From Zoning to Occupancy Certification: Understanding the Basics.

Understanding the Basics Can Help Buyers, Sellers, Tenants and Landlords Negotiate Better Deals, and Avoid the Timely and Expensive Pitfalls that Invisible Code Barriers can create.

Often in my experience, it seems the most highly qualified commercial real estate brokers will successfully identify the allowable zoning uses for a building and its spaces, ensuring that their client is allowed by the local zoning ordinances to move forward with their proposed use, per the zoning, at the proposed location.

That said, the feasibility review often stops there, without consideration of the existing spaces certificate of occupancy, and if the proposed use will trigger a change of occupancy. The existing occupancy certificate in place (if any), and any potential “change of occupancy,” have incredibly serious implications to buyers, sellers, tenants, and Landlords. Project build out costs, timeline, code related upgrade requirements, and sometimes, project feasibility, are all impacted by these invisible unknown code considerations.

A basic understanding of zoning and occupancy classification, and how it impacts a project, can be a great tool for avoiding some of the larger unforeseen code hurdles.

Lets clear this up……Zoning and Occupancy are two entirely different things.

Zoning, or the “zoning code” refers to a particular ordinance, developed by local city or county, designed to control allowable property and land uses within their local jurisdiction. Generally speaking, it typically includes regulations on how the land can be used, the types of buildings that can be constructed, their general aesthetics, the number of parking spaces required, the height and density of development in the area, specific sidewalk and green space requirements, and more. Zoning also covers allowable uses, as designated by zoning districts. Each zoning district in a community typically has different allowable uses for the properties within it.

Zoning laws can vary tremendously from one city and county to another, as they are decided and modified on by the hyper local municipalities.

Occupancy classifications, contrary to local zoning, are prescribed by the state building code. North Carolina currently uses the 2018 North Carolina Building Code. Per the code, occupancy refers to the use or purpose for which a building or a portion of a building is intended to be used. All occupiable spaces fall into one of the occupancy classifications determined by state code, as outlined in a simplified form below.

The 2018 North Carolina Building Code generally classifies occupancies into the following groups:

• Group A: Assembly, which includes places where people gather for civic, social, or religious functions, such as theaters, churches, and auditoriums.
• Group B: Business, which includes offices, banks, and professional services.
• Group E: Educational, which includes schools, colleges, and daycares.
• Group F-1 and F-2: Factory and Industrial, which includes buildings used for production and manufacturing.
• Group H-1, H-2, H-3, H-4, and H-5: High Hazard, which includes buildings used for the storage and handling of hazardous materials, such as explosives or flammable liquids.
• Group I-1, I-2, I-3, and I-4: Institutional, which includes buildings used for medical or care services, such as hospitals or nursing homes.
• Group M: Mercantile, which includes buildings used for the sale of merchandise, such as retail stores and shopping centers.
• Group R-1, R-2, R-3, R-4: Residential, which includes buildings where people sleep, such as apartments and hotels, motels, and boarding houses.
• Group S: Storage, which includes buildings used for storage of goods, such as warehouses and garages.
• Group U: Utility and Miscellaneous

Once a space is designed and built per the code to serve one of the previously listed occupancies, a “Certificate of Occupancy” is issued. A Certificate of Occupancy (CO) is a document issued by the local government or building department inspector, to verify that a building or portion of a building complies with all applicable building codes and regulations as they relate to a particular occupancy. The CO is typically required before a building can be occupied, and it confirms that the building is safe for the intended Group, and that Group alone. The specific occupancy classification of the space will be listed on the issued certificate of occupancy. The CO will typically indicate the approved occupancy classification, maximum number of occupants, and any specific use restrictions.

How can occupancy certification impact my project, or my intended use of a property?

The existing Certificate of Occupancy, and the planned future use of the space can have profound impacts on the building code requirements for the build out, and the level of cost and complexity to transition a new use into a space. This is totally independent of the allowable zoning. Let’s look at a couple of scenarios:

Scenario One – No change of occupancy: Say the tenant wants to do a hair / beauty salon. Under the building code, this falls into a “Group B” occupancy for professional services, as outlined above. Now let’s say the space they are looking is currently used as a real estate office, which is also a “Group B” occupancy, and the building department has a valid Certificate of Occupancy for a “Group B” use on file. This makes for a relatively smooth transition in tenants, as there is no change to the occupancy Group of the space, per the building code classifications, and upgrades required to the space are likely to be minimal. While a hair salon and a real estate agent office are very different functions, they fall into the same occupancy classification, and this makes for a relatively simple changeover in this scenario.

Scenario Two – A change of occupancy: Say a restaurant wants to move into that same real estate office. The space has a Group B occupancy for the office use. If we look at the classifications, the restaurant, which is allowed per the zoning, has a Group A Occupancy. This triggers what we call a change of use in the building code. A change of use can have too many impacts to cover in this article, but almost always triggers code related upgrades. Things like sprinklers, accessibility features, updated egress requirements, changes to fire protection and other code related upgrades all come into play with a occupancy Group change…. the list goes on.

Failing to plan for the unseen code considerations can have big cost implications.

In the scenario, the hair salon is a dramatically easier, and more economical, lateral tenant change than the restaurant. We are talking months of work and extra costs saved by avoiding the change of Group, if the change of Group even turned out to be feasible. Sometimes it’s practically impossible, depending on the building and the group change. These code considerations are often not seen, understood, or counseled on in early negotiations and due diligence. They often surface after an agreement has been executed and cause big headaches to all parties.

In Practice

While there’s no substitute for bringing in an architect for a full building code analysis. Landlords, Sellers, Buyers, and Tenants should all know the status of a spaces certificate of occupancy, what group the certificate covers, and if they trigger a change in the group. This is a great starting point to understanding the general complexity of the project, and an important factor in determining if a property or tenant is worth further pursuit. Sellers should also take note to be sure they have copies of all their certificates of occupancy, and that there are not outstanding violations or open permits.

Note: This information in this article is intended for general informational purposes only and should not be construed as legal or professional advice. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability of the information contained herein. Always seek professional advice and conduct thorough research before making any decisions or taking any actions based on the information provided in this article.