned property. In short, by passing zoning legislation, local authorities segment the land under their jurisdiction into districts, each of which is governed by specific ordinances that dictate what can be built on the land, how such buildings can be used, and how the aggregate of buildings within a district must relate to other districts.
Reviewing the Basics
The most familiar zoning regulations are equally applicable to every district type — residential, commercial, agricultural, and industrial — and pertain to the physical characteristics and practical usage of buildings. Aesthetic regulations guarantee a baseline coherence of building color, materials, and architecture, publically-viewable landscaping, and anything else that contributes to the “visual feel” of a district.
Regulators also frequently restrict the kinds of secondary structures that may be built on any given property through accessory and ancillary use codes. The former governs, for instance, the installation of detached garages, swimming pools, and decks in a residential setting, while the latter determines when it is acceptable for a developer to build a structure complementary to but outside a property’s primary intended use — say, an office supplies store within a business park that caters specifically to its neighbors’ needs.
These basic zoning regulations are powerful tools with which local governments are able to sculpt the appearance, atmosphere, and general character of their cities, but for CRE brokers, developers, and appraisers, they are required knowledge on day one of the job. In other words, understanding aesthetic regulations and accessory codes doesn’t so much constitute a competitive advantage as much as the entry-fee for playing the game.
Delving into the Nitty-gritty
A vast majority of the opportunities for CRE professionals to strategically leverage zoning expertise are found in regulatory grey area. For example, jurisdictions undergoing significant development or revitalization frequently create planned unit developments (PUD), a type of mixed-use development — usually incorporating residential, retail, and office elements — designed with a comprehensive and cohesive plan.
When intermixing residential and non-residential structures in a PUD, city planners have little choice but to compromise certain zoning regulations, as holding commercial tenants to residential standards would spell disaster for their project. With PUDs, strict zoning adherence is sacrificed in the name of a cohesive living environment. If, for whatever reason, a broker is having difficulty finding a property with zoning requirements with which his or her client can easily comply, a PUD might represent a solution that satisfies client, broker, and regulator alike.
But for every hidden regulatory gem there is a regulatory pitfall of which CRE professionals must be wary. For instance, as a jurisdiction expands and undergoes liminal development, the burden on local public infrastructure like water and sewer lines, roads, and green spaces experiences a corollary increase. Oftentimes, communities will force developers to contribute to the expansion or refurbishment of such public infrastructure by inserting exaction clauses into zoning ordinances.
Especially in developing areas, brokers must make sure that the development of any given property will not trigger an exaction that will blindside their client. The last thing a broker wants is to have a complex, extensively-negotiated deal fall apart because the buyer finds out that, in addition to paying the agreed upon purchase price and building according to aesthetic and usage ordinances, they will also have to help foot the bill for a new public infrastructure project.
Bending the Rules in Your Favor
No matter how motivated a CRE broker may be, not every client demand can be satisfied within prevailing zoning schemes. That said, the savvy broker should not admit defeat and instead maneuver to change prevailing zoning schemes.
While infrequent, comprehensive rezoning occasionally occurs and is most often initiated by the government. Landowners may petition to have their district rezoned, but such entreaties are typically only accepted in cases where the district has undergone a substantive change. When a property originally on the outskirts of town is overrun by new development, for instance, local authorities may choose to grant the owner’s request to rezone his or her land (and the district encompassing it) from agricultural to residential or commercial.
In cases when a property owner is only concerned with their particular parcel and not their district at large, a landowner or potential buyer can request a zoning variance: a discretionary, limited waiver or modification of the zoning regulations on the books. For the most part, variances are granted when strict application of zoning ordinances would result in practical difficulties or unnecessary hardships for the landowner. Though most jurisdictions only allow variances on physical regulations like setbacks — that is, the distance left between a structure and a street, river, or other protected community feature — there are some exceptional circumstances where use variances may also be granted.
As a last resort, developers can apply for conditional use permits (CUP) when their plans run afoul of a district’s ordinances. Provided a project satisfies agreed upon conditions and is demonstrably beneficial to the surrounding community, it may receive a CUP from the local authorities and proceed in authorized violation of standard zoning regulations. Convenience stores, schools, and churches are some of the most common CUP recipients in residential zones, while restaurants, gas stations, and hardware stores are the most common recipients in industrial zones.
Finding the Right Tools
CRE investors, brokers, and developers who master the nuances of their area’s zoning ordinances are strategically positioned to capitalize on the opportunities that go unnoticed by the poorly-informed and avoid deals that are ostensibly attractive but actually riddled with regulatory complications. Such mastery involves careful study of loopholes like PUDs and CUPs, but more fundamentally, it requires access to comprehensive information about every property under consideration.
At Reonomy, we understand the critical role that zoning plays in the CRE industry. That’s why we’ve created a platform that enables users to search for properties not only by features such as location, sales history, debt load, and price range, but also by zoning code, building size and unit density, and land use restriction. Even our vacant land listings are classified in granular detail, making it easy for a user with precise needs to search for, say, multi-family vacant land as opposed to single-family vacant land. It’s this level of precision — with respect to zoning particulars and a host of other property characteristics — that makes Reonomy a cutting-edge tool capable of optimizing any CRE professional’s process.