This post promises to be a short one. It could be much longer because I could cut and paste any number of sections from any number of municipal zoning codes to make my point.  But I won’t.  I will state my case succinctly.

As a real estate attorney, it is necessary for me to review local zoning ordinances often. Whether it’s to confirm the use of an existing building a client wishes to lease or purchase or to determine what can be built on a vacant parcel of land, it is important to be able to look at a zoning code and answer questions quickly.

However, most zoning codes are not user friendly. In fact, they are not written using proper English as most of us were taught in high school and college — or elementary school for that matter.  Grammar, punctuation, sentence structure and syntax are not used properly.  Cross references are confusing at best and are often wrong.  Definitions of terms would make Meriam Webster cry.

Most times, the answer can’t be properly determined from a simple reading of the zoning code. Therefore, it is often necessary to call planning and zoning staff for clarification.  And, you know what, many, not all, but many times, staff can’t answer the question.  They need time to “research”.  That means they need to discuss the question with a manager or city attorney because the code makes no sense to the people employed to interpret and enforce it.

Somehow, we fight through this language problem. We figure out what the code says or is supposed to mean.  We apply for approvals, variances, re-zonings, permits and site plans.  Then later, we try to draft new ordinances in proper English.  But somewhere down the road, a new zoning code will be enacted.  Unfortunately, it will be drafted in the same old zoning code language (are you listening Miami 21?).

Selecting the right property to buy or lease can be tricky. Every one knows the old adage “location, location, location”.  Clearly, location is crucial to every one involved in a real estate project from brokerage to development to construction; from lending to investment; from management to leasing, location will be a crucial factor in everyone’s return on the investment in real estate.  However, a corollary to location is zoning, zoning, zoning.  A property that does not have the proper zoning and land use designation for the proposed use, and one that can not be appropriately re-zoned, or variances obtained, will have no value to a buyer, developer, tenant or investor and location will add no value.

This rule applies to properties that are being purchased or that are being leased. A retail location might be the best spot in town for your client’s hot new night club.  But zoning might not allow any business which serves alcohol to be located in that location because a church is located within 1000 feet.  Or, noise regulations prohibit music after 10:00 because of the hospital across the street.   These are some of the things that should be considered even before entering into a contract or a lease.  They can save time and money.

When purchasing a property, it is a good idea to have preliminary, exploratory conversations with city planning and zoning staff to discuss the site. This is a good way to learn what the city would be comfortable with.  The meeting will help the buyer understand what approvals will be necessary for the project and will assist in formulating a timeline for obtaining approvals.

Upon preparing the contract, the buyer should make the obligation to close contingent upon obtaining the necessary approvals. The approvals can be specific, but I like to keep them as generic as possible.  For example, I define “Approvals” as all approvals necessary to enable buyer to obtain building permits to construct the Intended Improvements.  When pushed, I will list approvals to include, without limitation, zoning, land use, platting, site plan, and I will expand as necessary.

Many times, going into the contract, the parties know precisely what zoning is going to be required, or the seller has already begun the process of re-zoning in anticipation of a sale for such a use. This should not affect buyer’s contingency as the use drives the value of the property and must be in place prior to closing.

Zoning diligence before contract can make negotiations smoother and faster. It can also help buyers and sellers set a realistic price for a property, particularly because with proper approval contingencies, buyers won’t have to close if the zoning is not sufficient for the intended use.  But patient sellers will be more likely to get their desired price.

I have been negotiating and closing real estate development deals for a long time. In nearly every case, my developer clients have come to me prior to executing a contract to discuss the due diligence that they have already done on the property and what will need to be done going forward.  We discuss the proposed use of the property, the current zoning and land use, the necessary land use to construct the proposed improvements, what other approvals will be required and the seller’s willingness to allow us to obtain all these approvals prior to closing.  The client has generally assembled all or most of his team and has a pretty good idea of what he wants to accomplish and what he will be capable of getting approved, subject to further research and subject to the give and take of the zoning and land use process.

