Illegal Unit In Apartment Building

[CANative]

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.

The point is that the car is still a legal vehicle. Like buildings that are modified to a use that is a legal use of the land but the property owner got a ticket for not filing the paperwork. The remedy, assuming what they built is a legal use, is to pay the fees, get an inspection and pay any fines (which are usually nominal).

 

[Mike Kennedy]

Commercial Mortgage Fraud and Appraisers' Responsibilities
Legal Precedents
In fact, there has been a legal precedent for finding appraisers liable for losses caused by failure to verify, as in FSLIC. v Texas Real Estate Counselors, Inc. (1992). In this case, the appraiser was found liable for 1) failing to verify the alleged completion of improvements on the property, and 2) failing to disclose reliance on unverified data, when presenting estimates of value and effective age for the subject property.

In Fusco v. Brennan, the Superior Court of Queens County, New York, held that an appraiser's failure to independently verify the data supplied to him was so negligent that it warranted an inference of fraud, maintaining that the defendant had a duty to all possible investors to inform them of the type and source of data used and the extent of information omitted.
https://www.hg.org/article.asp?id=7093

 

[CANative]

What are trying to say? That the OP is considering committing fraud?

 

[hastalavista]

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.

I would not (and do not) jump to the conclusion that an ordinance violation creates an illegal use.
In my jurisdiction, for residential properties, new water heaters must be installed with a safety strap. Most are. Some are not (or the strap broke and has not been replaced).
I note that but I do not state that the SFR is an "illegal use" due to the violation.

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

This is the question. And here's the answer (mine, at least): A permissible use is a permissible use. A use allowed by the zoning, unrestricted (we call that a "use by right") is allowed.
In the OP's case, the use is an apartment. Presumably, as 12-units, it was legal. If the density does not allow for more than 12-units, and the alteration isn't grandfathered, then I would conclude that the use is now illegal. A 13-unit apartment building is not allowed on the site, and one could not be built. If I wanted to add a 13th unit and went to the city and applied for the permit to do so, they would deny me. 13 units are not "legally permissible" for my site. 13 units, as-is, fails the H&BU test in terms of legally permissible (as-is and as-vacant).

If, however, there is no density restriction and I could have 13-units on the site, then 13-units is legally permissible. As-vacant, it would be permissible to construct a 13-unit building. I'm good.
If 13 units are permissible and I've added an additional permit without permits when permits are required, then I have a legal use with an unpermitted alteration. The use is legally permissible, the alteration has not been permitted. I'm not changing the use or violating the allowable use-provisions, I've altered the building without the required permit. The remedy for this is to obtain the permit. If the use is allowed, it cannot be denied. The lack of permit may or may not have an impact on the value of that additional unit which should be analyzed.
The improvement (assuming 13 units is allowable) in its altered density is legally permissible. The lack of permit for the 13th unit needs to be disclosed.

 

[hastalavista]

Commercial Mortgage Fraud and Appraisers' Responsibilities
Legal Precedents
...losses caused by failure to verify, as in FSLIC. v Texas Real Estate Counselors, Inc. (1992)... 1) failing to verify the alleged completion of improvements on the property, and 2) failing to disclose reliance on unverified data, when presenting estimates of value and effective age for the subject property.

...In Fusco v. Brennan, the Superior Court of Queens County, New York, held that an appraiser's failure to independently verify the data supplied to him was so negligent that it warranted.

If you are advocating that appraisers need to confirm data, I don't think you'll have anyone disagreeing with you. Otherwise, I don't see the relevance of that excerpt to the question at hand.

Here is the the way to proceed in a nutshell (for this and all, similar scenarios) in regard to legally permissible:
A. Identify the property's physical characteristics. Identify its use (residential, commercial, etc.)
B. Review the zoning (if applicable) or any other development requirements that are applicable. Identify what uses are allowed and what the development standards are
C. Compare what exists to what the current regulation requires. If compliant, the improvements are legally permissible.
D. Compare what exists to what the current regulation requires. If different than what exists, go to the next step:
E. Determine if the subject is grandfathered; while it may not conform to current regulations, it is allowed to continue as-is. If so, H&BU as-vacant is likely different than as-is. As-is, if grandfathered, it is legally permissible.
F. If what exists is not consistent with what is allowed due to an alteration, then conclude then what exists is not legally permissible. Permits don't matter because one cannot obtain a permit for the alteration.
G. If what exists with the alteration is allowed, then the current use is permissible. If the alteration requires permits, identify that situation and consider it in the valuation analysis.
H. Disclose the steps taken to confirm the above.
I. Summarize the analysis used to make the conclusion.

