Certificate of occupancy

Certificate of occupancy is a money term you need to understand. Here’s what it means.

What is a certificate of occupancy?

A certificate of occupancy is a document issued by the local government that gives permission for tenants to live in a building that has recently undergone construction or renovation.

Deeper definition

A certificate of occupancy indicates that a building adheres to all of the local building and zoning laws. It serves as proof that the space is up to code and in livable condition.

There are certain situations that require a certificate of occupancy:

  • When a builder completes construction of a new building.
  • When the main purpose of a building changes.
  • When ownership of a commercial or multi-residential building changes ownership.

Builders must prove that their structures are habitable by securing certificates of occupancy. Without a certificate of occupancy, the title for the property cannot change hands. If an owner plans to rent a building formerly used for commercial purposes to residential tenants, a certificate of occupancy is necessary. The housing or building department of the local government maintains responsibility for issuing the certificate of occupancy.

Certificate of occupancy example

If you plan to invest in commercial or multi-residential real estate, you will need to obtain a certificate of occupancy for any potential purchases, especially if you are using a loan to pay for the transaction. The seller of the building must supply the document before the transaction can close.

For example, you may decide to add a multi-residential building to your real estate portfolio. You plan to finance a portion of the purchase. If the seller of the building does not apply for and obtain a certificate of occupancy, your bank may refuse to finance the purchase, and you have the option to refuse to purchase the building.

Interested in investing in commercial property? Check out Bankrate’s mortgage calculators to calculate your potential payment.

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