Commercial Lenders and Zoning Endorsements
Commercial real estate lenders are very careful today and are doing a doing a complete risk analysis of projects prior to funding commitment. The real estate market collapse of the past few years has taught them the dangers of "lending blind". Lending blind is funding the loan without completing due diligence research and conducting risk analysis from a legal firm, zoning consultant, borrower authority or local municipality.
One component of funding includes title insurance. Lenders require the borrower to purchase title insurance for the commercial real estate property. Title insurance protects lenders and borrowers against events that may have occurred in the past with the property or previous owners. Title insurance protects against claims from defects such as encroachments, liens, encumbrances, easements, fraud and more.
When insuring commercial property, title insurers issue the standard ALTA policy (please see new 2011 ALTA requirements under resource downloads on PZR® site). However the following matters are expressly excluded from the coverage of this policy.
"Any law, ordinance or governmental regulations (including but not limited to building and zoning ordinances) restricting, regulating or prohibiting the occupancy, use or enjoyment of the land, regulating the character, dimensions or location of any improvement now or hereafter erected on the land, prohibiting a separation in ownership or a reduction in the dimensions or area of the land, or the effect of any violation of any such law, ordinance or governmental regulation."
Zoning assurances are not part of the standard ALTA title policy. Lenders following sound and safe lending practices are requesting the two types of zoning endorsements to be added to the title policy.
Zoning Endorsement 3.0 is used primarily for vacant land before construction commences and informs the insured of the zoning classification applicable to the land and the uses permitted by that zoning classification plus insures against loss or damage that my be sustained by reason of inaccuracy in the information supplied or by reason of a final judicial determination invalidating the zoning ordinance. It may be issued with a loan policy only.
Zoning Endorsement 3.1, used primarily for improved property, insures against loss or damage that may be sustained by reason of a final judgment requiring the removal or alteration of existing structures on the land by reason of their violations of the zoning restrictions imposed on the use of the land relating to the site, floor area, set-back lines, and height of the building.
By adding zoning endorsements along with other endorsements to the tile policy, lenders are following safe and sound lending policies which protects them and their clients.