LaPlante Appraisals' Blog

A housing shortage has resulted in some cities and states to change zoning usages to allow for things such as Accessory Dwelling Units (ADUs). Instead of allowing one single family home on a plot, several cities have changed zoning to allow multi-family units (2-4units) or an ADU. In November 2023, the City of Phoenix changed zoning laws for R1-6 (Single Family Dwellings) to allow for Multiple Dwellings. You can read the details of the change on the city pf Phoenix Zoning Ordinances.  There are many different opinions about these new zoning changes. Just as with any change-there are always two sides to the argument.  

FOR ZONING CHANGES:
One pro is this change allows for multi-generational families to live on the same property with separate homes. Whether they are aging baby boomers or recently graduated college students, they can have their own house on the property while maintaining the feeling that they are not living on top of one another. 

Secondly, with the increase of inflation and the cost of living, people are now looking for 'side hustles' to make some extra cash. One of these 'side hustles' is investing in income producing properties such as: Air BnB or VBROs. With the opportunity to live on the same property and build another home for income producing purposes, Phoenicians can have additional supporting income. 

AGAINST ZONING CHANGES:
With increased buildings and populated lots, there are some potential problems. Due to sewer, water and electrical lines not built to support 1-4 dwellings on an individual lot, these utilities are at risk. Utilities were designed to service single family homes, however with a change in zoning allowance, utilities will need to be upgraded thus increasing taxes or utility bills to accommodate. 

Another thought is that although having multi-generational living situations sounds wonderful, there will be a time when large developers will come in to buy out these multi-generational properties. Homes that need rehabilitated will be bought out by developers who have the cash to do so. They will likely tear down the existing dwellings and build multi-dwelling units. Developers have the money to do so, which in turn will lead to tearing down current residential homes to build larger multifamily complexes.

Finally, these zoning changes will impact lending. When a home is zoned single family, banks have various loan options available. Payments are spread over 30 years, buyers can put down 3.5%, and there are lower interest rates due to 'risk' assessment. However, once a property is zoned for 5+ units, it becomes a commercial property. A commercial property requires higher interest rates, increased down-payment and more requirements to secure a loan. Therefore, making it more difficult for the average Phoenician to buy a house when competing again developers with larger pocketbooks. 

Whether you agree or disagree with these zoning changes, it is important to know both sides of the argument. LaPlante Appraisals strives to educate the public on Appraisal related topics. No matter if you are an investor, developer, homeowner, or future homeowner, these changes can impact you directly.

Kari, Good article. In much of the recent talk about up-zoning, I do think that specificity about the zoning change is important before blanketly declining a property 'commercial'. If zoning REQUIRES 5+ units, then that zoning will be a limiting factor in the highest and best use analysis, and I would agree that you are dealing with a commercial property (by the definition of more than 4 units). On the other hand, if the zoning merely ALLOWS additional units, then a highest and best use analysis might still conclude a residential highest and best use. In this way, it is no different than a property with no zoning at all. No zoning by definition ALLOWS all uses, therefore in the highest and best use consideration all uses are legally permissible. I don't know of any appraiser that would declare that all properties without zoning should be considered commercial. This is where the other elements of H&BU have to be considered. If a commercial use is not physically possible, financially feasible, or maximally productive, then it is not a commercial property. This means that in the consideration of up-zoning, if a property was formerly zoned single family and has been up-zoned to allow for up to 6 units, then we just have a wider range of legally permissible uses. That doesn't make it a commercial property. If the lot size limits the physical development to one or two units, then that would be the limiting factor, and thus the H&BU would be residential, regardless of the zoning. Very interesting times...thanks for contributing to the discussion.

Agreed. Highest & Best Use (HBU) definitely determines the use of a property not necessarily zoning. I was just trying to provide some informative points of views to the average person who is not familiar with HBU. Thank you for contributing to the conversation and bringing to light further explanation on the topic. I will definitely circle back around at a later date with a post about Highest and Best Use as I know most borrowers don't understand what that entails.