Zoning is the division of land into specific districts or zones to regulate how private property in California can be used, developed and maintained.
Zoning legislation is then enforced under local municipal or county laws.
The laws stipulate how a particular parcel of land may be used such as residential, commercial, industrial, agricultural or even mixed use purposes.
They may also stipulate further conditions such as height of structures, setbacks and density (the number of dwellings or amount of commercial floor space).
These laws exist to prevent the emergence of undesirable developments, such as a high rise building next to an airport, an industrial plant in a residential area or any build that does not complement its surroundings.
Zoning in California
In California, zoning matters more than in most other states.
This is because it is layered meaning any development has to satisfy each of the following:
The General Plan – the long-range blueprint for a city’s future development which legally outranks everything else
The Specific Plan – a document that implements the General Plan within a smaller, defined area
Base zoning – the underlying land use designation for a particular property
Overlay zones – additional rules pertaining to coastal or hillside regions, historic preservation, fire and flood precautions
State overlays – special zoning districts complying with state-mandated housing production requirements
Environmental constraints – anything deemed to have the potential to cause environmental harm as determined by the CEQA (California Environmental Quality Act)
In addition, many of these regulations are discretionary, political and litigable meaning they can take a lot of time and hence a lot of your money in interest payments if you hit a hurdle while funding a project.
Zoning issues that commonly impact flippers
Without thorough research, flippers leave themselves vulnerable to zoning issues that may not reveal themselves until after purchase.
These issues cause delays and denials, ultimately impacting the profit margin of the flip.
They include:
ADU assumptions that don’t hold up – Never assume approval. Size, height, setback, access and utility rules all still apply.
Non-conforming structures – Converted garages, renovations built pre code or duplexes on single-family lots are often permitted to remain on site but are not allowed to be expanded or rebuilt. This is a significant risk when buying distressed or inherited properties.
Setback and lot coverage violations – Flippers adding square footage may encounter FAR (floor area ratio) restrictions or plan on builds too close to property lines, over-max lot coverage or encroach into easements. These often contravene strict regulations regarding fire access, stormwaters and coastal or hillside protections.
Parking requirements – ADUs require replacement parking, bedroom additions trigger new parking counts while historic or coastal zones require enclosed parking.
Lot splits & SB 9 misunderstandings – SB 9 allows homeowners in single-family zones to split their lots or convert to a duplex. But local interpretations and specifics regarding access, frontage and slope limits can slow or curtail approvals.
General Plan violation – The General Plan always trumps local zoning rules – always.
Coastal zone issues – Expect headaches requiring separate approvals and significant delays.
How zoning affects lending and deal structures
Zoning is one of the first aspects lenders examine when considering a loan in California.
Uncertainty regarding planned improvements lowers the value used for LTV (loan to value) with lenders ignoring speculative upsides and pricing the property ‘as is’ rather than ‘as proposed’.
Hard and private money lenders cap the LTC (loan to cost) at 70-80%, hold rehab funds in draws and require interest reserves where entitlement risk exists.
Traditional lenders generally won’t fund these projects at all without approved permits.
Zoning uncertainty may also deter future buyers. Lenders tend to protect themselves with higher rates and shorter terms and may also demand personal guarantees.
If the CEQA (California Environmental Quality Act) gets involved, projects usually end up on life support.
It all underlines the importance of aligning zoning, scope of project and a watertight exit strategy for a smooth access to capital.
Zoning checklist for flippers
Some detailed preparation before purchasing a property can save a lot of time, money and heartache.
Flippers in California must thoroughly understand local zoning ordinances, leverage ADU laws and strictly adhere to new AB-968 disclosure requirements.
AB-968 demands sellers of single-family homes who bought the property within 18 months to provide buyers with detailed disclosures about recent renovations and repairs.
In addition, flippers are advised to:
- Always verify zoning before finalizing scope
- Work with local planners early
- Engage a real estate attorney to help prepare disclosures and reduce legal risks
- Partner with a seasoned real estate agent who can provide isights into neighborhood trends and market conditions
- For larger projects, hire a general contractor who can save significant time managing permits, scheduling inspections and ensuring work is code compliant.
- Seek a lender that understands California zoning nuance
Get finance and support today
Good zoning knowledge de-risks deals for both flippers and lenders.
It makes projects more likely to be funded and funded quickly.
Equidy is a hard money lender that understands real-world deal risk.
If a project stacks up, they will often approve loans in as little as 48 hours.
They stand by their core belief that anything is possible and they are determined to prove it every single day.
Even in difficult economic times, they love to reward entrepreneurship and strive to see their clients realize their wealth creation dreams.
But Equidy‘s services do not end there.
They have had an intimate and personal history with all aspects of real estate and property development in California for more than 40 years.
Equidy wants you to be successful.
That’s why they’ll help you navigate the long and winding road that comprise California’s zoning laws, to help make your project is a winner.
It makes them the ideal mentor or partner for your flipping business.
They will ensure you maximize the return on your investment without putting yourself at unnecessary financial risk.
Equidy enjoys long and established relationships with serious investors, sellers and real estate professionals while leveraging their reputation and trust, using clear communication to minimize the risk to all parties.
Contact Equidy today to book your free strategy call.
