Commercial Real Estate In Florida
When a lender makes a mortgage loan to a borrower, the lender typically conducts extensive due diligence on the collateral offered to secure the loan. Because the real property is the primary collateral securing a mortgage loan, comprehensive due diligence of the real estate is essential in commercial real estate In Florida.
One component of the lender’s due diligence usually involves reviewing the zoning for the real property. A detailed zoning review helps the lender determine the real property’s compliance with applicable zoning and land use laws.
This Note discusses the steps lender’s counsel must take and other important considerations when conducting a zoning review of developed commercial real estate in Florida.
From a due diligence perspective, it is important for a lender to confirm that the property’s use and improvements conform to local zoning laws.
Zoning ordinances are laws that regulate and define how a real property owner can:
- Develop the property.
- Use the property.
- Cities, counties, and other local governments typically adopt zoning laws to establish development and use standards.
Zoning laws generally include requirements that allow specific uses on the property. Common zoning use categories include:
Zoning laws may also include restrictions affecting what is permitted to be built on the property, such as:
- Height restrictions on the overall size of a building.
- Restrictions on the total area of a parcel of land that may contain structures.
- Restrictions limiting the number of units that may be constructed on a parcel of land.
Specific setback requirements or side yard requirements that may impact the proximity of buildings or other structures on the site to the front, back, and side property lines.
Local Aspects of Zoning and Land Use
Zoning and land use laws vary in each state and local jurisdiction. Understanding the effect of state and local zoning laws is an integral part of the lender’s due diligence process.
For commercial real estate In Florida, each municipality must create a comprehensive plan to help guide future development in its jurisdiction. The comprehensive plan must include a future land use map that designates general use categories within that jurisdiction in the future.
Why Perform Zoning Due Diligence
Lenders perform a zoning review of the property to verify the property’s compliance with local zoning and land use laws. The zoning review process helps the lender:
- Confirm whether the property is properly zoned for the current or anticipated uses.
- Identify and assess risks associated with the ownership or financing of the real property.
- Address and mitigate any noncompliance risks associated with the property that are identified during the zoning review process.
The failure to confirm zoning compliance for the property can affect the future rent stream at the property because:
- A municipality may be permitted to shut down operations at a property that:
- operates in violation of zoning use restrictions; or
- is nonconforming.
- A property that is legally nonconforming may not be permitted to be rebuilt after a threshold casualty.
What Lenders Review
In Florida, the zoning and land use due diligence for a property often includes:
- Receipt and review of certificates of occupancy for all buildings at the site.
- Receipt of a zoning confirmation letter from the local buildings department or its equivalent that typically:
- describes the current zoning designation for the site; and
- summarizes the uses allowed by the zoning law.
- Review of the local zoning maps to determine the actual zoning designation for the property.
- Review of the future land use map for the municipality to determine the future land use designation for the property.
- Review of local zoning ordinances affecting the property.
Review of an as-built survey for the property that includes a depiction of:
- all structures on the site
- the on-site parking spaces
- the applicable building setbacks
- other useful data about the property that is relevant to verifying compliance with zoning.
- Review of site plans.
- Receipt and review of all necessary permits and variances.
Florida Related Considerations
In some states, lenders may obtain comfort for zoning related risks by requiring a zoning endorsement to the lender’s title insurance policy. However, a zoning endorsement is not available for commercial real estate In Florida. Consequently, it important for lenders making loans secured by property in Florida to carefully:
- Review the zoning for the proposed collateral.
- Identify any related zoning risks inherent in the proposed collateral, such as:
- potential zoning violations;
- legal nonconforming issues.
- Assess the potential risks.
What is Requested from the Borrower
To manage the due diligence process, lender’s counsel typically circulates a closing checklist at the beginning of the transaction specifying the items the lender must receive for the property, such as:
A zoning confirmation letter that:
- provides the current zoning designation for the property
- describes the allowable uses under the zoning laws.
- confirms whether there are any existing zoning or building code violations at the property.
- The applicable zoning ordinance provisions.
- The certificates of occupancy for all buildings at the property.
- An ALTA/NSPS land title survey for the property.
- A site plan approved by the local municipality if the property is a planned unit development
The information is delivered early in the process to give the lender’s counsel sufficient time to:
- complete its review
- discuss with the lender any issues discovered during the review process.
Lenders that retain the responsibility for obtaining the zoning related due diligence items often engage a third-party service to prepare a zoning report for the property. The zoning report typically includes:
- A zoning confirmation letter from the municipality for the real property.
- The applicable zoning ordinance provisions.
