State and local laws regarding the development of real property are continually evolving. Sometimes they evolve to such an extent that certain improvements on or uses of property previously permitted become prohibited. Property developed and operating under obsolete laws is frequently referred to as “grandfathered.”
Grandfathered gaming and liquor establishments are scattered throughout the Las Vegas Valley. There is no single set of rules governing the acquisition of these establishments. Rather, a buyer must perform extensive due diligence regarding, among other features, the local jurisdiction of the establishment, the particular uses on the property and the land use and other licensing laws in effect.
Initial Considerations
When conducting due diligence on a grandfathered location, a buyer should carefully review the manner in which the grandfathered rights were obtained, either via the municipalities’ governing laws or via a special use permit or similar zoning change. If the grandfathered rights were granted under out-of-date zoning codes, it is essential to review the provisions in the current zoning codes regarding grandfathered rights as well as the old zoning codes to fully understand the rights and restrictions applicable to the property.
In the event the grandfathered rights were granted via a special use permit, it is essential to review the original use permit(s) and any corresponding ordinances as such permits and ordinances may contain contingencies or ongoing obligations that the buyer may need to assume.
Transfer Issues
Land use entitlements typically run with the land, meaning a buyer of improved real property does not have to re-apply for zoning, use permits and other entitlements. However, with a grandfathered property, there may be regulatory hurdles to satisfy to ensure that any special grandfathered rights properly transfer to a new buyer.
Certain local jurisdictions, for example, currently have hefty license origination fees that, in the case of a buyer of a grandfathered business, are only waived if the seller signs a required consent form authorizing the transfer of the seller’s license to the buyer or otherwise acknowledging the sale of the business from the seller to the buyer.
Closure Issues
A fundamental objective of grandfathered rights is to preserve the “going concern” value of a business. If a business closes and is no longer a “going concern,” the right to continue operating the business under the old laws will eventually expire.
Currently under state law, the Gaming Control Board will only grant new nonrestricted licenses in Clark County to “resort hotels.” There is an exemption for grandfathered establishments but the exemption does not apply to establishments that cease gaming operations for a period of more than two years.
The closure rules regarding nonconforming taverns differ from local jurisdiction to local jurisdiction. If a property remains without the applicable nonconforming tavern license, or if the business is closed or abandoned for a certain period of time, the right to operate a tavern may be lost or the tavern may be required to conform with the current provisions of the law. In some cases, a municipality’s approval is a prerequisite for a temporary closure. In this regard, a buyer should require the procurement of such approval as a closing condition and for the seller’s cooperation as necessary.
Restrictions on Development/Expansion
A buyer may intend to complete renovations to a grandfathered property post-acquisition. Incidental repairs and normal maintenance are typically permitted. However, extensive renovations are subject to various legal restraints and may require the closure of the establishment, which would be subject to the limitations discussed above. Furthermore, a grandfathered property use typically cannot be moved or expanded to adjacent, non-grandfathered parcels. Lastly, any changes to the use of the property to include other uses in addition to the grandfathered uses should be carefully considered, because zoning changes to accommodate these other uses may jeopardize the grandfathered rights.
Unique Asset
A grandfathered liquor and gaming property can be a valuable asset to a buyer’s real estate portfolio. However, a buyer must take extra care when conducting due diligence and when planning the future development and operation of the property.
By Rebecca L. Miltenberger, shareholder and Sonia Church Vermeys, of counsel, Brownstein Hyatt Farber Schreck
