Illegal Unit In Apartment Building

[NachoPerito]

I am wondering your thoughts on an unpermitted apartment unit. I am appraising a 13-unit apartment building with only 12 legal units.

It is for conventional financing.

In this case it isn't evident that the City is going to take action anytime soon to eliminate the space.

Is there an obligation to give it no value or should I value it based on what a typical buyer would pay for an unpermitted unit? In the hot multifamily market buyers may be more willing to pony up for nontraditional units.

Edit: The 13th unit is unpermitted and illegal as the site is zoned for 12 units only.

 

[Gobears81]

The answer is, it depends. The way that you describe it, there is some value, but less than that of the remainder, but that is really just contingent on the nature of the municipality which the property it is in, as well as the nature of the market participants. A sale with illegal units would really help to hang your hat on your conclusions, but interviews with local participants might suffice. I voted for some value though.

 

[hastalavista]

I generally agree with Gobears81.

I am wondering your thoughts on an unpermitted apartment unit. I am appraising a 13-unit apartment building with only 12 legal units.

IMO, there is a difference between unpermitted and illegal.
Does the zoning allow for 13-unit density on this particular site?

In this case it isn't evident that the City is going to take action anytime soon to eliminate the space.

If I were a buyer and did my research and concluded the same, that would offer little reassurance. Non-evidence of action being taken soon doesn't mean (a) it won't happen soon, and certainly implies (b) it could and maybe will happen later.

Is there an obligation to give it no value or should I value it based on what a typical buyer would pay for an unpermitted unit? In the hot multifamily market buyers may be more willing to pony up for nontraditional units.

(my bold)

The bolded would be my choice.

If the city didn't enforce their unit-density standards and higher-than-legally-permitted density properties regularly transacted, I'd note the that fact, state that the properties are actively traded in the market, and value my subject based on these same sales with a cautionary statement that a change of enforcement-emphasis could result in a requirement to reconfigure the subject to its compliant unit density.
If the city actively enforces their zoning standards and the unit is illegal, then a well-informed and prudent buyer would remove the unit to avoid any violations; that removal cost would impact the as-is value.
If the city doesn't care, then it is a free-for-all and buyers would likely value the unit (but rationally not at the same price as the legal units).

Regardless and in my opinion, if the density exceeds what is legally permitted, it is an illegal use. If 13-units is consistent with the density-standards and the 13th unit hasn't been permitted, then it is a legal use with a non-permitted additional unit (again, IMO).

 

[Meandering]

13 rentals or 12 rentals and a manager's quarters?

I agree with above - it has value. legality or not of the 13th unit would have to be intensely scrutinized for use/rental in the applicable zoning ordinance.

.

 

[Mike Kennedy]

Which City, which Zone?

 

[CANative]

Which City, which Zone?

*sigh

Nachu Picchu is a commercial appraiser and here's a residential appraiser wanting to read the zoning laws from the other side of the country.

 

[nstanbru]

Was this unit added after the original 12 were built or was it created by reconfiguring one of the existing 12 units?

 

[DTB]

*sigh

Nachu Picchu is a commercial appraiser and here's a residential appraiser wanting to read the zoning laws from the other side of the country.

*sigh

Why is an exalted CG confused on the issue?
"Is there an obligation to give it no value or should I value it based on what a typical buyer would pay for an unpermitted unit?"
Boy, this sure seems that someone is unsure of the appraisal concept.

 

[Mark K]

IMO, there is a difference between unpermitted and illegal.

Unless the OP's Zoning ordinance contains verbiage similar to...


(I have no desire to read ordinances from the left coast but this is from a local Zoning ordinance)

"12.10 Improvement Location Permit
a. Improvement Location Permits Required
.
No building or other structure shall be erected, demolished, moved, added to, or altered, changed, placed, or be established or changed in use, on platted or unplatted lands without a permit issued by the Director..."

"h. Failure to Obtain an Improvement Location Permit
Failure to obtain an Improvement Location Permit shall be a violation of this Ordinance and punishable under Chapter 13: Violations and Enforcement."


"13.2 ZONING VIOLATIONS

A. DESCRIPTION OF A VIOLATION
1. Whoever violates any of the provisions below shall be guilty of an ordinance violation. Each day during which a set of facts exists that constitutes a violation or offense, it shall
constitute a separate offense.
...
b. Failure to obtain the necessary Improvement Location Permit, or failure to obtain the necessary certificate of occupancy or any other necessary permit as established in this Ordinance."...


As I read it, failure to obtain a permit constitutes a zoning violation, hence, illegal IMO. In a similar fashion that the state has incorporated USPAP by reference into the state Code making a violation of USPAP illegal. That way the state AG can get involved in appraisal violations and enforcement.

 

[J Grant]

This is a variation of the question we see asked many times on the board in the form of non permitted additions that enhance value in a buyer's eye but may be "illegal" per zoning.

HBU has to be legal use for appraisal purposes. However, the reality is that buyers may pay more for an "illegal" use, since they can get enhanced functional utility or income from it. They are willing to gamble they won't get caught, aka be forced to apply for permits or remove it.

Imo why risk license for a bit of a higher value. Appraise it as the legal 12 units, disclose the 13th unit that exists, and comment that it has added appeal since some buyers once in possession of the building may choose to rent it out. However for appraisal purpose, the income is not counted since the 13th income unit is not allowed per zoning.

Is this 13th unit within legal allowed set backs or height of building? ( I assume it is).