When commercial review appraisers prepare detailed valuation reports, an important part of their report often focuses on zoning information. Within these reports, appraisers typically highlight how and why the particular zone in which a property is located has an influence on its value. While it's easy to read this information, it's often difficult to understand it. However, as a lender who is focused on protecting their bottom line, fully understanding zoning and the effect it has on a property's value is essential.
One of the first ways in which zoning regulations impact property valuation has to do with the common idea of supply and demand. This idea basically states that when supply is low and demand is high, cost increases. To apply this thought process to property values, consider a low-density commercial zone. Low-density zones set a maximum number of commercial structures that can be placed on a unit of property.
For example, a particular municipality might have a zoning limit of three commercial structures per acre of land. If there are more people looking to move their businesses into this low-density zone (demand) than there are properties available (supply), the value of the properties will be higher. On the contrary, a high-density commercial area that has a higher commercial structure limit per acre might see property values that are lower.
Another zoning factor that can have a significant effect on a property's value are zone changes, sometimes referred to as up-zoning. Zone changes occur when a municipality determines that it is necessary to change the zone designation of a particular area in order to allow for, or accommodate, growth. An example of this would be a low-density commercial area that has experienced a significant population increase.
In order to meet the commercial needs of the community, the low-density zone could be up-zoned to a high-density zone. This factor can often be very difficult for lenders to understand because they can see the value of their property decline almost instantly, for what seems to be no apparent reason. Given this scenario, not until the newly designated high-density zone maxes out on its commercial structures can a huge increase in value be expected.
As a lender, it's not just important to know the value of your property, but it is equally important to understand why your property has a particular value. Taking the time to familiarize yourself with the effects zoning has on value can really help foster your understanding.
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