The model was solid. The permits were not.

A cashflow model prices a building. It does not price what the building is legally permitted to be. In Cyprus real estate, those are routinely not the same thing, and the difference does not appear in any sensitivity analysis.

A buyer brought us the model first. Mixed-use building: ground floor offices, mezzanine offices above, residential flats on the upper floors. Fully let, strong income, reasonable assumptions, lending lined up. He wanted a second eye. Not because anything looked wrong. Because careful people get a second eye.

The model was correct. The mezzanine was not.

What a mezzanine is, legally, in Cyprus

In Cyprus, a mezzanine in a commercial building is typically approved for auxiliary functions: storage, plant rooms, mechanical services. The approved use is defined in the building permit and the approved plans. It is a legal designation, not a descriptive one. It determines what the space can lawfully be used for.

Converting a mezzanine from storage to offices requires both a new planning permission and an amended building permit. Under the relevant planning and building legislation, a change of use is a form of development, and the permit must authorize the use, not just the structure. Without both, the conversion is unauthorized. The space may look like offices, function as offices, and generate income as offices. Legally, it is something else.

The question for a buyer is not whether the offices exist. It is whether anyone authorized them to exist in that form.

What unauthorized means in practice

The most direct consequence is at the Land Registry. Where significant unauthorized works exist, the competent authority can register a restriction on the property that prohibits voluntary transfer and encumbrance. A buyer who completes a purchase without discovering a registered restriction finds, at the point of transfer, that the property cannot be registered in their name.

But the practical consequences appear well before any formal enforcement. Consider the employers occupying those mezzanine offices. Commercial insurance policies require the insured to comply with all applicable laws and permits. An insured event in a space not lawfully approved for that use gives the insurer grounds to decline the claim. A workplace accident, a fire, a liability claim: whether the insurer responds becomes a coverage question rather than a certainty, because the premises are not what the policy assumed them to be.

Consider the tenants. A business operating from offices needs a valid operating permit or business license for those premises. Where the space is not authorized for the use being carried out, the permit has no secure foundation. The tenant may have applied, received the permit, and moved in without knowing this. They are occupying offices, employing people, running a business as normal. They may also be doing all of it in premises that the municipality has never formally authorized for that purpose.

None of this falls on the current owner in most circumstances. It becomes the buyer’s problem the moment something goes wrong.

The amnesty that existed and the window that closed

There was a period during which unauthorized structures in Cyprus could be regularized. Applications under the relevant provision of the Streets and Buildings Regulation Law closed at the end of 2015. Regularization required payment based on the assessed value of the unauthorized area. That window has closed.

For a buyer, the question is not only whether unauthorized works exist. It is whether they were regularized during that window. If not, the buyer is acquiring either a registered Land Registry restriction, or the authority’s continuing right to register one. The income attributed to the unauthorized space in the model is not income the buyer can rely on without first resolving what it would take to address the position.

What the model could not see

The model was technically correct for what it was measuring. It could not measure what the building was legally permitted to be, because no one had asked that question.

Removing the unauthorized mezzanine income changes the yield. Discovering a Land Registry restriction stops the transaction. Discovering it after completion means having acquired a property with an open enforcement position and a restricted right of transfer. A sensitivity analysis that does not model those scenarios is not wrong. It is looking at a different building.

What the check actually looks like

Legal due diligence on a Cyprus property is not a lengthy exercise. The building permit, the approved plans, the planning permission, the certificate of approval, and a Land Registry search cover the material questions. For a building with a mezzanine being used commercially, confirming whether that use is authorized takes a few hours of a lawyer’s time.

The buyer in this instance did not lose the deal. He found the question before the answer became expensive. He went back, obtained the permit documents and the Land Registry search, and the picture became clear. The income from the mezzanine offices was not in the revised model. Neither was the price that had been assumed.

The offices were visible, occupied, income-generating. The model reflected all of that. What it could not reflect was whether anyone had authorized those offices to exist. That is not a question the numbers answer.