A zoning report is likely the lowest-cost piece of information in the due diligence process for a commercial real estate transaction — but it might be the most valuable. Many people order zoning reports for compliance or other outstanding legal issues, but the detailed property information the reports convey can significantly affect your return on investment.
Zoning revisions are a leading indicator of commercial property value or growth potential in a region, typically signaling an approaching market change six months ahead of time. New zoning rules can actually create new properties, change market conditions, and affect areas not subject to the new rules. Knowing the details can help you predict and anticipate the risks associated with growing markets, saturated markets, and alternative uses.
When a jurisdiction expands its commercial zones, it can lead to market growth and new commercial properties. With more properties available, your site may attract less interest and rent prices may fall. Conversely, expanded zoning can work in your favor if it complements your property. For example, a new multifamily complex can increase a large retail property’s rental income and lower its vacancy because of anticipated new business.
Zoning reports keep you aware of the important nuances that result from zoning changes. Many jurisdictions revise zoning as an economic incentive to induce growth. One trend is up-zoning around transportation hubs to create new commuter centers. Another trend is opening up fallow land to develop new corporate parks. Communities typically announce changes months ahead of implementation, and if you keep abreast of local issues, that knowledge gives you an advantage.
If zoning laws restrict growth in high-density regions, it’s important to understand the effect on a property. The rules may reduce the amount of rentable space you can rebuild if a building is destroyed or severely damaged. Properties have lost more than 20 percent of rentable space in such situations, leading to less income, reduced property values, and even potential defaults.
Many large cities have height restrictions, setback requirements, or public space considerations. Buildings built before code changes may not retain their “grandfathered” status and might have to adhere to new restrictions. Zoning changes can limit new construction or structural changes that affect a certain percentage of the property or its value. Limitations can include floor area ratio (FAR) and curtail the amount of rentable space you can rebuild on the same footprint. A 30-foot-tall building rebuilt to 20 feet loses a considerable amount of rentable space, income, and property value, and that’s critical information.
A careful analysis of local zoning regulations can suggest alternative uses for properties. Markets change based on the local economy, demographics, and macroeconomic factors. An office building could bring more value as a retail site. Zoning laws may limit use changes, require overcoming legal hurdles, or increase costs. It’s important to know the facts before investing in or lending against a property. A property owner that can adapt to supply and demand and has the flexibility to repurpose a property gains a strong advantage.
An accurate zoning report is essential to commercial real estate due diligence and legal review. If used wisely, an evaluation of zoning codes can anticipate future uses, restrictions, and opportunities. It’s one of the best low-cost investments you can make before any commercial real estate transaction.