Zoning Non-Conformance Insurance

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Zoning Non-Conformance Insurance

Zoning Non-Conformance Insurance (“ZI”) protects lenders in commercial real estate financings from a loss that results from a peril not otherwise excluded that damages or destroys a building or buildings such that it cannot be rebuilt to the same size and purpose due to zoning ordinances. Most zoning ordinances require a non-conforming property that suffers damage beyond a prescribed threshold to be rebuilt in compliance with current zoning ordinances. This can leave commercial real estate lenders with a potential loss based on the cash flows and value of the property as rebuilt.

ZI provides advantages to commercial real estate owners, developers and lenders by enhancing commercial real estate financings.

  • Lenders use ZI to protect against losses to individual loans. Coverage can also be written on a static portfolio basis.
  • Owners and developers use ZI to enhance their ability to complete financings and to reduce borrowing costs.

How does ZI work? ZI is put in place with the payment of a single premium at the inception of the financing. If the property suffers a loss from a peril not otherwise excluded that is equal to or greater than the level of damage that requires the property to be rebuilt to comply with current zoning ordinances, the insurance company will pay the lender an amount equal to the outstanding principal balance of its loan less: (i) the amount of the underlying property insurance proceeds; and (ii) the value of the land as appraised at the time of the loss. The lender retains its lien on the property and can exercise its rights and remedies against the property to collect any remaining amount it is owed.

The target customers for ZI include lenders, real estate owners and developers, investment and mortgage bankers, and professional services entities like law firms and accounting firms.

ZI is available for most commercial real estate property types including: office, retail, industrial, medical multi-family and parking garages. Specialty properties are considered on a case by case basis.

Currently, CRE Insurance Solutions only brokers ZI coverage for lenders.

ZI is part of a series of policies designed to help property owners, developers, investors and lenders close critical gaps in insurance protection. Other coverages include: Lease Enhancement Insurance, Residual Value Insurance and Shortfall Insurance.

This document is a brief description of a type of policy that CRE Insurance Solutions brokers to insurance companies providing Lease Enhancement Insurance. The policy terms and conditions govern the contract between the insured and the insurance company and this document does not create any coverage or expectation of coverage. If you are interested in this type of coverage, please contact us and we will provide you with a copy of the form insurance policy for this coverage.