Sunday, March 21, 2021

How to Navigate Legal Structures in Real Estate

As the real estate market attempts to move past the COVID-19 pandemic and progress toward a “New Normal,” federal moratoriums have become a way of life in real estate. Navigating the legal landscape of a local market has always been part of creating wealth in real estate. Every real estate marketplace is subject to its own local laws, as well as its state law and federal law. At the highest level, real estate investment and development is a game of understanding the rules—the applicable laws, ordinances, building codes, etc., and knowing when you can bend them in your favor through variances, court cases and lobbying. Although much of this may seem a little nefarious, it need not be, as our legal system was designed to establish a certain set of default rules for real estate, with a mechanism to allow for change in the event that either some rules are inapplicable generally or inadequate for a given situation. That stated, below are some ways to capitalize, navigate or at least survive the laws of any real estate market:

1. Choose Your Market Wisely

The most effective way to navigate any real estate investment is by carefully choosing the market in which to invest. Location, location, location once again proves to be a sage cliché. Being aware of legal risks and rewards is just as important to the analysis of any property as its income numbers and  property condition. The location of a property will not only determine the set of laws that an investor must navigate, but it will also determine the prevailing legal sentiment around the property. This sentiment will effect the laws passed in a given market and have a bearing on how local courts will view real estate disputes like waste, nuisance, foreclosures, evictions, etc. Understanding the local view of these issues will allow investors to accurately estimate the legal costs and make an informed investment decision as a result.

2. Know The Laws That Affect The Property

Understanding the applicable laws influencing property can be the difference between a profitable investment and a poor acquisition. Legal frameworks like rent control, affordable housing zoning and industrial tax credits will all effect the viability of an investment. This is especially true with real estate development, as many jurisdictions have detailed, idiosyncratic new development requirements that protect the rights of both the developer and the community. These requirements may affect zoning, construction ordinances, restrictions on selling and transfer of the property and even property taxes. An intimate knowledge of these regulations is essential, even if the purchased property is not newly constructed, as an acquisition that is economic in some jurisdictions can be rendered uneconomic by the prevailing local new development requirements. Please also keep in mind that recently renovated buildings can be considered “newly developed” in some jurisdictions and subject to new development laws.

In addition to new development regulations, investors must be aware of other laws that could affect properties. Building ordinances, for example, affect all properties, not just those that are undergoing construction and renovation. These ordinances are also present at every level of legislation from the federal American Disabilities Act and FHA guidelines all the way down to the village building code. Properties that are not compliant with the requirements of the local building code are subject to fines and violations, both of which eat into investment profits. Much of the same can be said for zoning ordinances. In most jurisdictions, there is a mechanism to apply for a variance or appeal for both zoning laws and the building codes. Variances to zoning are more frequent than building code appeals, as building codes are driven by use and public safety concerns, whereas zoning is primarily driven by municipal planning and use. Understanding local building codes and zoning laws is essential to real estate profitability. To do avoid doing so is to raise the risk of an investment by exposing it to additional risk that can be easily mitigated. Attorneys, expeditors and knowledgeable contractors are effective allies in mitigating this area of legal exposure.

3. Understand The City/Town/Village Plan

Every municipality publishes a plan of development for its area. Much has been stated and written about the importance of the local plan. This document outlines the areas that the local government wishes to develop and the incentives that it will provide to stimulate such development. Often times unviable projects become realities, because they are either moved to or fortuitously located in a development zone. Understanding the presence of incentives is essential to obtaining an accurate estimation of value for a property. The local municipal planning document will assist with such a determination.

4. Hire Great Professionals

This point is mentioned in numerous articles on this blog and above, so it won’t be expanded in much detail here. If legal analysis and/or real estate planning is not a strength, it is important to hire professionals to ensure that the necessary information is readily available.

5. Remember That It’s Not Personal

Laws reflect the dominant ideology of an area. Every area has its own context, demographic and history, which leads to a prevailing sentiment of how real estate should be managed by default. In other words, real estate laws are a collection of the most popular ideas of how real estate should be run in an area. Most people aren’t anti-investment, nor are they against wealth per-se. Most voters, however, will vote to protect their interests and this takes different forms in different locales. In most instances, with notable exceptions, real estate laws are not enacted for personal reasons and, in the absence of extreme lobby power, there isn’t much any one investor can do to change the laws. The most viable course of action for most investors is to be aware of the legal scheme that affects a property, earnestly consider if the local laws work for the investor’s criteria and find viable ways to navigate the relevant laws.

So, this is my take on how to navigate legal structures affecting a property. This a high-level view of this topic. This post definitely could have been substantially longer, but I am happy to discuss your comments below.

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