Commercial Loans and Fun Blog

Commercial Loans - Conforming Property and Non-Conforming Property

Posted by George Blackburne on Mon, Feb 26, 2018

Nonconforming property.jpgAll of my work life I have heard smart real estate people use fancy terms like conforming, legal nonconforming, illegal nonconforming, conditional use permits, and variances.  I would always nod my head and try to look intelligent, but the truth is that I never knew what the heck they were talking about.

Then I read the following blog article by Dan Harkey, one of the smartest minds (the smartest?) in the hard money business.  With Dan's generous permission, I am republishing his recent blog article, Conforming vs. Nonconforming - Making Your Property Lending DecisionsDan writes:


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Conforming vs. Nonconforming -
Making Your Property Lending Decisions


When underwriting commercial real estate loans, or even residential loans, as a lender, it is absolutely necessary (George: Note the emphasis) to determine the property's conforming status.  Is the subject property conforming, legal nonconforming, or illegal nonconforming?

Conforming Use

A conforming use is one where the subject property is in compliance with local zoning laws and the use of the property is legally permitted. Conformity is a byproduct of zoning laws and municipal ordinances which may change over a period of time.


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Legal Nonconforming

A legal nonconforming use is a use of lands or structure which was legally established according to the applicable zoning and municipal building laws at the time, but which does not meet current zoning and building regulations. A use or structure can become legal nonconforming due to rezoning, annexation, or revisions to the Zoning Code.  (George:  The government changed the rules.).

As long as a nonconforming property’s use status does not change, its legal nonconforming designation may be protected by municipality or regulatory agency. A legal nonconforming designation usually requires the property to be in continuous use. If it is vacant for a period of time, its legal nonconforming status may be lost. In some communities special or conditional use permits, variances, or site development permits may be obtained to extend or even modify legal nonconforming use.


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Communities vary in the way they treat legal nonconforming properties which are destroyed. Most will allow the rebuilding of the property to its prior condition only if 50% or less of the structure is destroyed. If, however, the entire structure is destroyed, most often the owner would be required to rebuild to current zoning standards.  (Helloooo?  Are you lenders pay attention?  You could easily lose your butt if you could only rebuild two units rather than four!)  

A lender in such a case may experience a serious loss in collateral value but may be able to mitigate such a risk by obtaining the correct property and casualty insurance coverage.  Endorsements to hazard policies may be available that would allow insurance proceeds to be used to build a different structure as a result of changes to building laws and ordinances. (Pay attention here!  Lenders should can get a special endorsement to the fire insurance policy.)


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For example, a retail strip center situated on a small lot may not have enough parking spaces to comply with current zoning requirements. If zoning changes regarding parking requirements have increased from requiring 3 spaces per thousand square feet of building to 4 spaces per thousand, the owner may be required to reconfigure the retail center’s footprint. The owner should seek knowledgeable insurance counsel to obtain this special protection. The lender should verify the type of coverage and require that they be named as mortgagee and loss payee as well as an additional insured.


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Illegal Nonconforming

Lenders are most at risk with a property which is nonconforming and has been illegally modified or is operating without proper conditional use permits. For economic reasons, owners may elect to illegally modify a property to a use that falls outside current zoning standards or the use permit framework. For example, a 4-unit building of 2 bedroom/2 baths units is converted into an 8 unit building of 1 bedroom/1 bath units.  If done covertly, without approvals or permits, it becomes illegal nonconforming.  This process is sometimes called bootlegging.

This example of bootlegging may be perceived as subjecting the surrounding community to unnecessary burdens.  Negative impacts could include traffic, ingress and egress, inadequate parking, more transient occupancy, and a lack of approved (and possibly dangerous) electrical, plumbing and general construction.


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Dan Harbkey.jpgDan Harkey has worked for over 45 years in the hard money lending business.  (To old veterans like myself, Dan is respected as an icon.). He currently consults with borrowers in need of hard money loans.  Dan can be reached at 949-533-8315 or at


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Topics: non-conforming buildings

Commercial Loans on Legal, Non-Conforming Properties

Posted by George Blackburne on Wed, Sep 4, 2013

A legal, non-conforming property is a commercial property that was legally built years ago, but it could not be newly built today on the land, as the land is currently zoned.  A couple of examples will make this more clear.

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Let's suppose that fifty years ago a developer built a 60-unit apartment building in downtown San Francisco with no on-site parking.  Since then the City of San Francisco enacted a municipal ordinance that says every two-bedroom apartment building must have at least one on-site parking space, and every three-bedroom unit must have at least two on-site parking spaces.

This apartment building - the old one with no on-site parking spaces - does not have to be torn down.  It's was legal when it was first constructed, and it is therefore still legal.  However, it no longer conforms to the current city ordinances.  It is non-conforming.

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Here's another example of a legal, conforming building.  Suppose that Florida city planners observe that stick-built apartment building adjoining the Atlantic Ocean fared particularly poorly during hurricanes.  After seeing countless such apartment buildings destroyed along the coast, the city planners for most coastal Florida cities adopt an ordinance forbidding the construction of multi-family dwellings within a half-mile of the coast.  Does that mean that all of the apartment building buildings along the Florida coast have to be torn down?  No.  It just means that they are legal, conforming buildings.

Legal, non-conforming buildings can be repaired; but if such a building is substantially damaged - say, in an earthquake or a fire - it cannot legally be rebuild.

Okay, so what?  The lender will insist on a fire insurance policy, right?  If the building burns down, the lender simply gets paid off by the fire insurance proceeds.

Many times this is true; but sometimes a legal, non-conforming commercial building is worth far more than its replacement cost.  Absent a special endorsement to the fire insurance policy, the fire insurer will only pay for the replacement cost of the building!  What if your commercial loan is much larger than the replacement cost?  Yikes!

For example, this 60-unit apartment building might only cost $2.8 million to rebuild, but it might be worth $6 million (before the damage).  Based on the cash flow, a reasonable commercial lender might have placed a $3.9 million commercial loan on the property.  The building burns down.  The insurance company hands the commercial lender a check for just $2.8 million, the building's replacement cost, because the building cannot be rebuilt.  The lender has just eaten a $1.1 million loss.  Ouch!

Okay, so how does a commercial lender protect himself?  He obtains a special endorsment to the owner's fire insurance policy, called a ________________ (anyone know?), that pays more than the commercial property's replacement cost if the building burns down or is otherwise destroyed.  This special endorement to the fire insurance policy costs around 15% to 20% more than a guaranteed replacement cost policy.

My own private money commercial mortgage company, Blackburne & Sons, will gladly finance legal, non-conforming commercial properties.

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Topics: legal, non-conforming buildings