Zoning Considerations in Manufactured Home Park Acquisitions

Obtaining a zoning report or zoning conformance letter is a standard buyer due diligence practice in many real estate acquisitions.

A zoning report is compiled by third-party vendors and typically includes excerpts from the zoning code and analysis of whether the property in question appears to comply with applicable requirements concerning permitted use, setbacks, building area, and other matters governed by the code. A zoning compliance letter, by contrast, is a statement directly from the applicable zoning authority regarding the property’s zoning classification and/or compliance with specified zoning requirements.

Investigating zoning compliance is a must for a prudent buyer, as acquisition of a property that fails to comply with applicable zoning requirements could be a very costly mistake. If the municipality is not willing to grant a variance or other necessary relief, the buyer could be prohibited from using the property as originally intended, or be forced to remediate the violation at the buyer’s own cost.

Zoning reports and conformance letters may indicate whether the property’s existing use and improvements are legal conforming, legal nonconforming, or nonconforming (or potentially non-compliant). A legal conforming use or improvement complies with the current requirements of the applicable zoning code. A legal nonconforming use or improvement does not conform to one or more current requirements but is nevertheless lawful and permitted to continue. This is common where the use or improvement lawfully existed before the zoning code was either put in place or amended (i.e., it is “grandfathered in”) or where the property was subsequently incorporated or annexed into a municipality with different zoning requirements.

However, while standard zoning diligence practices may reasonably establish that a property is lawfully operating in its existing condition, in transactions involving manufactured home communities (“MHCs”), this may be insufficient to protect the buyer against zoning-related issues that could crop up post-closing in connection with ordinary business operations.

For example, consider a 100-site MHC that has been legally operating for 50 years but no longer complies with current setback and density requirements. A prospective buyer has obtained a zoning report that describes the community as legal nonconforming. The buyer wants to know: Can the buyer replace an outdated home with a new one without the community losing its legal nonconforming status? What about a home that burns down, or is otherwise materially damaged? Can homes be moved onto lots that are currently vacant? All of these questions could affect deal underwriting, but a typical zoning report might not provide sufficient comfort. Even the fundamental conclusions in a zoning report (or the affirmative opinion of a government official) as to conformance may not hold up in court if the language of a local zoning code is ambiguous or out of alignment with applicable state or federal law.

State Law Limitations on Local Zoning Authority

Although the terms “mobile home” and “manufactured home” are often used interchangeably in ordinary speech and in local zoning codes, the terms may be substantively distinct under federal and state law. The National Manufacturing Housing Construction and Safety Standards Act (42 U.S.C § 5401) uses “manufactured home” and subjects all such structures to certain minimum standards. Many states use the term “mobile home” to refer specifically to homes that were built before 1976 and are not subject to HUD regulations. One example of the significance of this distinction is found in City of Freeport v. Vandergrifft, 26 S.W.3d 680 (Tex. App. 2000), wherein a municipality sought to enforce its zoning ordinance against the placement of a post-1976 manufactured home; the court concluded that the ordinance failed to take into account the difference between mobile and manufactured homes under Texas state law, and was therefore inapplicable to the home in question. Accordingly, a zoning compliance analysis based solely on the text of a local ordinance (or the municipality’s interpretation of that ordinance) may be incomplete if state law limits or preempts the municipality’s authority.

Replacement of Outdated or Damaged Homes

Unlike conventional multifamily residential properties, an MHC consists of a single community comprised of numerous individual homes, which may be owned by the landowner (or an affiliate) or by the individual residents. This structure may create uncertainty as to whether a finding of conformity (or legal nonconformity) applies to the community as a whole, to individual homes, or to both. Certain regulations, such as setback requirements, plainly apply at the level of an individual home or pad site. The applicable code might nevertheless define a permitted use at the community level. Imagine the following: The owner of a legal nonconforming MHC replaces an existing home with a new home that is somewhat longer. The replacement home complies with all current setback and size requirements applicable at the structural level, but the code prohibits the enlargement or expansion of a nonconforming use. Does this action qualify as an expansion of the use? More concerningly, could it affect the legal status of the community as a whole?

Courts have not been entirely consistent on these questions. In Stagecoach Trails MHC, L.L.C. v. City of Benson, 232 Ariz. 562, 307 P.3d 989 (Ct. App. 2013), the Arizona Court of Appeals determined that the relevant nonconforming use was that of the park as a whole, rather than each individual space. Other courts have found that the replacement of an individual home with a larger model constituted an impermissible enlargement of the nonconforming use. See Wiltzius v. Zoning Bd. of Appeals of Town of New Milford, 106 Conn. App. 1, 940 A.2d 892 (2008).

Some zoning codes distinguish between a home that is replaced due to casualty from those that are replaced for other reasons. A municipality might consider voluntary replacement to constitute abandonment, while distinguishing casualty-related replacement due to its involuntary nature. Another might permit reconstruction up to a certain damage threshold (e.g. 50% of the home’s assessed value) while prohibiting replacement following a total destruction. See Mousseau v. City of Daphne Bd. of Zoning Adjustments, 6 So.3d 544 (Ala. Civ. App. 2008) (affirming prohibition of replacement of casualty-damaged home when the damage exceeded the threshold set forth in the ordinance); Dial Away Co. v. Zoning Bd. of Appeals of Auburn, 41 Mass. App. Ct. 165, 669 N.E.2d 446, 450 (1996) (distinguishing voluntary and involuntary demolition under the zoning code).

Addition of Homes to Vacant Lots

Even if the protected nonconforming use attaches to the MHC as a whole, the addition of new homes within the existing boundaries of the MHC may constitute a prohibited expansion of such use, as occurred in one New York case; see Cave v. Zoning Bd. of Appeals of Vill. of Fredonia, 49 A.D.2d 228, 373 N.Y.S.2d 932 (1975). In other cases, the determinative factor was the number of lots existing at the time of the adoption of the current regulations, or whether the manifest intention of the owner at the inception of the nonconforming use was to devote the entire parcel to such use. The distinction could have significant implications for underwriting. A buyer evaluating an MHC with 150 pad sites, of which only 120 are occupied, may assume that the remaining 30 sites may be populated after closing. The physical existence of a pad site or an associated utility hookup, however, does not necessarily establish a continuing legal right running with the land to place a home on that site. The diligence process should accordingly include an investigation as to the historical site count and the vacancy history of the MHC.

Conclusion

The general conclusion in a zoning report that an MHC is “legal nonconforming” may be insufficient to protect a buyer of the property. Diligence should also consider:

• whether the protected use attaches to the community or to the individual home
• whether an individual home may be replaced with another of the same or different dimensions and under what circumstances
• whether homes can be placed on vacant lots and at what point vacancy may terminate that right
• whether the replacement, modification or expansion of a home could affect the legal status of the entire community.

In addition to careful review of the zoning code, counsel for buyer should research applicable state law and/or work with local zoning counsel to answer these questions with greater certainty. In an MHC acquisition, it is vital to determine not only whether the community can operate lawfully on the closing date, but also whether the buyer may continue the ordinary replacement, re-tenanting, and maintenance activities on which its underwriting depends.

Conducting due diligence on an upcoming purchase? Reach out to Joy Kerr or another member of LP’s Real Estate Group.