Real Estate

Would you buy a multidwelling building where zoning prohibits reconstruction in case of total loss?

  • Last Updated:
  • Dec 5th, 2017 6:47 pm
[OP]
Deal Addict
Feb 21, 2004
1431 posts
198 upvotes
Montreal

Would you buy a multidwelling building where zoning prohibits reconstruction in case of total loss?

I'm faced with a dilemma with a building I have on contract that I can still easily get out of.

Upon my own due diligence, I discovered that the building (20+ appartments) currently benefits from a special zoning dispensation that allows it to function normally without any constraints. HOWEVER, in case of a total loss due to a fire, the city would NOT permit reconstruction of the same building on that land and would only allow single family housing in that zone.

I checked and from an insurance perspective, the total reconstruction cost would still be covered but we would be responsible of finding another piece of land to reconstruct it on which is not easy to do in this suburban setting.

What would you guys or gals do in this situation? Ever been in such situation?
6 replies
Deal Guru
User avatar
Mar 23, 2008
11575 posts
7841 upvotes
Edmonton
Have you checked to see if your lender (assuming you have one) is comfortable with this caveat? It seems like it might affect their collateral in the case of a total loss fire, which wouldn’t be the case in a normal situation.

C
[OP]
Deal Addict
Feb 21, 2004
1431 posts
198 upvotes
Montreal
Most lenders will simply require a title insurance, I checked this part out.

Insurance will either pay for full insured reconstruction cost or pay out a depreciated amount.
Sr. Member
Nov 8, 2006
802 posts
290 upvotes
Toronto
It all depends on the environment and how comfortable of the risk.

What are the chances of a total loss? Earthquake or a major fire only...

Aside from these 2 catastrophe, its pretty hard to damage 20+ apartments.

Even if there is total loss, i think its a good deal since single family can go for a sale of the property to get out....or depreciated amount to do whatever you want.
[OP]
Deal Addict
Feb 21, 2004
1431 posts
198 upvotes
Montreal
I'm just worried lets say next year it goes on fire and its a complete loss. I'll still have a substantial mortgage on it and the depreciated amount wouldn't cover it.

I guess I'll have to negociate the value of the building down drastically or walk away
Deal Guru
User avatar
Mar 23, 2008
11575 posts
7841 upvotes
Edmonton
HoTiCE_ wrote: I'm just worried lets say next year it goes on fire and its a complete loss. I'll still have a substantial mortgage on it and the depreciated amount wouldn't cover it.

I guess I'll have to negociate the value of the building down drastically or walk away
This is why I questioned whether a lender would extend credit on it. They usually like to keep their butts covered. But I don’t buy apartments, so...

C
Deal Addict
Jan 15, 2017
3528 posts
2884 upvotes
In the case of a total loss, the condo corp and any assets (which in this case would be land value) would be sold and then distributed. As the land would be rezoned for single family home only, it's value would be significantly reduced.

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