Use Variance Definition for Commercial Real Estate Investors

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Key Takeaways

  • A Use Variance is a request from a property owner or investor to use a property for something other than the local zoning rules allow.
  • Investors like to request them as a way to add value to a property. Cities or municipalities may grant them because they provide a benefit to the community.
  • To obtain a Use Variance, requestors should write a letter, complete an application, and then wait. If the request is declined, real estate investors have an option to appeal.
  • Use Variance is one of two types that an investor could potentially ask for. The other is Area Variance, which is a request to use a property for something other than the allowed physical uses. For example, a homeowner may want to build a fence that is larger than is allowed.
  • When investing in a syndication that involves a Use Variance, real estate investors should be aware that a request can take a long time and can be very expensive to approve. Investors should be sure that the syndicator has the appropriate resources and proper contingencies in place to see the request to its conclusion.

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As part of their planning process, cities and municipalities enact zoning laws that define a series of permissible uses for properties within their jurisdiction. For example, they may want to designate certain areas for commercial properties and other areas for residential properties. Even more specifically, they may designate what the design of the properties must look like, how big they can be, or how many floors they can contain. But, the permissible use does not always line up with what an investor/developer wants to use the property for. In such cases, they must ask the governing municipality for a “use variance.”

In this article, we are going to discuss the concept of a use variance. We will define what it is, why it matters, and how to change it. By the end, readers will have the information needed to determine how the existence of a use variance in a potential investment can impact the transaction.

At First National Realty Partners, we specialize in the acquisition and management of grocery store anchored retail centers. While we rarely require a use variance, it isn’t out of the realm of possibility in a transaction. For this reason, it is helpful for investors to understand what it is. If you are an Accredited Investor and would like to learn more about our potential investment opportunities, click here.

What is a Use Variance?

A use variance is permission or a waiver to use a property for something other than what is allowed under local zoning regulations.

Purpose of a Use Variance

There are compelling reasons for a use variance from both the property owner/investor and city/county perspective.

From the property owner perspective, the purpose of a use variance is typically to add some type of value to a property. For example, suppose that a developer is considering purchasing a property where the local zoning ordinances dictate a residential use. But, for the property to be profitable, they need to be able to turn it into a commercial use, like a large multifamily property. In this case, they would request a use variance to use the property for something other than what current regulations allow. If it gets approved, the developer can add additional value to the property.

From the county/city perspective the rules are written for a reason. For example, certain roads may only be able to handle so much traffic or water/sewer/electrical systems may only be able to handle so much load. But, there may be a compelling reason to grant a variance. More people equals more property tax revenue or more housing, particularly if it is affordable, provides a large benefit.

When a Use Variance Is Needed

A use variance is needed whenever the planned use for a property is different that what zoning regulations allow. So, in order to identify this need, property owners and real estate investors must do the work to get familiar with local laws and regulations to ensure they have a thorough understanding of what the rules allow in the first place.

Once they have identified that their planned use is different from what the rules allow, they can request a variance.

How To Obtain a Use Variance

If real estate investors are considering a use variance, it is first important to take note of two things.

First, zoning rules are set at the local level. In many cases, this means that the city council and/or local zoning board is the governing body that sets the rules. Depending on the location, they could be set at either the city or county level.

Second, zoning rules are different from one municipality to the next. For example, Houston is well known to have very lax zoning requirements while places in New York and California are at the other end of the spectrum with very strict rules. For this reason, it is unwise to make blanket statements about commercial zoning rules because they are different everywhere.

With these guidelines in mind, there are four steps that property owners/real estate investors must follow to obtain a use variance.

Step 1: Write a Variance Letter

It may seem very simple, but the first step is to write a letter to local authorities that explains:

  • The desired use of the property
  • Why a use variance should be approved
  • How approval of the use variance will benefit the community.

Investors could write the letter on their own, but it is probably a better idea for it to be written by an attorney who is familiar with local zoning laws. The letter should be sent to the local zoning board.

