What is a certificate of occupancy?
A certificate of occupancy, or CO, is the building department’s sign-off that a structure matches its approved plans and the code in effect, and may be occupied for the use listed on it. Most states and cities adopt the International Building Code, and Section 111 of the IBC governs certificates of occupancy.
A CO is tied to a use and an occupancy classification, not to an owner. It stays with the building when you sell, and it describes what the building is legally allowed to be: say, an 8-unit apartment building in residential Group R-2, not the 12 units on your rent roll after 4 basement units were added.
When is a certificate of occupancy required?
Under IBC Section 111.1, no building or structure can be used or occupied, and no change in its existing occupancy classification can be made, until the building official issues a certificate of occupancy. In practice, these are the situations that trigger one.
- New construction: every new building needs a CO before anyone moves in.
- Change of occupancy: converting offices, a motel or a warehouse to apartments, or apartments to a different use.
- Additions and conversions that add units: splitting units, finishing a basement or attic into a dwelling, or adding an ADU where the local code requires a new or amended CO.
- Major alterations that change egress or occupant load: many cities issue an amended CO when the layout or exits change.
- Local triggers: some cities require a new CO or a certificate of compliance at sale or when a unit is re-rented.
What a certificate of occupancy shows
Under IBC Section 111.2, the certificate lists the facts about the building that the code official approved. Buyers check these items against the rent roll and what they see on the walk-through, so any mismatch is the first thing they’ll flag.
- Building permit number and property address
- Name and address of the owner or owner’s agent
- The portion of the building covered and the code edition it was reviewed under
- Use and occupancy classification, such as R-2 for apartments
- Type of construction and design occupant load
- Whether an automatic sprinkler system is provided and whether it is required
- Any special stipulations or conditions of the permit
Temporary certificate of occupancy
A temporary certificate of occupancy lets people occupy part of a building before all the permitted work is finished. IBC Section 111.3 authorizes the building official to issue one when the occupied portions can be used safely, and the official sets how long it lasts.
Temporary COs are common in new apartment buildings that lease up floor by floor. They expire, though, and a building that has lived on renewed TCOs for years can surprise a buyer whose lender wants the final CO. IBC Section 111.4 also lets the official suspend or revoke a CO issued in error or when the building is out of compliance.
Older buildings without a CO
Many older buildings never had a certificate of occupancy because none was required when they were built. In New York City, for example, the Department of Buildings says buildings built before 1938 generally don’t need a CO unless later alterations changed their use, egress or occupancy. An owner can ask the borough office for a letter of no objection confirming the legal use.
Other cities rely on permit history, assessor records or a zoning verification letter to show legal use. If you can’t find a CO, request the permit file and any zoning letter before you list. The buyer’s zoning consultant will run the same search anyway.
Rental registration and inspection programs
Some cities inspect rental buildings on a schedule whether or not anyone complains, and those inspections turn up unpermitted units and code violations. Los Angeles is a well-known example. Its Systematic Code Enforcement Program covers properties with two or more rental units, and the Housing Department aims to inspect most of them at least once every four years, with higher-risk properties every two years.
Owners who don’t correct cited violations can be placed in LA’s Rent Escrow Account Program or referred to the City Attorney. Check whether your city runs a similar registration or inspection program, because an open inspection case will show up in a buyer’s municipal search.
Missing CO vs open permits vs code violations
These three problems often show up together, but buyers and lenders treat them differently. The table is a quick guide; our page on selling an apartment building with code violations covers violation cases, fines and liens in depth.
| Issue | What it means | How buyers usually handle it |
|---|---|---|
| No CO, pre-code building | Built before COs were required | Zoning letter or letter of no objection; little price effect |
| No CO for added units | Units built without permits | Underwrite only legal units; price in legalization or removal |
| Expired temporary CO | Final sign-off never issued | Require the final CO or an escrow before closing |
| Open or expired permits | Work started but never finaled | Close out permits or credit the cost; can block a new CO |
| Open code violations | City has cited a condition | Cure, credit or holdback; see our code violations guide |
How buyers and lenders treat a missing CO
Agency lenders don’t just ask for a CO. They ask whether the building’s use and unit count are legal. Fannie Mae’s Multifamily Guide, Section 301.01, requires the lender to identify the property’s zoning, determine whether the current use is permitted and confirm the building either conforms or is legally non-conforming. When a zoning consultant prepares a zoning report, the data goes to Fannie Mae on Form 4089.
Freddie Mac’s small balance loan guidance from February 2025 is even more direct. If a CO is unavailable, the lender must show that its absence isn’t a violation of local law and won’t lead to enforcement. Non-permitted units are excluded from gross potential rent, but their expenses stay in the underwriting. After closing, the borrower must legalize them, get written confirmation of no enforcement or stop using them as units.
That rule drives price. A buyer using agency debt can only borrow against the legal units, so the illegal units add cost without adding value until they’re fixed.
Worked example: legalize the units or sell at a discount?
An 8-unit building has 6 permitted units renting at $1,700 and 2 basement units added years ago without permits, renting at $1,250. Gross potential rent is $152,400 a year. With 5% vacancy and $6,200 of expenses per unit, NOI is $95,180, worth about $1,410,000 at a 6.75% cap rate.
A buyer underwriting like Freddie Mac drops the basement rent but keeps the expenses for all 8 units. Gross potential rent falls to $122,400 and NOI to $66,680, worth about $988,000 at the same cap rate. Those two units cost the seller roughly $422,000 of value.
Now say an architect estimates $185,000 to legalize the units, with about 10 months of permits and work and carrying costs of $6,500 a month. If the city approves, the seller nets about $1,410,000 minus $185,000 minus $65,000 of carrying costs, or $1,160,000. That beats $988,000 by $172,000. If the city won’t approve the units, the seller is back to the 6-unit value and has spent money getting there, so get a zoning answer before paying for plans.
| Line | 8 units legal | 6 units underwritten |
|---|---|---|
| Gross potential rent | $152,400 | $122,400 |
| Less 5% vacancy | $7,620 | $6,120 |
| Expenses (8 units at $6,200) | $49,600 | $49,600 |
| NOI | $95,180 | $66,680 |
| Value at 6.75% cap rate | $1,410,074 | $987,852 |
Selling a building without a CO or with open permits
You can sell a building without a CO or with open permits, but you have to disclose what you know and expect the buyer to price it. The buyer will order a municipal search, and title insurance generally won’t protect against permit and zoning problems, so these issues come out in due diligence either way.
Your real choice is between fixing it first and selling as-is. Fixing makes sense when the work is clearly approvable and the value gap is wide, as in the example above. Selling as-is makes sense when approval is uncertain, the cost is high or you need to close on a 1031 exchange timeline.
How this works for a 5+ unit apartment building
For a 5+ unit building, the CO question is usually about unit count. Buildings split up over the decades, basement and attic units, and commercial space converted to apartments are where the paperwork and the rent roll stop matching.
Fire and life-safety rules also get stricter as buildings get bigger, so legalizing a unit in an apartment building can mean sprinklers, fire separation and a second exit, not just a permit. Pull the permit history, the CO and any zoning letter before you list, and match them line by line to your rent roll.
Selling your building to Skyline
Skyline Capital Investments buys 5+ unit apartment buildings nationwide, including buildings with missing COs, unpermitted units and open permits. We underwrite the legal unit count, price the rest honestly and buy as-is, so you don’t have to finish a legalization project before you sell.
Send the address and unit count through the form on this page or call (469) 660-2977. We typically respond within 48 hours.
