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How Zoning Can Impact Property Values

February 26, 2016

 

How important is the zoning of a property?  When an appraisal is performed on a property whether the property is residential or commercial, a part of the appraisal process is to determine the zoning of a property.  Then an appraiser determines if the zoning is considered to be a legal use, an illegal use, a legal nonconforming use (grandfathered use), or if there is no zoning at all.

 

 

 

What is Zoning? 

Zoning is defined as:  The public regulation of the character and extent of real estate use through police power; accomplished by establishing districts or areas with uniform restrictions relating to improvements; structural height, area, and bulk; density of population; and other aspects of the use and development of private property.   (The Dictionary of Real Estate Appraisal, 4th Edition)  

 

There are various types of zoning: 

  • Single- Family Residential

  • Multifamily Residential

  • Planned Unit Development

  • Commercial

  • Industrial

  • Mixed-Use

  • Public Building Facility

  • Airport

 

Some cities have zoning maps located on their websites however the city can always be contacted to provide the zoning for a property located within their city limits. By appraising in various cities in our markets, I can confidently state that each city has its own unique zoning.  Some are simple and some are very complex.  Some very small cities do not have zoning at all.  When an appraisal is performed on your home, the appraiser is to determine the zoning for the property if any.   Most of the rural areas that we appraise in North Texas that are located outside city limits do not have zoning. However, some properties or developments located outside the city limits will have deed restrictions.

 

What is the Highest and Best Use Analysis?  

 

Determining the zoning of a property is a part of the Highest and Best Use Analysis that is performed for an appraisal, this would include vacant land, residential properties and commercial properties.   A Highest and Best Use analysis of a property is performed both "as if vacant" and "as improved".  

 

When performing a Highest and Best Use Analysis an appraiser will make four determinations: 

 

1. What is physically possible?  - If the property is zoned for residential use with minimum lot size of 10,000 sq ft and the property is only 7,500 sq ft then it would not be physically possible for residential use. 

 

2. What is legally permissible? - This is where the zoning comes in.  Is the property a legal use based on the zoning? What are all the permitted uses under the zoning?

 

3. What is Financially Feasible? - This takes into consideration the financial aspects of the property.  Would the use produce a positive return? 

 

4. What is Maximally Productive?- This analysis will decide which of the uses produces the highest value. 

 

This is just a brief summary of Highest and Best Use analysis.  A more in-depth description of the aspects of Highest and Best Use  might be for another post. 

 

How would zoning impact the value of a property? 

 

Residential :  

 

 Most of the residential properties that we appraise are typically zoned single family residential and are a legal permitted use..  There are some occasions where a property may have a legal non-conforming use (grandfathered use) such as a single family residence that is now zoned Multi-Family but it is grandfathered.  The issues that come up with a grandfathered use are that you must check with the city to see if the grandfathered use would be allowed if the property was completely destroyed, if it was vacant for a certain length of time, or if it sold.   Each city is different. We recently appraised a property that was a single family residence but it was located in a Commercial Zoning District.  We inquired with the city and confirmed that the Residential use was a grandfathered use  and would be continued even if the home was completely destroyed.  The area consisted of  older residential homes.  There were no commercial properties in the neighborhood.  In this situation the city had wanted this to become a commercial district but currently it was still residential homes in hopes of transitioning into a commercial district.   

 

The zoning of a property may have restrictions such as set backs from the front, sides and rear.  There may be limits to number of garages allowed or a minimum garage requirement.  There may be limitations on any additions that you may be able to make to your home.  It is important to find out the zoning restrictions and requirements for your property.  

Value is market dependent and each market is different.  If a residential property is located in an area that is transitioning to commercial or mixed-use it could add to the value if the zoning is changed to commercial but in some cases it may detract from the value.  

 

Zoning variances can be allowed in some cities and could be requested but they may or may not be granted. Please research the city in which your property is located for further clarification on zoning variances. 

 

 

 

Commercial:  

 

The zoning of a property becomes extremely important when appraising commercial real estate as it will impact what type of commercial property can be constructed or what type of use a building can have.  Here is an example of zoning how impacted the value of a commercial property. A building that at one time had been used for light industrial/light manufacturing but the manufacturing business was not longer using the building. The building became vacant for an extended amount of time.  The building is located near a downtown district.  The city zoning created a Historic District which included the vacant building which was formally used for manufacturing.  The new Historic District us does not allow for light manufacturing thus this building which was designed for manufacturing can no longer be sold to anyone that would need to use it for light industrial use. Since the building had been vacant for a certain amount of time it could not have a legal non-conforming use as light manufacturing.  Because of the zoning, the value of the property is diminished as the number of buyers that would have a use for the building has now been greatly reduced which, based on supply and demand , would lessen the value of the building.

 

Another example might be the density requirement of zoning.  If there are two different large tracks of land, one zoned for SFR - minimum lot size 7,500 sf and the other track of land is zoned SFR- minimum lot size 1 acre.   A developer is wanting to put in a residential development.  Which track of land would be more valuable?    A feasibility analysis would need to be performed to see if the smaller lots would produce a higher return or if developing on the larger lots would produce a higher return.  You would be surprised as sometimes the larger lots bring a greater return based on the value and cost of construction. Sometimes the smaller lots would produce a greater return. It would depend on the market that the land was located on and the cost of construction.

 

These are just a few examples of how zoning can impact the value of a property or how important it is to know the zoning and what is allowed.  There are definitely more examples of zoning impacting commercial properties but there are a few occasions where zoning might be of concern to residential properties as well.

 

 

 

We hope this helps you to understand a little bit of how important zoning is and how it can affect a property.  What other questions do you have about zoning as it relates to appraising?  Please feel to contact us at: www.dwslaterco.com 

 

Disclaimer: All information deemed reliable but not guaranteed. The information is meant entirely for educational purposes and casual reading only and is NOT intended for any other use.  This information is NOT intended to support an opinion of value for your appraisal needs or any sort of value conclusion for a loan, litigation, tax appeal or other potential real estate or non-real estate purpose.  If you’d like to obtain additional information or order an appraisal for your specific needs, please contact us at www.dwslaterco.com

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