Investing In Industrial Outdoor Storage?

By Christine Norstadt

Industrial outdoor storage, or IOS, may be the new kid in the real estate market, but the age-old mantra “location, location, location” is no less true when it comes to choosing an IOS property. Whether one is evaluating an IOS investment or lease opportunity as a potential purchaser, investor, or user, one should carefully review the applicable laws, rules, and regulations to determine if a jurisdiction will permit IOS uses and ascertain other conditions that may be imposed on the site.

Working from an industry-accepted definition of “Industrial Outdoor Storage,” typical IOS uses include the outside storage, parking, and sometimes on-site repair of tractor trailers or trailers, large equipment (such as construction or farm equipment) and building and landscape materials.

Use Matters: Permitted, Unpermitted, and Gray Areas

Some cities and counties permit IOS uses “by right,” meaning the zoning ordinance specifically states that such a use is permitted in the applicable area or may be permitted on a conditional basis. Conditionally permitted uses require one to determine whether a permit has been issued to allow for use of the property for IOS.

Other jurisdictions take the opposite approach, imposing outright bans on truck parking and/or outdoor storage as a primary use of property subject to their ordinances.

Some jurisdictions adopt a “wait and see” approach in the form of a moratorium, such as a freeze on the acceptance of applications for the development (or redevelopment) of truck parking facilities. This tactic creates uncertainty for owners and users, but the measure is intended to pause development and allow community leaders to assess the pros and cons of continuing IOS uses in a given area.

IOS uses have a reputation for being unattractive facilities, and many in the industry refer to the space as the “ugly duckling” of real estate. One planner in a jurisdiction that imposed a moratorium shared recently that leaders considering the effect numerous IOS facilities could have on a particular area’s overall development plan are sensitive to increased truck traffic and community aesthetics. In this planner’s view, the ability to attract new residential opportunities is hindered by too many IOS facilities, which the planner viewed as unsightly and the source of excess truck traffic — generating safety concerns for residents using the same public streets.

Lastly, some ordinances are unclear as to how an IOS use will be treated, while others even contain conflicting provisions, creating uncertainty for a potential buyer, investor, or user of IOS real estate.

Other Property Matters: Additional Conditions

Zoning ordinances impose other restrictions on the use and operation of properties, of course. Complying with these additional requirements can be costly, and thus a prudent investor or user should evaluate whether the property complies now and what additional requirements could be imposed in the future.

Requirements relevant to IOS properties include setbacks, fencing and screening of parking and outdoor storage areas, and conditions related to surface material for parking areas and other driveway and apron design guidelines. Be mindful that complying with one portion of the ordinance may trigger another set of guidelines. For example, upgrading a gravel parking facility to asphalt will likely cause the owner to consider its stormwater management plan for the property.

Legal Non-Conforming Uses And Characteristics

It’s well documented that the growth of e-commerce spurred the demand for warehouses and the truck and container storage facilities to support them. The growth and surge in the IOS market has generated additional regulations on IOS uses by counties and cities. As a result, IOS use or property characteristic often preexists the current zoning ordinance.

Uses or property characteristics that are not currently permitted but were allowed when the use or feature began are typically classified as “legal nonconforming” uses and features. This means the use or feature may be legally continued subject to specific requirements, as outlined in the applicable zoning ordinance.

For example, an ordinance may require that the property be used for that specific purpose (i.e., the one that is now prohibited but was legal when it began) without interruption or with limited interruption. Other requirements may relate to how a new owner or tenant may continue the legal, nonconforming use upon transfer of the property, such as timely obtaining a business license and observing other non-use related provisions of the ordinance. Others may provide that upon renovation or destruction of a certain percentage of the property, the entire property must be brought into compliance with current standards.

Each ordinance is unique and constantly supplemented. Therefore, each IOS opportunity requires careful evaluation of the version of the ordinance in effect.

Title Conditions

Restrictions on use and property development may also be found in instruments affecting the title to the property, such as a declaration (i.e., “HOA” or property owner’s association) or restrictive covenants in a deed.

Piecing It All Together

An IOS property with noncomplying characteristics is not necessarily an opportunity dead in the water. Clear and honest communication with a planner, code enforcement official, property owner’s association, or other person with authority over the property facilities will provide clarity when evaluating the risks of the investment.

Investing or using a product type like IOS where the rules are rapidly evolving requires some risk-taking. Gathering as much information about the IOS market as possible will help a prospective owner or user best evaluate those risks.

A deep dive into the use and other property conditions requires careful analysis and examination of the ordinance, zoning map, county or city permitting records, and a title examination. In addition to analyzing the written records and regulations, oftentimes multiple phone discussions with a planner are needed to understand how the applicable jurisdiction will treat a use or property feature in the gray area.

Norstadt is a shareholder at Chamberlain Hrdlicka, where she practices commercial real estate law. She counsels owners, managers, and users of office, retail and industrial properties, apartments, and land in all aspects of commercial real estate. Norstadt’s clients span from individual, local investors to national real estate funds. She can be reached at christine.norstadt@chamberlainlaw.com.