With competition for acquisition and refinancing loans heating up and due diligence periods shrinking, engaging a vendor to complete a Zoning Compliance Review is becoming a more common addition to the loan review process.
The Municipal Information Summary Report (MISR) provides critical information for both lenders evaluating these loans, and purchasers during their feasibility period, according to CBRE Assessment and Consulting Services, Valuation and Advisory Services, which conducts thousands of such reports annually.
MISRs are increasingly popular in loans packaged for securitization and when lenders are arranging agency loans through Fannie Mae and Freddie Mac.
“We try to provide as much information as possible so that clients can make an informed decision about their transaction,” said Sara Ehrentreu, Zoning Compliance Department Manager of CBRE Assessment and Consulting Services, Valuation & Advisory Services.
“Where we do locate deviations or deficiencies, our first step is to determine if there’s an explanation, such as a change in Code provisions, or a variance, special use permit or other special approval which has been granted.
“If there’s not and there have been no Code changes that would result in discrepancies, then we determine for the client pragmatic ways for them to bring the site into compliance. In most cases, we can communicate the local municipality’s needs to the client and the situation can be worked out before it ever becomes an issue.”
While open violations for items such as improper elevator and boiler maintenance and outstanding fire code violations are the most common issues uncovered, they are often the result of paperwork mistakes or backlogs and can be easily rectified.
More serious issues, such as Legally Nonconforming property improvements exceeding the maximum permitted Floor Area Ratio (FAR) and tenant uses that do not conform to current zoning regulations are significant situations that will need to be addressed. CBRE’s experts will often work with city officials to resolve these issues.
Lenders and borrowers also need to be assured that their assets can be restored to their previously existing condition in the case of a fire or other casualty that befalls the property.
A municipality’s Code will specify the conditions under which a damaged structure can be rebuilt, in the event of a casualty. Although it varies from municipality to municipality, the most common damage threshold is 50 percent of fair market value or replacement cost.
In those cases, if there were factors that would limit the potential density for a property, Ordinance and Law Insurance might be requested in order to ensure that the ownership entity will be compensated for any value lost on the property as the result of development limitations imposed upon the redevelopment/restoration of the property by the municipality.
Zoning Compliance Review through an MISR provides a clearer picture of risks that go beyond a property’s physical condition, and often provide lenders with the assurance they need to move forward with their securitized transactions.