By-right zoning versus a better building that needs a special exception, for a boarding house

Question

A buyer choosing between two boarding house opportunities that split exactly on whether the use is permitted by right or requires a hearing is working through one of the clearest risk trade-offs in this asset class. Option one sits in a district where rooming houses are a permitted use by right, subject to license and inspection, in a tired 1920s frame house, 8 bedrooms, knob and tube wiring in half of it, one bath per floor. Code work there is real, likely 70 to 110k depending on how the sprinkler threshold reads in that jurisdiction, a plan reviewer question that varies by state and city. Option two is a masonry building with 6 baths, 11 rooms, wide stairs already in place, and drawings from an earlier attempt, but the use requires a special exception in that district, with four single family blocks on three sides and a history of similar hearings failing in that room over less. By-right removes the community risk entirely and puts all the risk in construction, which is at least biddable. A special exception puts the risk in a room full of neighbors, which cannot be bid, but clearing it delivers a much better asset with lower long-term maintenance and a bath ratio that holds tenancy. Soft costs at risk before the outcome of a special exception is known, commonly in the range of 18k, are the real price of finding out which way that hearing goes.

megan_doyle15 · Answer

Why is the 18k spent before you know anything? Can't you ask the planning staff informally whether they'd support the exception before you spend on drawings and a traffic study or whatever it is. I assumed staff opinion counted for something even when the decision sits with a board.

Rena Expert · Answer

Rigging, staff input often matters and a pre-application meeting is usually available, but in most jurisdictions a special exception is decided by a board or commission that is not bound by staff recommendation, and the weight given to neighbor testimony varies by state and by the standards written into the ordinance. Confirm the actual decision standard in the text of your ordinance rather than assuming, and get the pre-application notes in writing.

Parcel, the two options are not comparable until you price the code work as a range instead of a point. The by-right house at 70 to 110k is a 40k spread on an 8 room building, which is 5k a room of uncertainty. That spread is bid-able only after a plan reviewer tells you which sprinkler and egress provisions attach to your occupant count, and occupant load thresholds for residential care and rooming occupancies differ by state adopted code edition. Get the threshold identified before you treat construction risk as the known side.

The special exception path has a different structure. Your 18k is a real option cost with a binary outcome and no salvage. What matters is the conditional value, so the question is what the masonry building is worth to you if the exception clears, against the probability you assign to clearing it. If you think the hearing is a coin flip, you're paying 18k for a 50 percent shot, and the better bath ratio and lower maintenance have to cover that.

The assumption doing the most work here is your bath ratio claim. If six baths on 11 rooms genuinely holds tenancy longer than one bath per floor on 8 rooms, that shows up in days vacant per year, and you should build both pro formas with different vacancy assumptions rather than the same one.

kevin_lombard · Answer

I read this thread twice and the thing I still don't follow is the salvage point. If the exception fails, does the seller not have a better building either. Parcel, could you get the seller to share the soft cost or credit part of it at closing given his earlier attempt already produced drawings you can use. That would change the 18k to something smaller and make the coin flip cheaper.

karen_whitfield · Answer

Patience is my whole strategy so I'd take neither today, but if forced I'd take the by-right house. Construction overruns hurt and then end. A denied exception leaves you with nothing to show and a record in the file that follows the parcel, which makes the next attempt harder for you or anyone else. Juniper's idea about splitting the soft cost is the only version of option two I'd consider.

hannah_west29 · Answer

Running Parcel's numbers as posted. Option one at, say, 300k purchase plus 90k of mid range code work is 390k for 8 rooms, which is 48.75k a room. Option two at the masonry ask plus 18k soft plus the fit out gets spread across 11 rooms, so the per room basis is likely lower even after the hearing cost, and the six baths mean less capex in year three. That is the case for option two on paper. What undercuts it is that the 18k is only part of the exposure. If the deposit goes hard while the exception is pending, the deposit is at risk too, and that number never appeared in the post. Parcel, what does the contract look like on contingency?

By-right zoning versus a better building that needs a special exception, for a boarding house

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