Why a Zoning Report Is Critical For New York City Commercial Real Estate Transactions

If you are considering acquisition of a commercial real estate property, your lender might require a Zoning Report as part of the due diligence process. In many areas of New York State and all of New Jersey, a buyer is required to conduct thorough zoning due diligence prior to the purchase of any commercial building or property. Zoning Reports are also required in loans packaged for securitization. A Zoning Report can benefit the borrower by minimizing risk and ensuring your investment is feasible, safe, and profitable. It will help to avoid costly problems in the future by bringing to light potential conformance or violations issues prior to purchase.

A standard Zoning Report includes the current zoning district, permitted uses, and current requirements for that particular zone. Zoning designations for commercial properties are generally classified as commercial, retail, office, industrial, manufacturing, multifamily, or agricultural. Each designation has a certain set of development standards to which new development and redeveloped structures must adhere. Most towns and municipalities across New York State have simple, rudimentary zoning districts (residential, commercial and retail). However, the City of New York has many intricate, unique and complex zoning laws and district sub-categorizations that cannot be found anywhere else in the country. For example, there are Manhattan core parking restrictions as well as sky exposure plane requirements which limit the floor area allowed for a structure above a certain specified height. There are quality housing program districts which regulate certain standards for multifamily housing by requirement properties to adhere to four key components: building interior regulations, recreation space minimums, safety and security requirements, and parking requirements. There are also special purpose districts that are tailored to the needs and characteristics of certain neighborhoods across the City.

Lenders will require borrowers to have a full summary of any deviations from zoning code requirements before issuing a loan. Depending on the findings, the lender may then require the borrower to purchase ordinance and law insurance coverage to insure against any potential loss of income or value to the property. A current, or prior, change in the zoning designation of a property can raise very complex issues.

Serious issues can also arise in zoning conformance standards findings, such as the property being considered Legal Nonconforming, as it relates to use, or the property exceeding the maximum density allowed for the district. A property is considered Legally Nonconforming when it was in compliance with all applicable codes at the time of construction, but due to recent changes in zoning regulations, it no longer complies. New York City, which has some of the oldest and most intricate zoning laws in the country, is in the midst of several rezoning initiatives. Here you can find a digitized zoning code to better help understand these changes.

Conversely, an Illegal Nonconforming structure would be one where the property was established either without approval, where the owner increased the intensity of use without prior approval, or where the number of parking spaces was reduced below the required number without prior approval from the municipality or governing body.

By identifying any open code violations or expired permits, prior to closing of transactions, Zoning Reports provide clients a more complete picture of their property. Some examples of the most common types of violations identified are improper elevator and boiler maintenance and outstanding fire code violations. These violations are often the result of filing errors or backlogs and can easily be resolved with the assistance of an expediter. Zoning experts work with city officials to facilitate solutions for any issues found during the course of research.

While the balance of Zoning Reports are conducted on established properties, some zoning consultants are also able to prepare reports for sites in pre-development, or where one phase of a multi-phase development has been completed. In such cases, zoning consultants will evaluate the use of the property, whether it’s a multifamily or a single-family leased property, and will determine whether the use is permitted by right within the Subject district, or if additional entitlements are needed for its development. In one recent Zoning Study for a multi-unit single family development, it was determined that a single-family leased property, located on a single parcel, was a permitted use, provided that it could comply with the applicable standards of another, compatible single-family district. This knowledge allowed the lender to provide a loan on future transactions.

Combining the Zoning Report with an American Land Title Association Survey is an efficient, cost effective option to present a more complete picture of the property. Ordering an ALTA Survey at the same time as the Zoning Report ensures that specific property information is accurate and can help facilitate a smoother, faster transaction. For properties in New York City, consider hiring a land use attorney and even possibly owner’s title insurance. Between the intricacies of air rights, deed restrictions, historic landmarks, as well as ever-changing neighborhood zoning entitlements, it may be worth the extra money to ensure compliance and asset risk management.

Zoning compliance has become an important factor in commercial real estate transactions. Before purchasing any commercial property, you should consult with a professional to conduct adequate Zoning Due Diligence