Recently, a client told us about a neighbor who wanted to install a marijuana growing facility on the property next door to his home. To his relief, zoning kept that use away.
Oftentimes as real estate investors, we view zoning in a negative light, because it tells us all the things we can’t do.
But as I learned early on as a commercial agent, reviewing the zoning is actually the first step to forward progress and improvement on a property.
Let’s look at how zoning can work in your favor.
1. It tells you all the uses the municipality or county wants to see on the property
Let’s say you purchase a 30-unit apartment building. There is a lot of extra land on the property. Is it safe to assume you can build more units?
- In reviewing your zoning, you may see that they would not allow more apartment units based on density, but if it is in a mixed-use zone, a daycare or retail use might be listed as permitted.
- That use may be more lucrative than simply building more apartments. Often the zoning suggests things you haven’t thought of, and providing those uses can be a win-win for the investor and the local area.
2. It increases your future value by protecting the integrity of the surrounding area
Have you traveled to areas of the US where there is no zoning? Family of ours in Montana live in a rural area where it is pretty much anything goes, which is great if people take care of their property, and not so great if they don’t.
- Having standards for noise, parking, landscaping and more can work in your favor by making sure surrounding properties are also maintained and used in a positive way.
- For instance, if a neighboring property owner decides to move a motorcycle club into an empty garage space, standards in the zoning may allow you to prohibit that use, which helps keep your tenants happy and in place. That keeps your cash flow happy too.
3. It limits your competition
This might sound bad, but it’s a reality of tight zoning regulations.
- Look at Lancaster County, PA. Lancaster has a wealth of preserved farmland, which is beautiful and great for the agriculture industry. It also has stringent zoning protections for agriculturally zoned land.
- Those protections limit how much land can be converted to housing, industrial, or retail uses. Consequently, a parcel with appropriate zoning for your intended use is worth significantly more, because you have a high-demand product in a limited-supply market.
The law of supply and demand, working in your favor.
4. It dictates your value
This one can be interesting. Take the previous example of the 30-unit apartment building with extra land. You may find the extra land could support up to 20 more units. However, if a ‘coverage ratio’ limits building or paved surface to 60% of the land, and your current use already covers that amount, the only way to build more units is to tear down existing structures and build taller. That’s often extremely impractical and cost-prohibitive — so in this instance, the extra land is actually a negative (all the cost of mowing the grass) rather than an opportunity for more use.
On the flip side, if you’re able to put a daycare on the site, benefiting from that extra grass as a children’s play area, you’ve now put that extra land to work in a cash-generating way.
Zoning, in this way, can greatly influence the usability of your property and its corresponding value.
5. It must allow for uses not listed as permitted
Say a business that wants to move into your property does crypto mining. Look at any zoning ordinance right now, and you won’t see crypto mining listed anywhere as a permitted use. The same goes for data centers, EV charging, and other modern uses. Some ordinances still lack short-term rental regulations as well.
Zoning ordinances divide municipalities into districts (residential, commercial, industrial, and so on) and lay out permitted, conditional, and prohibited uses within each. But with the rapid evolution of technology and business models, many modern uses like data centers may not yet appear in older ordinances.
So what happens when a proposed use isn’t listed? Can a township or county simply deny it? Or must they accommodate it?
Legal Landscape in Pennsylvania
Pennsylvania’s Municipalities Planning Code (MPC) governs zoning throughout the Commonwealth. Under the MPC, municipalities must allow for the reasonable development of all legitimate land uses. Case law in Pennsylvania has established that a zoning ordinance may be deemed constitutionally invalid if it excludes an otherwise legitimate use of land without providing for it somewhere in the municipality.
In short: townships and boroughs in PA cannot arbitrarily exclude lawful uses like data centers. If challenged, a court may require the municipality to amend its ordinance to allow the use, at least in some zoning districts.
Investors can also pursue a use variance, which allows a non-listed use based on hardship, or argue that the proposed use is analogous to an existing permitted use (for example, claiming a data center is similar to a warehouse or utility facility). But these paths are uncertain and involve time and legal costs.
Maryland: Similar Rules, with Localized Nuances
In Maryland, land use law is primarily controlled at the county level. However, the state’s zoning principles follow similar constitutional standards: a zoning ordinance cannot wholly exclude lawful and necessary uses.
Conclusion
Approaching zoning as a public-private partnership with the local area can help accelerate your real estate investing in a positive way. It can be frustrating when the governing body tells you what you can or cannot do with your property, but approached from the angle of how we can work together to create pleasant communities, it can result in a win for both your property and your bottom-line NOI. And we all love that.
Have Questions About Zoning on a Property You’re Considering?
If you’re looking for additional insight into ways to grow your property income within the parameters of your zoning, contact us to discuss further. We can recommend additional uses, or, if needed, a highly skilled attorney who can assist with zoning matters.
