Understanding commercial property zoning can make or break your real estate project.
Imagine paying a fortune to purchase a piece of land you want to develop as a hotel only to realize later on that it cannot be used for that purpose. Avoiding these kinds of losses is one reason why paying attention to CRE zoning is important.
In this article, we will highlight the top challenges with CRE zoning and what you can do to navigate them so you can succeed as a CRE investor.
Nondisclosure of zoning restrictions
Whether intentional or not, some CRE buyers may fail to inform you of zoning restrictions on the property they are trying to sell.
This is one reason why you must conduct due diligence on a property before signing on the dotted line. You should visit the relevant municipal authorities and inquire about that particular piece of land.
Properties built in contravention of zoning regulations
During your due diligence, you may discover that the land already has structures that violate certain aspects of the zoning regulations.
This can be legally possible if the developer got special permits and variances from the relevant authorities.
However, you can’t rely on what the seller is saying about such permits and variances. Instead, request for relevant documents backing them up and confirm the validity of such documents from the relevant authorities.
Overvaluation of restricted-use properties
Zoning regulations can cover different aspects of land and properties including permitted use, building height, setbacks, floor area ratio, density, parking requirements, and landscaping, among others.
A combination of all these can affect the potential use of a property and its potential value, by implication. That is, land with restricted use should not command the same value as comparable land with no restrictions.
Therefore, when purchasing land or properties, ensure you factor in zoning regulations to the valuation process. This can prevent you from overpaying for certain properties.
Undervaluation of properties
On the other hand, some zoning regulations can have positive impacts on property values.
For example, zoning laws that allow certain CRE properties (trendy restaurants, for example) to be built in certain locations can increase the value of businesses and residential properties around it.
Furthermore, historic zoning districts that conserve some cultural heritage can command greater value for their cultural and historic importance.
Also, some zoning legislations require green spaces, parks, and facilities to be built in a neighborhood. The presence of these can make the neighborhood more desirable and its properties command a higher price.
If you own land or properties in areas with such positive zoning laws, awareness of these laws can help you avoid undervaluing the properties you want to sell.
Misunderstanding regulations
Once you know the zoning regulations, you can just go ahead and abide by them, right?
Not exactly. It is preferable you first create an architectural plan, outlining how the property will be developed, and seek approval for it from the relevant authorities.
This is important because your understanding of the zoning regulations may end up being different from what was intended. Going through the approval process will help you smooth out any misunderstandings and ensure you are on the same page with the authorities.
It is only when you get approval from them that you should proceed to purchase the land or property from the seller.
Earnest money deposit and due diligence
It is now a norm in the US that you have to pay earnest money deposits before you can inspect properties and negotiate their prices with sellers. Sellers demand this to know if a potential buyer is serious.
Before you can carry out all the inspection and due diligence needed on the property, you will need to first pay the earnest money deposit.
Since this inspection process is essential to the viability and profitability of the deal, securing your earnest money deposit should be a priority.
With Duckfund, you can get earnest money deposits for all your CRE deals. You can complete the simple application process in two minutes and have the earnest money deposit sent to the escrow within 48 hours.
Duckfund does not require credit reports and its financing fees are competitive.
By getting earnest money deposits out of the way, you will be ready to conduct a thorough inspection and due diligence to overcome top challenges with CRE zoning.