            Perhaps at this point a Letter of Intent has been discussed or even executed; the basic financial terms agreed to.  However, my job is about to begin – prepare a contract.  It will be most important to hash out the contingencies, specifically the contingency for approvals.  Although the seller is prepared for this, we both might have strong opinions about the required time frame to obtain the approvals.  Some of this will be based on the amount of time the buyer needs to prepare plans.  Some this might depend on seller’s desire to approve plans, particularly if the property is part of a larger development.  Sellers want to make sure buyers don’t miss rigid deadlines.  Buyers, on the other hand, need leeway for governmental delays, slow engineers and architects and even slow response times from sellers.  There is give and take between the parties.

            Extensions of time periods may be built into the contract or subsequently negotiated.  Additional deposits or extension fees are part of this discussion.  Are they applicable to the purchase price?  Are they refundable or non-refundable?

            I write about this because I am working with a client who recently came to me with a fully executed contract for property on which he wants to build a high density (for the neighborhood) multi-family, multi-story apartment building.  the property is only about 1.25 acres and currently has a single family house with an ancillary garage or some other building on it.  The property is zoned for residential/agriculture.  The contract has a 120 day due diligence period followed by an immediate closing.  The purchase price reflects the desired use of the property, but not the current market value or as is use.  The client had not assembled any team or professionals and, other than a brief meeting with city planning and zoning staff, had done no investigations to determine whether we could build what he wanted to build.

            We have since met with the city and determined that the city is in the process of initiating a re-zoning of the property to a favorable designation.  However, the density will not provide the desired number of units, leaving the client roughly 15 units short.  This city does not allow variances for density and there is no possibility of re-zoning to another classification.  The economics of the deal would not work without these units.  The zoning classification will allow mixed use, meaning that the client can put office/retail on the ground floor.  With about 10,000 square feet of office/retail in addition to the apartments, the client believes the economics are very favorable. Tthe client has not yet assembled his team and the due diligence deadline is rapidly approaching.  We have a team that has submitted proposals that are awaiting the client’s approval.

            But, that brings us back to the seller.  The seller’s expectation is to close immediately following the 120 day due diligence period.  This is the problem with executing a contract before understanding what is permitted and what will be necessary in order to build your project.  The seller, unfortunately, has medical issues and needs cash.  Fortunately, non-refundable extension fees solve the seller’s cash needs and we will be able to extend the contract for the 10 months necessary to obtain the approvals.

            The work is just beginning. The project needs to be designed in order to be approved.  We need to now work with the engineer to prepare a site plan in accordance with the proposed zoning ordinance.  The client needs to describe his vision to the architect to design a building that the city will also like.  Working with a good land planner who will act as the quarterback to keep everyone on task, including surveyors, civil engineers, landscape engineers and me, we can get this project approved within the 10 month time frame and the contract closed.

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        For the first time, the White House has waded into local zoning policy. Because of the role that NIMBY groups play in planning and zoning board decisions, the White House recently published a Housing Development Toolkit of Economic Evidence and Policy Fixes to assist local leaders to advance housing policy. Many high density projects are proposed as affordable housing. Neighborhood groups are quick to organize in opposition, often citing the change in quality of the neighborhood. Zoning boards are reluctant to fight and change laws and policies and when they do, approvals come with high cost to developers. These costs are passed on to tenants via rent.

             The Toolkit recommend policies that would help reduce development costs and improve zoning laws. For example, cities are encouraged to eliminate parking requirements for high density, urban projects. Parking is a high cost component of construction which is passed on through rent. Tenants in urban areas should be encouraged to use public transportation or walk. Vacant land owners should be taxed higher as an incentive to develop sooner. This tax revenue should be donated to non-profit developers. The permit process should be shortened. Eliminate restrictions on accessory dwelling units such as basement and garages. And, height restrictions should be eased. While this would increase density, the increased revenue will off set higher land costs.

