Alan Hall, Senior Account Executive, LightBox
Picture this: You’ve found the perfect property for your next real estate venture. The location is prime, the potential is limitless, and you can already envision the return on your investment. But before you sign on the dotted line, there’s one critical step that could make or break your deal: the zoning report. Lenders demand these reports for a reason – they’re not just paperwork, they are your gateway to minimizing risk and ensuring the success of your investment. Here are the top 7 reasons why zoning reports are the unsung heroes of commercial real estate (CRE) lending.
Lenders require zoning reports for several compelling reasons, each rooted in the goal of minimizing risk and ensuring the viability of their investments:
- Legal Compliance is Critical
Zoning regulations dictate how properties can be used and developed within a specific geographic area. Lenders need assurance that the property conforms to these regulations to ensure legal compliance. Non-compliance with zoning laws can lead to costly legal battles, fines, or even forced closure of the property, jeopardizing the lender’s collateral.
- Risk Mitigation
Zoning reports help lenders assess the level of risk associated with financing a particular property. By understanding the property’s zoning designation, permitted uses, and any restrictions, lenders can gauge the likelihood of potential obstacles or liabilities that may impact the property’s value or income-generating potential.
- Protecting Collateral
For lenders, the property itself serves as collateral for the loan. Ensuring that the property complies with zoning regulations helps protect the value of the collateral. If zoning violations are discovered post-financing, it could diminish the property’s value or render it unusable for its intended purpose, thereby increasing the lender’s risk of financial loss.
- Future Marketability
Lenders consider the future marketability of the property in the event of foreclosure or default. Properties with zoning issues may be less attractive to potential buyers or investors, making it harder for the lender to recoup their investment in the event of default. A thorough zoning report provides insight into any potential impediments to future sale or lease of the property.
- Project Viability
In cases where the borrower intends to undertake development or renovation projects, lenders need assurance that the proposed plans align with zoning regulations. Zoning reports help lenders evaluate the feasibility and viability of the proposed project within the context of existing zoning laws. This assessment is critical for assessing the potential risks and rewards associated with financing the project.
- Compliance with Loan Conditions
Lenders may impose specific conditions related to zoning compliance as part of the loan agreement. Obtaining a zoning report helps ensure that the borrower meets these conditions, thereby safeguarding the lender’s interests and maintaining the integrity of the loan agreement.
- Rebuildability
Improvements built on the land often preceded the latest and greatest changes to the zoning codes. These buildings and structures are often grandfathered in and are allowed to operate legally even if they could not be built again in the same way today. Lenders consider this along with the “rebuildability clauses” defined by the jurisdictions as they state that if a building has had so much damage, it needs to be torn down and rebuilt to code instead. This can drastically change the value of the collateral, especially if a smaller structure with less rentable space needs to be built instead.
Overall, zoning reports provide lenders with essential information to make informed lending decisions, mitigate risks, and protect their investments. By requiring zoning reports as part of the due diligence process, lenders demonstrate their commitment to prudent risk management and responsible lending practices in the commercial real estate market.
PZR is accepted by every major Lender and Title Company in the U.S. including Fannie Mae and Freddie Mac. PZR is the nation’s most trusted zoning due diligence company delivering unmatched speed, accuracy, and efficiency, since 1993.
