When most investors consider how to increase the value of their commercial property, they consider either renovating the property itself, adding amenities, or increasing tenant rents.
All of these are excellent methods of increasing ROI, but if you’re interested in finding a good property in a Class A neighborhood, you might be out of luck.
However, there is one little-known way some investors are using to increase their income commercial property’s value: rezoning.
Here are some essential steps to take when considering rezoning as a value-add strategy.
Locate The Commercial Zone Boundaries
It’s generally easier to get zoning laws changed when the property is close to other commercial properties with better zoning, so check the fringes of areas where commercial real estate meets residential.
Let’s say you find an empty retail facility that would be great for an e-commerce facility seeking warehouse space close to the city. If the area is already in transition and there are several properties in the area with better zoning, then it’s possible a request to change zoning will be granted.
This is particularly true if the properties on two or more sides of the income property you’re interested in already have better zoning.
In these “border” areas, it’s not uncommon for some properties to have better zoning, but not others. That’s one reason, for example, you might see a few houses scattered among a largely commercial area. This might mean you have a decent chance of getting a zoning approval.
Keep in mind that changing from residential to commercial isn’t the only type of zoning change that can increase the value of a commercial property. Zoning codes, laws or ordinances for a municipality control many facets of the use of the land, including what can be built upon it and how the structures can be used.
Changing the size of a land lot for subdivision, the external appearance of a building, and how many units that can occupy a specific area can also have a significant effect on a property’s value. Therefore it’s wise to consider if there is more than one type of zoning that can improve a property’s profit potential.
Investigate Past Zoning Requests
As an investor, you’ll have little control over whether or not your zoning request will be approved. However, you can predict whether or not your request is likely to be approved, by speaking to commercial property owners who have received zoning approvals in the past.
If zoning approvals are being handed out like cotton candy at a local fair, buy one (or more) properties and get the ball rolling. On the other hand, if zoning approvals are handed out infrequently, then you might want to reconsider that particular property.
Request The Least Controversial Zoning Category
Before you submit an application to change zoning restrictions, examine each category and find the one that will give you the most to work with, but is the least controversial.
So if there is zoning that is meant for multifamily but it will also support the density required for an office building, then choose that one over another less likely to be approved zoning category.
Determine The Profit Potential If The Commercial Property Is Re-Zoned
Once you’ve determined that there is a zoning change is probable, you’ll want to get a handle on exactly how much the property might be worth.
This is important not only because you need to see if it fits into your investment goals, but also so that your profit margin will be high enough to justify purchasing the commercial property.
You can get an idea of estimated property value by using a similar property already located in the area, but don’t just base your numbers on hearsay.
Get building specifications and find out if there are any amenities or other factors that might be driving up the price. You’ll want to use these as a baseline for determining the type and scope of the renovations needed for the commercial property you’re considering.
Make Sure There’s A Need For The Property Type You’re Considering
Don’t forget to do your due diligence as well. It’s essential you examine the market in the area to determine whether or not the property type you’re considering is likely to do well.
Do a walk through on the land the property is built on and analyze it in terms of the intended use. If you plan on building a commercial property with a large parking area, but the area is hilly and will need to be graded, then you’ll need to add that into estimated costs.
Don’t forget to check federal, state, and local regulations for environmental regulation or sustainability incentives that might affect the commercial property now or in the future.
As an experienced commercial real estate investor, it’s never smart to buy a property based on speculation. However, you can make an educated guess based on the current use, the property type, and the commercial real estate market in general.