Zoning and Land Use Issues in Hospital M&A Transactions

  The age and complexity of hospital real estate often result in zoning and land use issues that must be addressed in hospital M&A transactions.  In larger transactions, purchasers and their lenders frequently obtain zoning reports prepared by one of the national companies, which summarize existing code requirements and potential non-compliance by the hospital.  For smaller transactions, it is common for purchasers and their lenders to rely on a letter from the local Planning & Zoning office, which is often limited to confirmation of the zoning classification and whether there are outstanding zoning and land use violations.  While zoning reports and letters are helpful in identifying potential issues, parties to a hospital M&A transaction must carefully analyze the findings to determine if there is a bona fide issue that needs to be addressed.  Described below are several issues commonly encountered and how those issues might be addressed.   One of the more common zoning issues is the failure of buildings or uses of real estate to conform to current code.  Non-conforming buildings and uses are typically "grandfathered" from complying with the current code; that is, the non-conformance is permitted to continue.  But even if the facility is deemed to be "legally non-conforming", purchasers and lenders should confirm that a change in ownership will not cause the facility to lose its "grandfathered" status.  Most zoning codes will allow a non-conforming structure to be repaired if it is has been damaged.  However, jurisdictions have different limitations on the extent to which a damaged building may be re-constructed.  In many cases, an owner may not have the right to replace a substantially damaged structure. Another common zoning issue involves structures built on multiple lots.  Typically, a structure must be constructed on a single lot, and the local code will require certain setback distances between the building and the property line.  Over time, hospital buildings often expand over the boundaries of the individual lot, resulting in a single building being located on multiple lots.  Many jurisdictions now have a lot consolidation process by which a property owner can combine multiple lots into a single tax parcel.  In that event, the setback distances run around the entire larger parcel.  But, in many instances, the consolidation process did not exist or was not enforced at the time the construction occurred.  So if the local jurisdiction applies the setback distances to each individual lot, rather than the entire parcel, portions of the building may technically encroach into the setback areas of those individual lots.  If a zoning compliance letter is issued without any exceptions, the local jurisdiction often views the lack of lot consolidation to be a "grandfathered" and "legal non-conforming" condition.  If the lot consolidation process is required, it can frequently be accomplished through an administrative process, particularly if the hospital is the owner of the abutting properties.  From a practical perspective, many purchasers decide to voluntarily consolidate multiple lots post-closing in order to have a single tax parcel and address. Effectively addressing zoning and land use issues requires detailed analysis of the subject facilities, the timeline for any expansions, the local codes then in effect, and the policies and practices of the local jurisdiction.  With a careful evaluation of each of these factors, many zoning and land use issues can be resolved without adversely affecting a transaction.