Making sense of zoning regulations: the process.

In real estate development, understanding zoning is critical when assessing a project's viability. However, many people find zoning issues complicated and vague. Variances, for instance, are often necessary to make a project functional, but how are they obtained?

In NYC, property is developable "as of right." If the Department of Buildings is satisfied that a structure meets both Zoning Resolution provisions and the Building Code, a permit authorizing construction is issued to the developer. However, in some cases, obtaining a permit is not so easy especially if one needs a special permit requiring discretionary action by the Board of Standards and Appeals (the "BSA"). For instance, transferring unused development rights to adjacent properties, FAR bonuses, or use changes are all handled by the BSA.

Discretionary action may be obtained when development of a particular parcel of land would cause owner hardship. The BSA, a quasi-judicial entity, may grant variances from use and bulk provisions to ensure that an eminent domain taking does not occur in violation of the Constitution's fifth amendment. In order to grant a variance, however, the owner must prove five conditions with each condition acting as a stepping stone to the next.

The first condition requires, most importantly, that the practical difficulty or unnecessary hardship complained of is caused by unique physical circumstances. For example, an irregular parcel or topography issues that would make development inefficient or costly would satisfy this condition.

The second condition requires that the currently permitted use or bulk would not provide the owner with a reasonable return from the property. The process of verifying such financial hardship begins with the preparation of a cost workout that should reveal how the parcel's hardship conditions affect the investor's ability to earn a return from development. In addition to a cost workout, an effort to rent or sell the property for conforming use may also be required.

Furthermore, an applicant must produce evidence that each and every use permitted in the district is unfeasible for the subject property. For instance, a developer seeking a variance for commercial use in a residential zone that also allows certain community facility uses, must show that neither a medical office building nor a typical residential use would be feasible. After satisfying the requirements mentioned above, the income from the property is analyzed to assess whether, once developed, the property will rent or sell at a rate sufficiently high enough to produce an acceptable internal rate of return ("IRR") for the developer to take on the risk. If not, the variance is structured to generate more income either by increasing FAR, enhancing design, or allowing a more lucrative use.

The third condition states that if the variance is granted, the essential character of the neighborhood will not be altered, use of the adjacent property will not be substantially impaired, and the public welfare will not be detrimentally affected. For instance, a warehouse which is considered (M) cannot be built in a residential district (R) since its use is inconsistent with the neighborhood's built environment. Additionally, the requested use cannot be detrimental to the public welfare such as one that would draw criminals or other dangerous elements to the neighborhood. Such would be grounds for rejecting a variance

The fourth condition requires that the practical difficulty or hardship complained of was not caused by the property owner or his predecessors. If a property has already been in conforming use, and the owner claims that its actual income has been insufficient, hardship must be determined by some other unique conditions.

One's personal financial situation, mismanagement, or depressed economic conditions do not qualify a property for a variance. In fact, the BSA is suspicious of owners trying to get a variance by consciously mismanaging a property. Consequently, they will carefully scrutinize any attempts to deceive them in this way. Furthermore, one cannot buy a property with obvious hardships and then expect a variance to be automatically granted. In order for a variance to be granted on grounds of hardship, the hardship must have been unexpected or unknown to the owner before purchase. Purchasing property is thus subject to caveat emptor.

The fifth and final condition allows only the minimum variance necessary to provide relief be granted. The full workout demonstrating the inability to earn a reasonable return from conforming or complying development, required by the second condition, must be accompanied by an additional workout demonstrating how the proposed project will perform after the granting of a variance. If it appears to show that the variance results in a high IRR to the owner, the Board will require changes in the proposal to less obtrusive uses, i.e. a smaller building or a different configuration.

After satisfying all of the five conditions, the BSA will assess the proposal for potential environmental impacts as well--in accordance with State Environmental Quality Act (SEQRA) and City Environmental Quality Review (CEQR) procedures.

BY RONEN ABERGEL

PRODIGIOUS CAPITAL ADVISORS