Commercial real estate transactions are fraught with pitfalls and traps. Any real estate investor can attest to that. Fortunately, hard money does not apply. Hard money funding represents one of the easiest and least stressful ways to finance the acquisition of a new real estate investment. The same cannot be said for zoning issues.
The number of potential problems capable of delaying closing on a commercial real estate deal is pretty significant. Among them are different issues that can arise from zoning. A real estate investor could find a great piece of property, make an offer, and even sign an initial contract, only to see the whole thing fall apart due to zoning.
On the other hand, that same investor could successfully obtain a hard money loan from a firm like Salt Lake City’s Actium Partners and move forward with confidence that the loan will not fall through. That’s good, because he has enough to worry about with zoning issues.
Intended Use Mismatches
One of the more common zoning issues for investors is the intended use mismatch. In other words, the investor wants to use the property for a particular purpose that doesn’t align with current zoning. So now the investor needs to go to the local zoning board to petition for a variance or have the land rezoned. But it all takes time. Closing can be delayed for months.
Nonconforming Properties
There are situations in which the property’s current condition does not conform to zoning requirements. A good example is insufficient parking. Before the deal can be closed, nonconforming issues need to be addressed. If an issue is serious enough, delayed closing might be the least of an investor’s problems. Serious issues could prevent the sale from ever taking place.
Processes Are Slow and Cumbersome
Adding insult to injury are slow and cumbersome processes investors need to go through in order to address zoning issues. Let us say an investor wants a piece of property rezoned for another use. He needs to file an application with the zoning board. That application must be reviewed. If it gets through the review process, a public hearing must be held.
It could take 30-60 days just to get from application to public hearing. In some communities, multiple public hearings are necessary in order to finalize zoning changes. Forget about closing in under a month. It is not going to happen.
Zoning and Property Values
Zoning could have an impact on a property’s value. This is especially critical when it comes to financing. An investor planning on successful rezoning may present a comparatively high value on the property. The lender assumes an equally high value with the understanding that rezoning is successful. But what if it’s not?
Even if the investor wants to proceed to closing without successfully rezoning, he is now faced with the possibility that the property is worth less. That means less financing as well. A lender is going to adjust its maximum loan amount commensurate with the property’s value. All of this takes time to work out. It all delays closing.
Hard Money Is So Much Simpler
Property investors are fortunate in that hard money is so much simpler than zoning. Where zoning problems can easily delay closing, investors rarely have worries about their hard money loans. When a firm like Actium Partners agrees to lend, getting it from approval to funding is fast, simple, and uneventful. That’s the way it should be.
Maybe hard money lenders should teach zoning boards how to do business. But then things just would not be the same. Would they?
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