             President Obama also announced that the FY 2017 budget will include $300 million to offer grants to cities that update zoning laws that promote higher density development. These laws would in turn off set higher land costs, help to push back against NIMBY groups and make housing more affordable. Any tools, incentives and assistance that the federal government can give to local government which in turn can be passed on to developers to help increase affordable housing stock is a welcome shot in the arm. Local policy makers can not continue to be intimidated.

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        The cost of renting an apartment or buying a new home or condominium in Miami is expensive. In fact, according to Wallethub.com, Miami and Miami Beach ranked 299 and 300, respectively out of 300 U.S. cities in affordability. Rents and sale prices are both extremely high, making it extremely difficult for working class people to live in the downtown, urban and eastern areas of the county.

             Miami-Dade Commissioner Barbara Jordan has proposed a remedy for this problem. The Commission will consider Commissioner Jordan’s proposal to require that new developments of 20 or more units provide at least 10% of its units for work force housing. Of these units, 50% would be set aside for those earning from 60% to 79% ($48,100) of the median county income and 50% would be set aside for those earning from 80% to 140% of the median county income. A developer meeting this requirement would receive a density bonus of 15% of the total units. If the developer has no work force units, the developer must pay a fee into the county affordable housing trust. Developers may earn additional density bonuses equal to 1% for every 1% increase in the amount of work force units.

             The proposed ordinance will provide that municipalities may opt out of the requirement provided that the cities adopt adequate work force housing ordinances. Two cities, in particular, have been vocal in their opposition to Commissioner Jordan’s proposal. Aventura and Sunny Isles, two small, but affluent cities which are densely populated with luxury condominiums have formally objected to the Commission. Aventura has passed an ordinance objecting to the proposed county ordinance and Sunny Isles has directed its city attorney to send a letter of objection. Both cities have some work force components in their city code, however, there is not data available as to the number of work force and affordable housing residents living in the two cities.

             Many builders and developers are concerned about the ordinance as well. Jose Gonzales of the Latin Builders Association believes that the ordinance could have “unintended consequences”. For example, the density bonuses could cause additional parking requirements which in turn could inflate construction costs. This adds risk to the developer and underwriting risk to the lenders that neither are prepared to take. Another concern is how condominiums would assess the lower priced units in a building. In a luxury condominium, monthly maintenance fees equate to the mortgage payment for an average homeowner. These payments would price such work force units out of the market even if set aside for work force residents. There are clearly solutions to this problem. The work force units in a condominium could remain rentals, owned by the developer or a third party investor, or, they may have to remain much smaller than the higher end units so that they may be assessed lower. New York developers often use a “2 door” method. But, that method creates a 2 class system, shutting the lower end unit owners off from the amenities of the higher end units.

             Despite the high cost of Miami and the push back against the proposed ordinance, there are success stories of affordable and work force housing in Miami. Melo Group, for example, recently announced plans for Square Station, located between NE 14th Street and NE 15th Street next to the School Board Metro Mover Station. Square Station will consist of 710, 1 to 3 bedroom apartments in 2 towers. The developer has entered into a covenant with the city which provides that 96 of the 710 units will be reserved for workforce housing. Here, workforce will mean that the tenants can not earn more than 140% of the median county income. In return, the city has waived impact fees on the 96 units. This will be a tremendous cost savings to the developer.

             This is not the first time I have written about the need for thoughtful affordable housing policy (see Here and Here). It won’t be the last. Commissioner Jordan’s proposal is a good start. It might need some work, but the concept is correct. Encourage developers to provide affordable housing by offering incentives. Additional units is one way. Commissioner Jordan did not go so far as to offer an inclusionary zoning ordinance as I have previously discussed. If developers continue to push back and not accept the carrot, inclusionary zoning is a stick that needs to be wielded.

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