When purchasing existing properties to reposition or operate, the most important thing that real estate professionals usually want to know with respect to zoning — and certainly what they hope will be true — is that the development they are about to acquire is permitted or permissible. Most cautious real estate professionals do not want to be saddled with properties that feature uses or development aspects inconsistent with local land use laws, known as nonconforming uses or development. However, to the extent that such nonconformities are legal, they may present a unique opportunity to own a property type that is in high demand but in limited supply.
What is the reason for reluctance to take advantage of these opportunities?
For one, many lenders take a conservative view of governmental compliance and are hesitant to secure a loan with what is sometimes misperceived as an illegal development.
For another, those same lenders – as well as prospective owners – rightly want to keep what they believe they are getting, which may be thwarted by regulations making it difficult or impossible to rebuild if the property suffers a casualty.
These are all understandable perspectives. However, these same rational impulses can blind purchasers and lenders to an important reality: Like land, nobody is making new nonconforming uses and development. I do not mean that formerly conforming properties are not always becoming less conforming over time — they are. I mean that because prohibited uses and development types themselves cannot be newly established, they may present an opportunity to own a business or property with a unique competitive advantage.
Perhaps the best known examples of this dynamic in Portland are gas stations, which in many locations (and most in the Central City area) are considered nonconforming uses. The fact that new gas stations are often impermissible means that existing stations are uniquely valuable, if for no other reason than location.
With the city of Portland’s adoption last year of its new Comprehensive Plan and Zoning Code, which will become effective in 2018, many existing auto-oriented developments – and particularly those where higher-density nodes and corridors are planned on the eastside – will become nonconforming in terms of surface parking, drive-through facilities, access, or all three. While in some cases there will be substantial added value in redeveloping these properties to the denser style called for in the Comprehensive Plan, in other cases they present a unique opportunity to continue and reinvest in businesses that possess characteristics that are being zoned out of existence.
As an attorney, I am better trained to identify the risks of nonconforming development than the potential rewards of possessing a property with unique use and development rights. However, such risks are often overstated for several reasons. First, where nonconforming uses were legally established and not discontinued, they are considered to be legally nonconforming and can usually continue. In fact, established nonconforming use rights may be functionally superior in terms of land use entitlement to more recent land use approvals. Second, while improvements may trigger requirements to address nonconforming development, seldom must the nonconforming uses themselves be discontinued and the required upgrades do not usually impact the essentials of a property’s operation. Finally, nonconforming uses and development can usually be reestablished if destroyed by fire or casualty if done so within a certain timeframe and if a portion of the structure remains. In Portland, for example, under the current code a nonconforming structure can be totally destroyed and rebuilt on the same footprint as long as its destruction is not caused by the owner.
Obviously, the conformity of each property must be carefully evaluated on its particular facts in the context of applicable regulations. However, given the reality of nonconforming use and development risks as opposed to their stigma, buyers, lenders and investors should not ignore the potential value of properties with unique attributes that “they aren’t making anymore.” This is especially the case in regulatory environments like Portland, where upcoming zoning changes could substantially increase the potential rewards of continued investment in legally nonconforming properties.