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COMMERCIAL FINANCE 701: Zoning – trust, but verify, authenticate & insure

MOLLY MOODY & BEN WILLIAMS

MOLLY MOODY & BEN WILLIAMS

Zoning plays a critical role throughout the life of a commercial development.  In terms of reviewing zoning status, the Reagan-adopted “trust, but verify” adage should come to mind.  Zoning, however, can be quite complex and the more appropriate proverb might be “trust, but verify, authenticate and insure.”

As the term is generally used, “zoning” refers to the approved usage of real property as dictated by ordinances of local government.  As examples, may the property be developed for office use, residential development (multi-family or single family), or industrial purposes?  But zoning ordinances are considerably broader than a simple classification.  Related ordinances often impose additional restrictions such as setbacks, maximum densities, required parking spaces, and limitations on heights. This article addresses the various methods, issues and challenges with the determination and confirmation of zoning status.

The Basics. In the first instance, parties often look to zoning maps and zoning certificates.

zoning-graphic-1_4cZoning Maps.  Some years back, a zoning map was a large black and white scroll that could be viewed at city hall or the county courthouse.  Fast forward to modern times and the zoning map might be a few mouse clicks away.  You’ll likely find a free, navigable, multi-layered, mega-pixel, zoning map in a .pdf format on a government website.

Zoning Certificates.  Parties routinely obtain “zoning certificates” from a local government.  This elementary, government-issued certificate provides a written indication of the zoning classification, though it often uses confusing jargon such as tax parcel numbers (as opposed to a straightforward street address) and references zoning classifications such as C-1A Restricted Commercial Development (rather than providing a plain-language permissible use description, such as “commercial office building”).

The Problems.  Zoning maps and certificates are beneficial, but have their limitations.  Maps are secondary sources of information and represent a depiction of the various ordinances.  A zoning certificate merely represents the government clerk’s understanding of the zoning classification.  An inaccurate map or incorrect certificate does not change the zoning ordinance or grant a variance.  There is little or no recourse for an inaccurate map or incorrect certificate. You deal with the government at your peril.

What More Could You Want?  Recognizing the limitations of zoning maps and certificates, real estate professionals often require additional verification.   Options include:

1. Zoning Letter.  In lieu of the minimalistic zoning certificate, some friendly jurisdictions have a more extensive form zoning letter that addresses a host of zoning-related issues.  And the zoning departments in some jurisdictions are even willing to complete a more detailed form tendered by the requesting party.  Still, as with the zoning certificate itself, scant relief is available to the recipient of an inaccurate zoning letter.

2. Zoning Report.  Numerous businesses, including title insurance companies, offer comprehensive “Zoning Reports” or “Zoning Compliance Reports” that address all aspects of zoning.  This comprehensive puppy leaves few stones unturned in analyzing the zoning status and use restrictions of a property.  Typical information includes classification, applicable variances, special permits, conditions rezoning approvals, outstanding violations, right to re-build, parking requirements, and certificate of occupancy history and status.  Reports usually run between $500 – $1500.

3. Legal Review of Restrictive Covenants. Private covenants are not technically zoning restrictions, but can be just as onerous. Some sellers of land include restrictions of future use in the deed. Developers often file “restrictive covenants” in the land records.   Many newly developed business parks come with a set of covenants to provide various lot owners in the development certainty as to the future of the land.  While these covenants are privately imposed, they have a similar effect to zoning and are enforceable in court.  A thorough review is appropriate.  The title report is likely to merely indicate the title is, as an example, subject to the “Declaration of Covenants” filed at Book 1814, Page 1968, but the attorney should carefully review the underlying instrument and obtain the appropriate endorsements to a title policy (such as the ALTA 9 Series – Private Rights).

4. Survey.  The “ALTA/ACSM Land Title Survey” (an “ALTA survey”) is the gold standard of surveys.  It is, admittedly, a higher-priced type of survey that is not always appropriate or necessary for a given project. The ALTA survey can be tailored to address all zoning-related issues, such as setbacks, parking, height, and density. (See COMMERCIAL FINANCE 701: Land surveys: More than just a sketch, Mississippi Business Journal, June 25, 2016.)

5. Title Insurance Policy with Endorsements.  The standard title insurance policy excludes zoning, but the policy can be enhanced by the addition of various endorsements related to zoning and use.  Endorsements address issues including access, zoning, private restrictions, and survey matters.   In the event of a dispute, the title insurance company will defend, attempt to cure, and pay for insured damages.  (See COMMERCIAL FINANCE 701: Enhancing a title policy with endorsements, Mississippi Business Journal, August 27, 2015.)

Risk Aversion.  Developers are, by nature, more willing to accept risk than lenders. A real estate developer might purchase land without the benefit of the more expensive options listed above.  For large real estate construction loans or acquisitions, local lenders generally require a detailed survey and a title insurance policy with several endorsements (including a zoning endorsement).  Because of the long-term nature of the loan, the “permanent” loan market has the highest standards, requiring the zoning compliance report, ALTA survey, and lender’s title policy with a host of endorsements.  (See COMMERCIAL FINANCE 701: Permanent loans & other oxymora, Mississippi Business Journal, April 30, 2015.)

SUMMARY AND CONCLUSION. Zoning is complex and involves more than mere classification.  Owners and lenders need to fully analyze the zoning classification, approved use, and variance issues associated with a property.  Several types of reports, certificates and insurance policies are available.  Our advice?  Trust, but verify, authenticate and insure.

» Ben Williams and Molly Jeffcoat Moody  are attorneys engaged in an active commercial law practice at Watkins & Eager PLLC.   Ben and Molly are both recognized by Chambers USA and Best Lawyers in America.   Ben was selected as Best Lawyer’s 2016 Project Finance Lawyer of the Year in Jackson, Mississippi.   Additional information is available at www.watkinseager.com.

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One comment

  1. Hi Ben and Molly, Zoning can be a complex issue. Great straightforward article.

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