Do You Know What Your Zoning Is?

Published on Saturday, 12 October 2013 04:19:56    Written by Marc
I will admit, even after many years working in managing real estate and leases, I never gave much thought about zoning. If you purchase land to build something on it, or of you are a developer, zoning is something you normally look at from the start. However, if you purchase or lease existing real estate for your own operations you check the zoning to validate that your business can operate there (especially if you are in manufacturing) and if there is a problem, you quickly set out to seek how long it can take to rezone a site.

know your zoningIn addition, if it is not possible to rezone, you often simply pass on the purchase or on the lease. In the case where you simply lease an office space in an existing building, the notion of zone often takes a backseat because you rightly assume that the building already has the proper zoning. After all, there was a tenant in place before you (either in the same space you are leasing or on another floor). In most cases, the focus is on leasing the site and the terms and conditions, not on the zoning.

However, what happens if you purchase an existing building that already has manufacturing operations and is located in an area that is zoned for manufacturing (industrial). Do you check in detail the terms and conditions of the zoning of that particular building you are preparing to purchase? If you had asked me that question a few years ago, I would have answered that checking the zoning for the area in which the building was is good enough. Not anymore. Get burned once….

A few years ago, we purchased a company and the acquisition came with a number of owned buildings and leases. After a detailed due diligence of the site, we found nothing out of the ordinary. The leased buildings were manufacturing and had been there for about 20 years. Zoning was not a problem. If it were, would not the issue have popped up within the last 20 years?

A few months after the acquisition, we decided to close down some sites. Those that were owned were put on the market to be sold and those that were leased were put on the market to be leased, or sublease (to be more precise). When someone came to see if he could lease our manufacturing site, the one that had been in operations for 20 years, we asked what type of operations he had. His answer was warehousing. Now, considering that warehousing is normally not a problem for industrial zoning, we took for granted that it would not be a problem.

However, after some discussion with the city, we found out that although the zoning for our building was for manufacturing, the city had added a few clauses in recent years to exclude any type of operations than our specific operations. In other words, if we were making widgets, the city would only accept another widget maker to operate there. The city had modified the zoning because although 20 years ago the entire surrounding area was desert, over the past years people had changed the zoning for the surrounding area to residential and hundreds of houses had been built. Our site now stood right in the middle of a residential neighbourhood and the city wanted to shut down the site the moment our operations ceased.

Short story, we could not find any subtenant that met our exact operations (that would have been a direct competitor (so no chances of that happening). We had to go back to the landlord to make a deal to buy back our lease, on his terms and conditions. From a landlord’s perspective, he got a sweet deal and could turn around, demolish the site and sell the land for residential. For us, it was either make a deal with the landlord or continues to pay full rent for many more years left on the lease, for a site that no longer had any operations. We did think of moving some other operations to that site, but the economics were even worse than dealing with the landlord.

Morale of the story: Zoning is sometimes more important than it seems….