Upzoning, Downzoning, and Everything In Between: A CRE Investor’s Guide to Commercial Property Zones

Getting your head around zoning laws will help you make a success of your CRE investment.

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When launching a real estate venture, many entrepreneurs overlook commercial property zoning laws in favor of startup costs, location, and tax. 

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Yet doing this could mean they end up breaking the law.

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Zoning laws may seem like a complex web of regulations written only for men in suits; they also eat into valuable free time, but understanding them is crucial for any savvy CRE investor.

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“Investors and property owners must be aware of the zoning regulations in the areas they are interested in,” says Thomas Casey, Principal Broker at Cadwell Realty Group. “They will significantly affect the property's potential uses and, consequently, its market value”.

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So how do we take this important step? This guide is here to help. Read on to take a closer look at zoning laws for commercial buildings, including;

1. What is the meaning of a commercial zone?
2. What are the different types of zones?
3. How does commercial zoning affect property values?
4. How to navigate zoning for commercial property: The process and key regulations
5. What are other examples of rezoning?
6. How to improve your commercial property listing by understanding zoning laws

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Let's dive in.

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Knowing about property zoning is key to CRE investing; so is getting the right funding. Get in touch with Duckfund and we’ll show you can grow your portfolio without dipping into your capital.

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What is the meaning of a commercial zone?

Think of a commercial zone as a city's designated area for businesses to thrive. 

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It's where local governments spell out what can and can't happen on a piece of land that has retail stores, office buildings, restaurants, factories, and other commercial spaces.

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These zones are created to balance business needs with community desires, which means cover everything from what type of business can operate, to building height, parking requirements, and even signage. 

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The aim is to create harmony between businesses and residents and avoid, say, a noisy factory popping up in a quiet residential neighborhood.

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Zoning can help smooth the wheels of a commercial property value growth. Answering a question like “How much is commercial land worth?” may come down to the kind of zoning regulations it’s subject to.

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But don't get too excited just yet. Commercial zoning isn't always straightforward. You might need special permits or variances to make your investment a reality. And if you're eyeing a property outside a commercial zone, rezoning (we’ll cover this later) is a complex process that involves local government bureaucracy.

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So, while knowledge of these zones offers opportunities for growth and profit, understanding the rules is an essential part of the commercial real estate analysis that all investors should do.

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How does commercial zoning affect property value?

CRE zoning was designed with good intentions, but red tape and politics mean that it isn’t always good for the value of the properties that it covers. 

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Let’s take a closer look at the positive and negative impact commercial property zoning can have on your investment.

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Positive impact

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Zoning laws that allow for popular commercial uses, like trendy shops or restaurants can boost demand for the surrounding business and residential properties.  

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Take a zoning regulation permitting a mixed-use development for ground-floor retail space and upper-floor apartments in a sought-after residential area. The Pearl District in Portland, Oregon is one such example of this type of project, which the Urban Land Institute found can increase values by 10 to 20%.

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Historic zoning districts can also protect architectural heritage, attracting buyers who value unique properties and pushing up values in that area.

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Zoning legislation often mandates green spaces, parks, or community facilities to help boost a neighborhood's desirability, which also helps drive up property values.

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Negative impact

Nobody likes restrictive legislation, but this is often the best way to describe zoning laws that prevent property owners from developing their space, even if it doesn’t impact on their neighbors. 

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One example is a single-family zoning restriction that prevents an investor from subdividing their large property into multifamily housing, even if this would not affect the surrounding area.

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On the flip side, you may see zoning that permits undesirable uses. Industrial activity near residential areas may hit property values due to noise, pollution, or traffic.

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Investors should always be aware of the fine print in zoning laws before making a CRE purchase, particularly when studying how to flip commercial real estate. Failure to do so may lead to a loss-making project. 

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What are the different types of zones?

The best way of getting to grips with these questions is to learn the commercial property zoning codes and what they stand for.

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Here are the most common types. 

• C1 (Commercial). Typically covers the smallest CRE spaces, including retail shops, offices, and services. It's often found in neighborhoods and suburbs, so you’ll most likely have to deal with this if you’re outside this city centers.
• C2 (General commercial). A wider range of retail, services, and offices are covered with this code. Shopping centers and larger standalone stores often fall into this category.
• C3 (Commercial highway). Designed for larger-scale retail, often along major roads. Car dealerships, big-box stores, and hotels are common in these zones.

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What is C4 zoning?

C4 zoning designates areas for larger-scale commercial developments that require significant space and often generate higher traffic volumes. Think of it as the older sibling of C3 zoning. 

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Prominent examples include Flushing in Queens and the Hub in the Bronx, both of which are located outside of the restricted space of central business districts.

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Unlike C3 zones, which are often located along major roads, C4 zones normally cover established commercial districts or areas zoned for industrial use. This means they can accommodate a wider range of commercial activities, including:

• Large-format retail stores. (Think big-box stores like Walmart or Target)
• Warehousing and distribution centers due to their size requirements.
• Industrial facilities. In some cases, C4 zones may overlap with industrial areas.
• Office complexes: Larger office buildings can be accommodated.