Step 2: Complete a Variance Application

Once the letter is completed and sent, the next step is to complete a formal variance application. The application and its contents can vary by municipality, but it typically covers the same type of information that is described in the letter. Among other things, the application requires information about:

  • The individual/entity requesting the variance
  • Why the current zoning laws are not appropriate for the planned use and how they cause unnecessary hardship
  • Demonstrating how hardship is caused by circumstances that are unique to the property involved in the application
  • How the zoning variance, if approved, will benefit the local community. Or, at a minimum not cause harm to the community.

The variance application can be lengthy and complex – this is by design. As described above, the rules exist for a reason and an exception to them must have a compelling case.

Step 3: Wait

Once the application is submitted, the best that the investor can do is to wait. The local zoning board will take their time to review local rules, community interests, may speak to owners of nearby properties, and may even hold a public hearing if the proposed change has a large or potentially controversial impact.

It could take weeks or months to hear back, but real estate investors will eventually learn whether or not their application is approved or declined.

Step 4: Appeal

If, for whatever reason, the application is declined, real estate investors may appeal the decision. In this case, there is another chance that there could be a public hearing so individuals who live in the surrounding neighborhood have an opportunity to weigh in on the proposed zoning changes. As with every issue, there are likely to be those who support and those who oppose so it will be the zoning board’s job to weigh the arguments on both sides and make a decision that is in the best interest of the community.

Again, it is important to note that this process could vary by community and there is no set way for how it works. It can take a really long time to complete and there could be a lot of cost involved to hire attorneys, architects, engineers, or anyone else that would assist in making the argument that the change is a good thing.

Use Variance vs. Area Variance

A request for a use variance is just one of two types of variances that real estate investors could potentially seek.

Again, a use variance is permission to use a property for something other than what zoning laws typically permit. For example, if a developer wants to build a commercial property in a residential zoning district, this would be an example of a use variance. A use variance is more common in commercial transactions.

An area variance is more common and a request for one occurs when a homeowner or investor requests permission to use their land or property in a way that the physical uses outlined in the local rules does not allow. These are more common in residential use cases, but a common example would be if a homeowner wants permission to build a new fence in a place or size that is not normally allowed.

Part of the process of requesting a variance is understanding which type investors want to request. This highlights why it can be helpful to have the assistance of an attorney.

Use Variance and Investing In Real Estate Syndications

There are two important points to make about use variances and investing in real estate syndications.

First, requesting and obtaining a use variance is complicated, time consuming, and can be very expensive. For an individual investor to take on this process alone can be intimidating and challenging. For this reason, it may be a good idea to leave this work up to a deal syndicator who has experience with this type of work.

Second, if an investor is thinking about investing in a deal that requires the approval of a use variance to be profitable, they should understand that this raises the risk profile of the transaction. If the variance is not approved or if it takes longer than expected, the actual returns could differ materially from those described in the offering materials. Investors should ensure that the syndicator has the appropriate contingencies in place to account for any unforeseen circumstances that comes with a use variance request.

Summary of Use Variance

A use variance is a request from a property owner or investor to use a property for something other than the local zoning rules allow.

Investors like to request them as a way to add value to a property. Cities or municipalities may grant them because they provide a benefit to the community.

To obtain a use variance, requestors should write a letter, complete an application, and then wait. If the request is declined, investors have an option to appeal.

Use variance is one of two types that an investor could potentially ask for. The other is an area variance, which is a request to use a property for something other than the allowed physical uses. For example, a homeowner may want to build a fence that is larger than is allowed.

When investing in a syndication that involves a use variance, real estate investors should be aware that a request can take a long time and can be very expensive to approve. Investors should be sure that the syndicator has the appropriate resources and proper contingencies in place to see the request to its conclusion.

Interested In Learning More?

First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. We utilize our liquidity and decades of experience to find multi-tenanted, world-class investment opportunities for our partners. 

If you are an Accredited Investor and want to learn more about our investment opportunities, contact us at (800) 605-4966 or info@fnrpusa.com for more information.

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