In our sales work, many owners think about zoning only when a buyer's lender asks. By then it is late.

Zoning shapes how long your facility can keep operating, whether you can expand, and how much a buyer will pay. Buyers price it in.

Zoning rules differ by city and county. Your city planning office is the authority on yours. Use this post to know what to ask, not to read your own status. It is not legal advice.

Why deals fall apart in due diligence

A seller gets an offer. The price looks fine. Then the buyer's lender orders an environmental report and a zoning report.

The zoning report shows something the buyer did not expect. Maybe the facility operates under a special status or permit instead of plain storage zoning. Maybe it carries conditions.

The buyer now cannot say how long the facility can keep operating as is. Some lenders pause or decline. Some buyers cut the price.

This is avoidable. Ask the planning office first.

Why zoning changes value

A cap rate is net operating income (NOI, what is left after operating costs) divided by the price, so price equals NOI divided by the cap rate. Buyers use it as a shortcut, but they price on the income they expect to earn.

Zoning doubt hits both sides. The buyer trusts less of the income and wants more of it per dollar paid. The price falls, and the cap rate on the old NOI rises.

Here is the math on a sample facility in a small Arizona town:

• 50,000 net rentable sf at $0.80 per sf per month, with 90% economic occupancy (rent collected is 90% of potential rent)
• Gross income: 50,000 x 12 x $0.80 x 0.90 = $432,000 a year
• NOI at a 55% margin (after a 6% management fee): $237,600
• At a 7.0% cap rate: about $3.39 million
• At 7.5%: $3.17 million, about $226,000 less
• At 8.0%: $2.97 million, about $424,000 less

The 7.0% is an assumption for a small Arizona town. The 7.5% and 8.0% steps are illustrations, not quoted market cap rates. A small move in cap rate is a large move in price.

Zoning affects value in three ways.

1. Certainty of use

A facility where storage is clearly permitted has a clear future. One with open questions about its status carries doubt. Buyers price doubt as a higher cap rate.

2. Room to expand

Say zoning would let you build 70,000 sf and you have built 50,000. If those extra 20,000 sf rented at the same $0.80 per sf, 90% and 55% as the sample above, they would add about $95,000 of NOI a year, once leased up and before construction costs. A buyer may pay for that option, though not all of it.

Zoning approval is not the same as buildable land. Setbacks, parking and lot coverage are separate limits, and your land may not hold what zoning allows. Check the site before you count the space.

The reverse also happens. If zoning caps you at what you already built, a buyer who counted on expansion will lower the offer.

3. Financing and holding

A buyer who plans to refinance in a few years wants a clear, lasting right to operate. If that is in doubt, lenders may refuse or charge more. Buyers know this and lower the price now.

Deal-killer situations

Unclear right to keep operating. If the planning office cannot confirm your facility's status in writing, buyers and lenders see risk. Some lenders may pass, and the price drops.

A permit with conditions or reviews. If your approval comes with conditions, buyers want to know when and how it could be reviewed.

Limits on what you can add. If zoning limits building size or uses such as vehicle or RV parking, you cannot add that income. Buyers who planned to add it will revise their numbers.

Extra rule layers. Some parcels carry other rules on top of base zoning. Ask what applies to yours.

Deal-saver situations

Storage clearly allowed, with room to grow. Buyers see lower risk and added upside. That supports a stronger price and easier financing.

Little land zoned for new storage nearby. Fewer new competitors means less risk. AJ Osborne, an experienced storage investor, says if no new storage is zoned or being built within five miles, "that's a good sign. That reduces risk." He adds that zoning can be changed, so it is no guarantee (Osborne, Investors Guide).

Broad commercial zoning that lists storage as a permitted use. If storage ever stops working, other commercial uses may be possible. Some lenders may see that flexibility as a plus.

A growing area. If nearby development is coming and your zoning supports it, buyers may see upside in future demand.

How to check your zoning before you sell

1. Get the paperwork. Ask your city or county planning office for your current zoning letter and any permits or approvals on file. Read them line by line. Note every date, condition and size limit.
2. Mark what can end or come up for review. Rules can change, so today's rules may not hold. If anything could end or be reviewed while a buyer holds the property, a refinance is no longer a safe assumption. Expect buyers to price that in.
3. Ask what else applies. Ask whether any extra rules apply to your parcel.
4. Have your attorney review it. Confirm what your status means and what could change it.
5. Test your expansion room. Ask the planning office whether you could add a specific building, and get the answer in writing. Check setbacks, parking and coverage too. If the answer is "probably not," do not market the expansion as upside.

What a broker should do

Before listing, a broker should review your zoning, explain the risks in dollars and put the answers in the offering materials. Surprises in buyer diligence cost you leverage.

The bottom line

Zoning rarely makes headlines. It does decide how many buyers will bid, whether their lenders will finance, and at what price.

Know your dates, expansion limits and permit terms before you list. The buyer's lender will find them anyway.

Thinking of selling? The Gorden Group can review your zoning position before you go to market. Connect with the Gorden Group