Illegal Unit In Apartment Building

[Terrel L. Shields]

wever for appraisal purpose, the income is not counted since the 13th income unit is not allowed per zoning.

The economic rents may exceed the market rents then. Why would your license be at risk for including the 13th with market evidence vs. pretending it is not there (which you appear to be advocating). This "It was illegal so I pretended it didn't exist" way of valuing property is a sure fire way in my state to lose your license. It is there. It is illegal. It provides an income. It enhances the value. There may be a discount for the illegal unit, but it is still there and has a contributory value.

 

[hastalavista]

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.

Mark-

I own an industrial building, 10,000sf. Original built as a single-user building.
I demise the space into two units (5k each) and rent them out.

Is your interpretation of the ordinance you cite that because of my action, I've now created an illegal use and my improvement, as-is, fails the H&BU test based on "legally permissible"?

 

[J Grant]

The economic rents may exceed the market rents then. Why would your license be at risk for including the 13th with market evidence vs. pretending it is not there (which you appear to be advocating). This "It was illegal so I pretended it didn't exist" way of valuing property is a sure fire way in my state to lose your license. It is there. It is illegal. It provides an income. It enhances the value. There may be a discount for the illegal unit, but it is still there and has a contributory value.

Nowhere did I say "pretend it does not exist". I advised not to count the illegal rent in the rental income approach, because it is not legal per zoning and HBU has to be legal use. I said to comment that a buyer might value the 13th unit as they might rent it out. Of course disclose it all to the client and photo it as well. I fail to see how a state board would discipline an appraiser for not including an illegal rent in an income approach.

If the possibility of illegally renting a unit leads to buyer paying more for a property, that is something the appraiser has to handle in reconciliation. They can reconcile it on higher end of value because of the additional unit. That's my take on it, yours is to include an illegal unit as additional income so be it.

 

[Terrel L. Shields]

I fail to see how a state board would discipline an appraiser for not including an illegal rent in an income approach.

They might not, but our board - from anything I've heard from them- definitely does not like the idea of ignoring a chunk of the property.

 

[J Grant]

Once again, nowhere did I say to ignore it. The below was from my post;

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.

 

[Gobears81]

Once again, nowhere did I say to ignore it. The below was from my post;

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.

My take would be-appraise it as market forces dictate. Values are dictated by the four forces (social, economic, governmental, and physical/environmental), but there are municipalities that take an extremely hands-off approach, whereas others require periodic inspections into multi-family units and a rigorous approval process. The value of that 13th unit is most likely different in the hands-off municipality vs others. In the municipality that takes a hands-off approach, should I appraise it as a 12-unit property when the market suggests otherwise? Language in the report should undoubtedly be used to call attention to this unit being illegal, but if the market suggests that the rents/ value for the 13th unit should be considered, then that is how it is analyzed. I've done appraisals in markets where there is a new warehouse in an R-1 district. The clerk was saying that zoning must be a mistake, but there was no record of any variances or petitions to re-zone, and there was also a 0% chance that the municipality is going to require conversion to an allowable use. Obviously, that is more of an exception than the rule, but we evaluate each scenario on a case-by-case basis.

 

[J Grant]

GB-"In the municipality that takes a hands-off approach, should I appraise it as a legal 12-units when the market suggests otherwise?"

The critical question, and perhaps one that different appraisers would answer differently.

We are opining market value opinions, not solely price opinions. If we were hired to provide a price opinion, opine exactly as the "market" pays, whether the use is legal or not. I understand that where enforcement is lax in an area, buyers are aware of it, and thus willing to pay more. However, as appraisers, we are obligated to appraise within certain parameters, which includes legal use restrictions, (along with analyzing the $ market might pay for added benefit of illegal use, which translates to value in use for the owner. )

Even not including the 13th unit in income, the OMV might equate to what buyers are paying via the reconciliation process. That's for the appraiser to work out. Could also depend on whether the 13th unit exceeds allowable zoning setback, sf allowed for the site or height restrictions.

 

[Mark K]

Mark-

I own an industrial building, 10,000sf. Original built as a single-user building.
I demise the space into two units (5k each) and rent them out.

Is your interpretation of the ordinance you cite that because of my action, I've now created an illegal use and my improvement, as-is, fails the H&BU test based on "legally permissible"?

Not if the zoning allows for the division and the requisite permits were obtained. If the division was done without permits, I think you now have an illegal use, at least according to this particular county ordinance.

The ordinance that sets the density standards, e.g. 1 family vs. 2-4 family, is the same ordinance that establishes the requirements for permits. Splitting an SFR into two units in a one-family district is a violation of the same ordinance that sets the requirements for permits.

My point is that, according to this particular zoning ordinance (and I suspect that some others mimic this one in some fashion), the lack of a required permit results in an ordinance violation. Is an ordinance violation, whether its a density violation or a permit violation, an illegal use and, if the improvements are an illegal use can they be 'legally permissible'?

Maybe the question that needs answered is "does an ordinance violation create an illegal use?" If not, what would create an illegal use?

 

[CANative]

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.

And I think you are incorrect. The violation of the law was committed by a human, not a building. We develop opinions about the property rights and contributory value of the improvements, if any.

The OPs problem is a local issue. Depending on how the winds blow in that specific market I might consider the income from that unit as excess rent and adjust or moderate the cap rate.

 

[Mark K]

And I think you are incorrect. The violation of the law was committed by a human, not a building.

I agree. Much like the poor car that gets parked by a human being in a fire zone and gets towed away. Its not the car's fault but the remedies available to the authorities affect both the unsuspecting car and its human owner.