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Understanding Zoning Regulations and Their Impact on Land Loans

April 18, 2024 • Adulting


Before closing a land loan, your credit union may require you to check the land's zoning laws. This precaution helps avoid constructing buildings that don't comply with local codes.

If avoiding messy legal hurdles is your goal, rest assured your lender agrees.

While lenders and borrowers are now expected to conduct due diligence, encountering problems due to zoning regulations raises questions. Would your credit union refuse to lend money in such cases?

Not necessarily. This article delves into zoning complications, their impact on land loans, and offers solutions. With this information, you will be empowered to make informed decisions with confidence.

Also, make sure to check out Canopy’s article Land Loans: Everything You Need To Know > Canopy CU for more information to prepare you.

Property Zoning Regulations Explained 

Zoning laws regulate the land use within a municipality. They're designed to ensure the safety of residents, manage traffic flow, and preserve the overall quality of life in a town or city. The zoning can be classified as residential, commercial, industrial, mixed-use, or special districts (schools or parks).

Zoning ordinances dictate how land within specific municipal zones can be used. They also establish parameters for construction projects on said lands, such as height, placement, and size. Through each zoning law, towns and cities establish development parameters. Thus, they ensure harmonious coexistence between residential, commercial, and industrial zones.

While zoning laws can forbid landowners from constructing a building of a specific size, purpose, and style, landowners can appeal to consider the plot for rezoning.

How Zoning Ordinances Impact Land Loans

Zoning impacts land loans when complications are found. Zoning complications can occur in three primary instances:

  • The borrower's planned use of the plot is against what's allowed in the zoning regulations. 
  • The borrower has the land surveyed, and its infrastructures have been discovered to not comply with zoning regulations. 
  • The lender invested in a zoning attorney who confirmed that the structure or the land's intended use is "non-conforming."

When such complications occur, the loan can be delayed, affect the loan agreement, or even cause the borrower to default.
Here are three types of zoning complications that can affect property land loans: 

1. Legally Non-conforming

There are non-conforming infrastructures on the property. In such instances, these infrastructures were approved and constructed based on previous zoning codes. Because the landowner's actions did not cause them, the owner doesn't need to bring it into compliance. 

Instead, the municipality will establish a damage threshold. The landowner must rebuild the infrastructure according to the current zoning code requirements if the infrastructure reaches said threshold. 

How Land Loands are Affected:

Lenders require the loan agreement to have ordinance or law coverage to protect their investment with the borrower. This coverage will be explained further in the next section.

2. Non-conforming (Permitted but Not Built) 

The municipality approved infrastructure on the property but has yet to be built. This status complicates the selling of land because it also sells what doesn't exist. 

For example, a plot of land is sold as semi-developed land with a water supply and drainage system. However, upon survey, it was discovered that it doesn't have said infrastructure and is, therefore, raw land with lesser value. 

How Land Loands are Affected:

Land loans are delayed when non-conforming infrastructures exist. As the negotiations with the seller change due to the survey results, the land loan must be put on hold until the actual value of the land is determined. 

3. Non-conforming (NOT Permitted but Built) 

In this status, the infrastructure was built without the municipality's approval, making it harder for landowners to rebuild it the way it was. 

An example would be a property with parking spaces that were not approved. If it were rebuilt to be up-to-code, the parking spaces would have to be fewer. 

Another example would be having more than one infrastructure permitted in the lot. 

How Land Loands are Affected:

In the case of unapproved infrastructures, land loans are delayed as the borrower obtains permits and meets other zoning requirements. 

If the non-conforming infrastructure is more than permitted, the loan can be postponed as the borrower determines the coverage needed and whether to continue buying the land.  

Secure Your Land Loan by Rebuilding within Zoning Codes: Law or Ordinance Coverage

When infrastructure within a plot is detected against zoning ordinances, rebuilding it into compliance can be costly. Therefore, lenders often require borrowers to obtain a law or ordinance coverage before closing their land loans. This type of coverage is an add-on to your pre-existing property insurance policy.

Ordinance coverage helps finance the rebuilding of structures within the property and bring them up to code. 

For example, if your home's water tank is destroyed, your standard insurance policy will pay you the value of the tank before it was damaged. But if you have ordinance or law coverage, your insurance will pay you the amount to replace the tank in compliance with the most recent zoning laws.

Furthermore, most cities have laws requiring buildings damaged beyond 50% to be completely demolished and then rebuilt. Such codes can significantly impact finances

If you only have the standard insurance policy, it would only cover the damaged portion, not the entire cost of rebuilding the property.

But if you have an ordinance coverage, it covers the loss of the undamaged part of the property, its cost to demolish it, and the entire rebuilding cost in alignment with current building codes.

Navigate Zoning Requirements with Our Services

Zoning issues can arise in many instances during land buying. However, they can be resolved and help prevent property grief in the future. Reach out to Canopy for personal guidance and services on land loans.

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