Building Codes and Zoning Regulations: Valuation Concerns

A real estate market analysis should include an examination of building codes and zoning regulations affecting the subject property.

Since local governments create their own building codes, the requirements can vary substantially by location. All things being equal, a property that already satisfies current building codes is more valuable than one needing to be brought up to code. In addition, it is more expensive to comply with more stringent building codes. Therefore, the cash flows generated by the subject property must be high enough to compensate for the additional construction costs. Building codes may also address hazards unique to the area, such as the risk for earthquakes in California and hurricanes in Florida. There are fewer legally permissible and financially feasible real estate development projects in areas with more stringent building codes.

One of the unique features of real estate is that the asset’s valuation is impacted by the surrounding properties. You can’t consider the subject property without considering its neighbors. For this reason, it is important that the zoning of the plots around the subject property are either the same or complementary. For example, it is better for residential lots to be located next to other residential lots and commercial lots to be located next to other commercial lots. In addition, a property that is already zoned for the intended use is more valuable than one that is not. The local planning board can change a property’s zoning designation, but the time and challenge associated with a zoning change may not be worthwhile.