Helping Buyers, Sellers, Tenants and Landlords Avoid Problems and Make the Most Out of Their Commercial Real Estate Decisions
Buyers have a lot to consider when purchasing an existing building
Financing, title issues, leaking roofs, environmental and more all present risk factors. Many potential pitfalls are apparent during a walk through and some basic research, but what about the invisible walls represented by zoning and building codes? These barriers are very real, but rarely seen, until you bump up against them.
These walls rarely appear during the standard due diligence and acquisition process.
You can go through the entire purchase without seeing them, only to have them block your way when you need a permit for construction… or a new tenant needs an occupancy permit… or anytime you as a building owner comes into the prevue of the city for a host of issues. Will you need to install an expensive sprinkler system or add costly ADA upgrades to even use the building? Will you be required to correct or tear out the unpermitted work of past owners? Will you need to actually terminate and remove a tenant in the building because their use and occupancy does not align with that of the building?
There are many stories of companies, organizations and investors, big and small, that purchase (and lease too) a building thinking their use or plans for the building will be relatively easily accomplished, only to find out when applying for a building permit to improve the building there are a host of previous issues that need to be corrected, and/or the use and improvements “triggers” a bunch of unanticipated and expensive upgrades, that if known earlier may have precluded the purchase of the building, or at least changed the terms of the transaction.
Zoning and Occupancy… not the same.
While not everything can be learned within the tight timeframe for due diligence, being aware of a few simple principles can help you be aware of and plan to navigate these barriers after the purchase. Below are a few of the more common mistakes buyers make when evaluating existing buildings:
Conflating Zoning Code Uses and Building Code Occupancies is often the foundation for some of these potential pitfalls. Zoning Code Uses and Building Code Occupancies are two tools the City uses to classify businesses and uses in a building. While these tools overlap they are not the same thing and have very different implications.
When working with buyers or on commercial real estate transactions in general it is not uncommon for many involved to not understand zoning and occupancy and how it can be very crucial to the future economic use of the property.
I often get “Isn’t zoning and occupancy the same?” Or even “What is occupancy and why should I worry about it?”.
Briefly, Zoning is local in nature and is the product of city or county laws and regulations that govern activities and types of businesses that are allowed to operate in certain geographic areas. Zoning allows local governments to regulate which areas are under their jurisdiction and dictates the use of the land and buildings for particular purpose. These classifications can include residential, commercial (retail); industrial; offices; multi-family or more. Many times a certain zoning will allow multiple types of uses such as General Employment (EX) in Portland that allows, office, limited light industrial; apartments etc.
Cities generally apply zoning city-wide as a part of a periodic in-depth process to both limit and encourage certain types of uses in particular areas of the city based upon long-established guiding land use goals and principles. Portland updates its zoning (Comprehensive Plan) every 30 years with the last review just recently completed in 2016.
Building Codes are typically adopted state-wide and are used to establish fire, life and safety codes to protect those who will be occupying a given building. By limiting the hazards, such as fire spread and earthquake harm, Building Codes help protect those individuals that live or work in a given building.
Every building use falls within certain occupancy classifications that follow the aged (but still followed) International Building Code that then are interpreted by local jurisdictions. The more intense use, or more people involved in a given use, the higher the occupancy classification and hence the more robust safety measures a building has to have. A movie theater will need much more safety and stout construction standards than say a factory… same for a daycare versus a retail store.
The more people in general that may be in a building, the higher the occupancy classification, and more fire, life safety characteristics (i.e. exits; seismic resiliency; sprinklers etc.) that the building will need to have. Occupancy always comes into play when establishing any use in any building, but is much more complicated (and often times a barrier) with older buildings that have less stringent and less vigorous building standards that what has been required over the last few decades.
This can be compounded (and expensive) when older buildings built decades ago for a certain use – say as industrial – but now often due to upgrades in the zoning can be converted to office, retail or multi-family. It gets even more confusing when often times one building can have multiple occupancy classifications, such as a multi-story building that has retail on the street level, offices above, then apartments above that.
Sometimes Use and Occupancy categories overlap, sometimes they don’t. The main thing to realize is that while a use may be allowed by the Zoning Code, it may present a different occupancy than what the building currently has, thus resulting in the dreaded Change in Occupancy, which often requires expensive upgrades when viewed through the lens of the Building Code.
In fact, the business may not even be allowed to exist in the building if the construction type, building area, or other Building Code factors do not support the occupancy classification of that entity. Example: A technology company (occupancy code of B) wants to occupy a warehouse which has a lower occupancy designation (F) thus resulting in potentially expensive upgrades to accommodate this higher occupancy.
City planners apply the zoning code and Building Code officials apply the building code. Typically there is very little crossover between the two. It can be frustrating to hear from a planner that your business is an Allowed Use and everything looks great, only to run into Building Code problems later. It’s critical to understand that these codes represent two independent areas of regulation, and both must be evaluated and understood as part of any building purchase.
Not Understanding the Existing Legal Occupancy
As mentioned, every building is classified using one or more Building Code Occupancies, but typically they cannot be found in any database or on any map – another invisible wall. Each time the City conducts a permit review, the plan reviewer pulls previous permit records and uses their discretion to determine previous legal occupancy. Permit record quality varies greatly by age, so a lot of “discretion” may be needed – forecasting the results of this process can be hazy at best.
Let’s back up for a moment. How clear is the existing occupancy of your building, and how clear do you need it to be for your intended use? If there are not current building plans – which is true for many older buildings – you need to do some digging, but a minimal amount of research can reveal if the records are clear, accurate and consistent, or a mishmash of conflicting information. Likewise, if your intended occupancy (like F for production or S for storage) is low‐hazard and well supported by the building’s construction type and permit record, the uncertainty may be kept to a minimum. Seeking advice from a qualified architect or engineer who is familiar with the jurisdiction can help establish the level of investigation warranted, and what it may reveal about your prospective purchase.
The goal is not to obtain 100% certainty, but rather to reduce a substantial amount of uncertainty with a small amount of investigation and planning. In other words, risk management.
Failing to plan your course after purchase
Most building owners who run into unexpected problems fail to recognize the invisible walls of Zoning
and Building Codes and run into them headlong after the building acquired. Others know the walls are there, but fail to plan a successful course through. Only a few recognize the walls and plan a course through them that minimizes risk, maximizes their use of the building and avoids unexpected costs and delays. No building is perfect, but with a little planning and investigation most risks can be known, assessed and planned for.
Sellers too
All the above mentioned issues have been mentioned from the perspective of the Buyer, but Sellers too should be aware of these important aspects of their building. Understanding that there are no “alligators” related to your building, such as up to date occupancy permits, no outstanding inspections or permits, and all previous work was done to code and city-approved are important. It will help hasten and smooth the due diligence process with a buyer knowing that he is getting an “up to date” building and maybe even add value to the transaction for the Seller.
This information was compiled and put together with help from Shem Harding; Principal Architect at Deca Architecture. Shem and his firm are excellent at helping investors, companies, individuals, organizations or anyone looking to buy or lease a building to understand all the nuances regarding city codes, permits, occupancy and more as delineated above. Shem can be reached at 503-239-1987 harding@deca-inc.com.