Detailed information from the municipality regarding the existence of zoning or building code violations at the property. An analysis prepared by the third-party provider summarizing whether the use and improvements at the property are:
- legally nonconforming
Identify the Collateral
The first steps lender’s counsel should take are to identify:
The type of collateral securing the mortgage loan. Different types of collateral for commercial real estate In Florida include:
- multi-family apartments
- retail shopping center;
- office building; or
- industrial property.
The specific characteristics of the collateral securing the mortgage loan, such as:
- the leasable area of the buildings on the property;
- the number of leasable units in the buildings;
- other important characteristics about the collateral that are important to complete a risk analysis.
This information is typically included in:
- The loan application submitted by the borrower to the lender.
- The term sheet for the loan prepared by the lender.
- The commitment letter for the loan issued by the lender to the borrower.
It is a critical to understand what the lender is underwriting to properly perform a zoning analysis of the property. For example, if the collateral securing the loan is a multi-family apartment building, lender’s counsel should review the loan application, term sheet, or loan commitment letter and identify:
- The number of units included in the lender’s collateral.
- The number of buildings included in the lender’s collateral.
- The number of on-site parking spaces for the collateral.
- The number of stories for each building included in the lender’s collateral.
Conforming Use of Property
Zoning laws often change over time. Municipalities may amend or modify their zoning codes. Uses that were permitted at one point in time may no longer be permitted or may only be permitted with conditions. Setback requirements, parking requirements, or other restrictions affecting the development of a property may also change to make development more restrictive. These changes may render a property legally nonconforming.
A legal nonconforming use means the collateral’s use and improvements complied with the applicable zoning laws at the time of construction, but no longer comply due a change in the applicable zoning laws.
Most municipalities include specific provisions in their zoning code to deal with legal nonconforming uses. A project that is legally nonconforming is often permitted to continue operating in the manner it was initially developed, but may have to conform to the current zoning requirements if it is:
- left alone for a specified period of time.
- Damaged or destroyed by a casualty.
As a result, it is important for lender’s counsel to verify whether the borrower’s current and anticipated use of the property in the zoning district is:
- A permitted use.
- A conditional use.
- A non-permitted use.
- To accomplish this, lender’s counsel typically reviews:
- The zoning confirmation letter or zoning map to identify what zoning district the property is located within.
- The applicable zoning district provisions within the municipalities zoning ordinance.
- The future land use map designation.
Verify No Existing Zoning Violations
Lender’s counsel should verify that there are no existing zoning or building code violations at the property. This information may be included in the zoning confirmation letter for the property that is obtained from the local municipality.
If the zoning confirmation letter does not contain this information, lender’s counsel should require other proof to verify that there are no current zoning or building code violations. Some municipalities provide a detailed history of the property showing the existence of any existing violations rather than specifying that information in the zoning confirmation letter.
Legal Nonconforming Use or Improvements
A property that was permitted under the zoning ordinance when the project was built, but no longer complies because of a change to the zoning ordinance is usually considered legally nonconforming.
Most municipalities include specific provisions in their zoning ordinances to address legal nonconforming uses or improvements. However, these provisions vary in each jurisdiction. Generally, an owner with a structure or use on its property that is legally nonconforming may continue to use and operate its property in the manner it was initially permitted under the zoning regulations. However, most municipalities require that the use and structure conform to the current zoning regulations if:
- The use is abandoned or discontinued for a specified period of time.
- The structure is damaged or destroyed by a casualty.
Some municipalities may include a “sunset” provision in their nonconforming ordinance. A sunset provision generally requires all legal nonconforming uses to conform to the zoning regulations after a specified period of time. Sunset provisions are not very common.
for commercial real estate In Florida, a Planned Unit Development (PUD) is a zoning designation that permits more flexibility regarding what a property owner is permitted to develop on the property. Not all municipalities have a PUD zoning classification. PUD zoning typically requires additional criteria for approval:
- The submission of a site plan by the owner to the planning and zoning department detailing the parameters of what the owner intends to construct on the property.
- Approval by the applicable planning and zoning department. A public hearing may also be required as part of the approval process.
If a property is zoned PUD, the site plan approved by the planning and zoning department dictates what can be constructed or rebuilt on the property. Lender’s counsel should request and review the approved site plan for any property that is zoned PUD.
A zoning variance is a permitted deviation from strict compliance with one or more zoning regulations applicable to the property. A property owner may need a zoning variance to develop the property if the intended development does not strictly comply with the applicable zoning regulations.
Zoning variances typically require approval from the planning and zoning board for the local municipality and may require a public hearing. Typically the property owner must prove that an unnecessary hardship exists to receive a variance. The approval process varies in each jurisdiction for commercial real estate In Florida.