There. Everything disclosed and USPAP compliant. The lender can then determine if it requires permits or not or if it wants to make a loan on the property or not.
Accurately stating what exists and what the zoning allows, describing the steps used to consider how "what exists" is evaluated, summarizing the conclusion, and then considering that conclusion in the valuation analysis is what should be done in all cases.

It really is that simple.

 

[CANative]

Nice Denis.

I'm going to copy that and save it. I think I might even post it to my FB appraiser friends.

 

[Mark K]

This is the question. And here's the answer (mine, at least):

So, to summarize, an illegal use is an ordinance violation but an ordinance violation might or might not create an illegal use.

In the case of the OP, it sounds like both a violation and illegal use. HBU, vacant, is for a 12 unit building. HBU, as-improved, is a continuation of the current 13 unit use, assuming the local authorities continue to overlook the transgression.

I can live with that.

And now, since its Indy 500 weekend and the parties have begun already, I think I'm done for the week. Have a good one.

 

[CANative]

I don't think your interpretation of Denis' post is completely accurate.

 

[hastalavista]

So, to summarize, an illegal use is an ordinance violation but an ordinance violation might or might not create an illegal use.

In a strictly logical analysis, you are correct.

• An illegal use is a zoning violation without any doubt and is an illegal use. No need to dig further on that.
  
• Permits for alterations may be required as well. The lack of a permit does not create an "illegal use". It may create an ordinance violation.

Both are contrary to an ordinance. One is never permissible and will not be allowed. The other, if permissible, can happen legally and will be allowed.

In the case of the OP, it sounds like both a violation and illegal use. HBU, vacant, is for a 12 unit building. HBU, as-improved, is a continuation of the current 13 unit use, assuming the local authorities continue to overlook the transgression.

The OP isn't clear on what is allowable. The OP states "12 legal units" and calls the 13th unit "Illegal". I don't know if it is or isn't; that's why, in my original post, I suggest the OP determine if the density doesn't allow 13-units (which would make it illegal in my opinion) or if 13 units are allowed but the 13th unit in this case simply has not been permitted (which would not affect the legality of the use- a 13-unit multifamily apartment- but still requires a permit).

What also should be remembered is this: An assignment that requires market value needs to conclude market value. Illegal improvements and uses have an impact on value, but do not create a situation (by itself) where market value cannot be credibly concluded and supported.
If the subject's use is illegal, then the H&BU as-improved isn't "as is". The as-is market value is "as-is" however; the impact on the illegal use is analyzed as part of that market value.

In an as-is market value assignment, the significance of illegal (or non-permitted alterations) impact the reporting requirements as well as the H&BU and valuation analyses. That's all.

And now, since its Indy 500 weekend and the parties have begun already, I think I'm done for the week. Have a good one.

 

[NachoPerito]

@CANative - I like the name Nachu Picchu I hope I can use that.

@DTB - Thanks for the vote of confidence (sarcasm). I was interested in the gallery's opinion because appraisers sometimes give no value to an illegal unit because it is illegal rather than analyzing the value of it on the open market. They feel they are hamstrung by rules and regulations and in the residential world, they are sometimes.

If I say the unit is illegal then it is illegal. Things are getting overcomplicated by assuming I haven't confirmed what I already stated as fact.

I will be talking to the brokers on both sides to determine the estimate of contributory value of the illegal unit and I will be talking to the local jurisdiction about the status of the subject property and the seller about the workmanship and reasoning for not getting permits. I will come to a conclusion of the contributory value and make sure to disclose boldly in the report that one unit is an illegal unit.

Now go back to badgering each other.