Conditional Use Permits in Commercial Real Estate Investment and Development

A conditional use permit, or CUP, allows a landowner to use land in a way not permitted by ordinary zoning regulations. Technically, this is considered a non-conforming use, as the use falls outside the relevant zoning ordinance. Schools and religious institutions, such as churches, typically need to get a conditional use permit in order to operate in residential neighborhoods. In addition, home-based businesses also may need a CUP in order to operate.

However, conditional use permits aren’t just for these types of issues. In fact, they can address nearly any type of non-conforming use, such as building height and density, setbacks, as well as a variety of other specific commercial zoning issues related to office, retail, and industrial real estate.

In this article, we’ll address many frequently asked questions about conditional use permits, including:

• How conditional use permits relate to overall zoning objectives

• Conditional use permits compared to rezoning and variances

• How to apply for conditional use permits

• How to appeal a conditional use permits

• Hiring a zoning attorney during the CUP application or appeals process

• How conditional use permits impact commercial financing

CUPs, Zoning Objectives, and Commercial Real Estate Development

To fully understand the context behind a conditional use permit, investors and developers should first appreciate the main objectives behind most overall municipal zoning strategies. In general, zoning is intended to protect public health and welfare by:

• Reducing the potential for incompatible land uses within a reasonable distance (for example, preventing heavy industrial businesses from operating near a residential neighborhood.

• Limiting the location and frequency of certain kinds of businesses, such as liquor stores, adult entertainment-related businesses, and fast-food chains.

• Encouraging developers (sometimes via conditional use permits) to make sure that essential services are available in certain areas (for example, requiring a developer to lease out a space to a grocery store in a food desert).

While the three examples above are particularly common, they’re far from the only ways that communities use zoning. For instance, some cities encourage community safety and quality of life by zoning retail, office, and residential within a close proximity to cut down on traffic congestion and potential accidents. In other areas, cities may rezone specific areas to promote economic objectives, such as tourism.

Conditional Use Permits vs. Rezoning vs. Variances

A CUP allows a property owner to utilize a property in a way not allowed under current zoning ordinances. If approved, there are typically specific rules or conditions that the owner must follow to use the property in the non-conforming way. However, conditional use permits are only one of a few different options on the table for commercial real estate property owners to change how they are permitted to utilize their assets. Rezoning and variances are the most common alternatives.

Rezoning, unlike a CUP, legally changes the zone of the property. Rezoning generally needs to have the support of the community, and meetings may be held to discuss any rezoning plans with local residents. In essence, rezoning may be the most definite and permanent way to develop a property in a way that it was not originally zoned for, but it’s usually not the easiest or the most cost effective. Plus, rezoning is generally not undertaken for specific parcels of land for the benefit of the developer — this is referred to as spot zoning and is technically illegal in most states. However, this isn’t to say that the largest developers don’t have an influence on the rezoning process, especially when it involves a large project that will benefit the local community.

In contrast to rezoning, a variance is closer to a CUP, as it allows a property owner a one-time, limited waiver in order to alter a zoning ordinance. Variances are generally used when a property has some kind of unique feature that conflicts with a zoning regulation and that makes a property less economically valuable compared to similar properties without those features. In order to get approved for a variance, an owner must typically prove that the zoning regulation as currently enforced causes an “unnecessary hardship” — not just a minor inconvenience.

How to Apply for a Conditional Use Permit

In many municipalities, permitted types of conditional use permits are listed for each zone in a particular city or county. Developers will typically have to go before a local zoning or planning board in order to argue their case. If the zoning board or committee believes that the use of the structure will benefit the surrounding community, it may issue a CUP.

However, these uses are generally “with conditions.” These conditions are designed to minimize any harm or inconvenience to existing homes or businesses in the area. For instance, if a private school were to be given a conditional use permit to build in a neighborhood, it may have to make sure it provides sufficient parking for parents, teachers, and employees. This would make sure that local residents aren’t left scrambling for a place to park, reducing or eliminating any negative impact on the local community.

In addition, some municipalities have a “general plan” or “master plan” for community development, and, in order to be approved, a CUP must generally not interfere with this plan. Consulting with a zoning attorney or another zoning expert can ensure that your CUP application is consistent with these types of broader municipal zoning strategies.

Appealing Conditional Use Permits

If a zoning board rejects a conditional use permit application, a property owner usually has a chance to appeal the decision — even if these appeals are often significantly time consuming. A commercial real estate property owner may wish to appeal decisions they feel place unduly burdensome conditions on an asset.

For instance, if the aforementioned private school had only 20 students, but the city wanted them to create a 200-spot parking lot, the owner may wish to appeal in an attempt to reduce the amount of parking spots required — and, thus, the cost of development. Note that, should an owner not honor the conditions of a CUP, the permit may be revoked entirely.

Hiring a Zoning Attorney During the CUP Process

Investors or developers will typically want to hire an experienced zoning attorney to guide them through the entire CUP process, from initial research and application to presentation and any appeals that may be required. Zoning laws regularly change, and even when zoning laws remain the same, prevailing attitudes and political factors can greatly impact which types of individuals and businesses will be awarded CUPs. Therefore, a smart zoning attorney will not only be able to guide you through the complex web of zoning rules but can also give you a handle on the human relationships and various players involved in the zoning process in your area.

Conditional Use Permits and Commercial Financing

Before obtaining a commercial real estate loan to purchase, rehabilitate, or construct a commercial property, lenders will want to know that the borrower’s plans for the property do not interfere with any current zoning ordinances. If they do, they will want evidence that the issue has already been handled via a CUP, variance, or a full rezoning of the area in question. Therefore, if a conditional use permit seems like the most effective remedy for your commercial zoning issue, it’s essential to start the research and application process as early as possible.

In addition, many lenders (and some states) require a borrower to submit a zoning report to the lender, along with other required documentation, to reduce the chances of borrower default, future litigation, and other unfortunate outcomes that could occur as a result of improper planning around zoning restrictions.

To learn more, speak with a commercial real estate loan specialist today.