1 unit with commercial space

[Gabriel R.]

Hi BP,

I'm in the process of buying a property and have been inform by the lawyer that there is a zoning issue with the property.  I have a property under contract that was listed as a 3 flat with a non conforming unit in the attic.  The property is zone B3-1.  There are currently 3 tenants on the premise paying $100 under market. After running numbers on the BP Calculator I'm looking at a cap rate of 8%. After the Inspection was done on the property the report reveal that the property would need considerable work.  For instance it will need a new roof and there is some "bulging" on one side of the building. A side from this im looking at adding new boilers and windows down the road.During the appraisal the appraiser noted that "The appraisal is made: Subject

to de-conversion of the illegal apartment in the attic $600"   

The seller claims he got a permit to build the attic and that it's grandfather in.  We are in the process of seeing if we can pull a permit for this.   If I have to de-convert the unit that will take a 3rd of the income of the table and will make the deal not as appealing. 

Today I received an email from the sellers lawyer saying they will provide 10k as repair credit BUT that I should be aware that the zoning certificate came back as 1 UNIT WITH A COMMERCIAL SPACE.  My lawyer is looking into this but I wanted to know if anyone has run into something similar? The 1st floor was originally zone for commercial but has since been converted to an apartment.  What  type of implications will this zoning have on my loan? Will I need to convert that unit back to commercial space? 

Any feedback is greatly appreciated. 

[Matthew Olszak]

@Gabriel R. What kind of loan are you using? As a buyer, that zoning certificate should be totally unacceptable even if you were purchasing with cash. I've used a company before that dug back into the water dept. records years and years back and was able to justify w/ the city that a 2 unit building was actually a nonconforming 3 unit. But it sounds like the seller has already been working on this with their attorney, so I worry that they might have known this all along and are playing dumb now. See if they've done anything to push back at the city about this not being a mixed use building.

If a permit was really pulled, an FOIA request w/ the building dept. should be able to find that, especially since he should know more or less when that occurred. Are there any violations on the property now or previously that could shed some light on the issue? Current zoning isn't so much an issue as long as you can justify that the current use has existed and was conforming prior to the city changing the zoning.