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Note: It’s important to remember that these zoning categories can change from city to city. Each town or city has its own set of rules, or zoning codes, that dictate what can be built where. 

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These codes cover everything from what kind of business can open up to how tall a building can be, how many parking spaces are needed, and even what your building should look like.

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Understanding these local rules is key for anyone looking to invest in or develop property - it can mean the difference between a profitable project and a frustrating one.

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Zoning for commercial property: The process and key regulations

We’ve established that zoning is the government's way of deciding how the land can be used, so this means you’ll have to go through the authority’s approval process if you plan to use land for commercial property development.

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Zoning maps can help you find out which zoned area your plot lies in, and each zone will have its own set of rules about what can be built there. 

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Once you know this, you’ll need to provide a detailed plan that outlines your long-term vision for your plot’s growth and development.  

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Here are some important zoning regulations every investor should know about.

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• Permitted uses. Does your building match the allowed use for that zone?

• Building height. Is it within the accepted height limit as stated by the zoning law?

• Setbacks. Does it fall within setback requirements i.e. the distance a building must be from property lines or boundaries?

• Floor area ratio (FAR). Does your floor space fall within the accepted limit?

• Density. For large plots, are you within the maximum number of houses within an acre?

• Parking requirements. Do you have the required number of parking spaces for your building (if any)? 

• Landscaping. You may have to deal with requirements for greenery and open space.

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Once you’ve checked all the items on this list, then you’ll be in a strong position to deal with zoning boards and planning commissions.

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Zoning boards typically handle requests for zoning variances - exceptions to zoning rules, while planning commissions review proposed developments and make recommendations to the governing body. 

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Public hearings are often held to allow residents to voice their opinions on proposed developments if they’re affected by them.  

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Permits and variances

Most investors are aware of property permits, but how does zoning affect them?

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Well, zoning laws often dictate what kind of permits you can get. For example, if you want to open a restaurant in a residential area, you'll likely need a special permit, as it's not a standard residential use. Checking out the local land use laws is the best way of staying informed.

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If your project doesn't fit the exact zoning rules, you might need a variance. This is like asking for an exception. It's not easy to get and often involves a public hearing, but it could be your ticket to moving forward.

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To make things easier, talk to your local planning or zoning office early on. They can guide you through the process and help you avoid surprises.

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Can I change my property zoning from commercial to residential?

Switching your property from a business zone to a home zone, also known as rezoning, isn't always easy.

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Local governments, or municipalities, have strict rules, called zoning ordinances, about what can be built where. Converting commercial real estate to residential usually requires a change in these zoning laws.

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This process is often complex and time-consuming. You'll likely need to go through a formal application process, attend public meetings, and possibly get approval from a zoning board or planning commission, as mentioned. They’ll consider factors like the property's location, size, and surrounding land use in their decision.

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In a nutshell: it’s possible, but be prepared for a battle!

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What are other examples of rezoning?

Rezoning can be a catalyst for change within a community, according to Adam A. Millsap, Senior Research Fellow at the philanthropic community Stand Together Trust, who says “Zoning changes can increase the supply of housing and boost local tax bases.”

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Investors, too, can benefit from these changes and help their investment make a positive impact on the surrounding community by offering sought-after accommodation and services.

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One common example of this is upzoning, which increases the density allowed on a property, often to accommodate more housing units. Urban areas with high population growth often see this take place.

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Downzoning is the opposite, a process that reduces the permitted density or intensity of use, often to protect the character of a neighborhood. Areas with historic preservation concerns or where residents desire a quieter atmosphere are the most common beneficiaries (or victims) of this.

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Rezoning can also be used to create mixed-use developments, combining residential, commercial, and sometimes even industrial uses within a single area. Benefits often include increased property values, vibrant communities, and reduced reliance on cars, but there can also be challenges in balancing diverse land uses.

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Rezoning can transform neighborhoods, but it's not a one-size-fits-all solution. Every community is different, with unique needs and goals. Understanding these nuances is crucial for making the best investment possible.

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How to improve your commercial property listing by understanding zoning laws

Understanding zoning can make all the difference when selling your commercial property. 

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It’s much easier to attract a wider pool of potential buyers and increase your chances of a quicker sale if you can highlight your property’s current zoning benefits. 

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For instance, mentioning that the property is in a mixed-use zone can attract buyers interested in both residential use and commercial ventures.

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Mentioning other specific zoning perks, such as conditional use permits to build apartment buildings, can spark interest among investors seeking particular property types. 

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Accurate information about zoning requirements, including setbacks, parking, and floor area ratios also helps, particularly in tough zoning regions like New York City.

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Many CRE deals have fallen through due to misleading zoning classifications which damage the seller’s reputation and might even lead to legal action. Sharing zoning information, however, will show you to be accurate and transparent and will help build a buyer’s trust in you ‒ one of the most important aspects of a real estate sale.

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Once you’ve done your property zoning homework, you’re going to need funding to make your deal happen. Contact Duckfund to find out how our Sign Now Pay Later approach can help you grow your portfolio.