Growth amid regulation: how to avoid unanticipated consequences
Longevity, stability and growth. These three words describe family-owned businesses in West Michigan.
A 2016 PwC Family Business Survey of 2,800 senior executives from family businesses identified two key challenges to growth: (1) regulatory compliance and (2) the need to continually innovate. Regulation and innovation often compete with one another. Navigating the regulatory landscape is critical to long-term planning for growth and innovation. Ben Franklin’s axiom that “an ounce of prevention is worth a pound of cure” is as true today as it was when he made the quote.
One type of regulation that may not readily come to mind is zoning. Zoning regulations are essential to a rational land-use pattern in your local municipality. Since many family businesses occupy property that has been in the family or held by the business for generations, there may be an assumption the specific use is permissible indefinitely. The term “grandfathering” often is thought of when zoning issues arise. But what does “grandfathering” really mean? It does not mean successful implementation of the succession plan from your grandfather to the next generation.
A “grandfathered use” is a vested right in the use of property that does not comply with current zoning restrictions but is protected because it lawfully existed before the zoning regulation’s effective date. Zoning ordinances frequently are updated as the development character of your municipality changes. One of the reasons for grandfathered status is to protect the financial investment of the property owner as the municipality updates its ordinance. Most zoning ordinances classify these uses as “legal nonconforming uses.” A gas station on property currently zoned residential may be legally nonconforming because, although allowed historically, the use is disallowed by the current ordinance. A legal “nonconforming structure” is a structure that does not comply with current ordinance requirements, such as lot coverage, height or other dimensional items. Despite the ordinance change, the site may still be utilized as is but with certain limitations.
If you are operating in a zoning district that has changed, you might assume the operations or structure can continue without municipal intervention. Not so fast! Your first and most important step is to review your local zoning ordinance. Your local ordinance may provide a process to request changes to your use or the structures. However, it also may provide that if you move or reduce any part of the nonconformity, the part of the nonconforming use that is moved or reduced shall conform to the requirements of the current ordinance. The nonconformity is in no case allowed to increase. The continuation of a nonconforming use requires the use to be substantially the same size and essential nature as the use existing at the time of the original ordinance. This means the use must remain in the same spatial confines and cannot move to another portion of your property. Likewise, a change in business hours may be considered an impermissible expansion of your use. If the use substantially changes, then the municipality may terminate the use.
The local municipality may also terminate your use if it is abandoned. Certain zoning ordinances may set a time limit (for example 12 months) of nonuse before a use is considered abandoned. Similar to courts in Michigan, your municipality may consider factors that are evidence of “abandonment.” Those may include removal of utility connections, cessation of business operations, removal of necessary equipment or the failure to maintain necessary business licenses.
Certain nonconformities have sunset provisions that require compliance with current regulations. Many municipalities now have sign regulations that require noncompliant signs to conform to the current ordinance over time. Municipalities often are aware traditional methods to eliminate nonconformities do not work and have resorted to using amortization provisions in the ordinance as a means of mandating compliance.
In my experience, property owners find themselves at odds with a municipality by moving forward with operational or dimensional changes without understanding these unanticipated consequences. Although an ordinance may provide a starting point, it is important to know courts in Michigan review expansion issues on a case-by-case basis by weighing a number of factors and considering the historical use of the property. At a minimum, courts consider:
The ordinance in effect at the time the business originated
Any approvals or licenses originally issued to the business
The type of business at the time it originated
The size of the business at the time it originated
The business hours at the time it originated
The location of the use or structure at the time the business originated
The changes to these items from the time of the original use
The current zoning ordinance requirements
The burden of proving a legal nonconforming status is on the property owner. If the property owner fails to prove this, the current zoning ordinance may prohibit it.
If your local ordinance does not specifically address changes to a nonconforming use, consider seeking a variance from the current requirements of the ordinance before you begin your expansion. Apart from a variance, your ordinance may permit improvements or site modifications. Whether the ordinance specifically addresses these changes or you are considering a variance, keep in mind that your municipality may require compliance with other site-related regulations. In my experience, this process may include, at a minimum, additional parking or screening. The nature and extent of site modifications required by the municipality likely will affect the budget of your planned modifications.
You may ultimately decide on-site modifications are not adequate for your plans. If your business plan entails the acquisition of new property, you should request a zoning compliance letter from the local municipality as part of your due diligence process. Among other things, a zoning compliance letter should confirm the use and improvements on your proposed site are in conformance with the current zoning requirements.
Although Ben Franklin was not addressing zoning ordinances, his statement is important in order for your family business to innovate, grow and increase value.
A member of the Rhoades McKee Executive Committee, Patrick Drueke concentrates his practice in the areas of real estate law, business formation, environmental law and litigation.