Location and a wide array of public financing sources make reuse a great niche.
Not everyone has the eye or the interest to sell or develop adaptive reuse, but if you're passionate about it, it's a labor of love, says Sandra Jarvis, president of IndySquared Commercial Properties in Indianapolis. One challenge, she says, is that you have to look past the pigeons and the disrepair and paint the picture for the buyer.
So why bother with reuse when you can show straightforward steel and glass? One word: location. The biggest advantage to adaptive reuse is that you can get a terrific location. In most cities, the best sites are pretty picked over, but you get a great site if you reuse, says Bill Adams, CCIM, CRE, president of Adams, REALTORS®, in Atlanta. Older buildings may also be protected by historic preservation ordinances, making rehab the only option.
Adaptive reuse isn't cheap, though. Bill Roberts, vice president of operations at National Louis University in Chicago, estimated that he spent an added 15 percent to 18 percent to build out classrooms and other interior spaces in six floors of a historic Daniel Burnham-designed building at 112 N. Michigan Ave. Extra costs included reinforcing floors with steel to support the library and wedging in faculty office space between the two-story X-shaped braces that the architect used to stabilize the 20-story building.
Reuse can also come with some unwanted surprises. You never know what animals you'll find when you open the walls in an adaptive reuse project, says Frank Micali, CCIM, managing partner of Capitalize360 Group in New Haven, Conn. Add in the expenses of zoning permits and you don't want to buy a reuse project for more than 50 percent of eventual market value, he says.
Picking a Reuse Candidate
Even at a good price, not every building is a good candidate for reuse. The physical constraints of the asset are the single most limiting factor in most adaptive reuse projects, says Todd Clarke, CCIM, CEO of Cantera Consultants & Advisors Inc. in Albuquerque, N.M. Small floor plates, antiquated construction techniques, and the need to preserve historic elements all limit a building's future uses. We recently worked on a historic Route 66 motor lodge with very small units, recounts Clarke. Even though the market might have supported retail or rental housing, we had to focus on either senior or student housing.
Fitting a reuse project into an existing building is often like constructing a jigsaw puzzle, says Craig VonDeylen, principal of Perkins VonDeylen Architects in Indianapolis. Each of the eight residential units in the company's Fletcher Place Lofts (a former church parish hall) is a different shape. The lack of uniformity makes management and marketing more challenging but also makes the property unique, he says.
Floor loads are often issues when you're changing a building use, says Stanley Rabun, a professor in the architecture department at the University of Tennessee in Knoxville. Office buildings usually have a floor load of only 50 lbs. per square foot. Change the use to a restaurant and you'll need to double that, says Rabun, co-author of Building Evaluation for Adaptive Reuse and Preservation (Wiley, 2009). Rabun advises that before buying any building for reuse, do a buyer walk-through and let the building tell you what's wrong. Many major problems are apparent even before you call in the structural engineer for due diligence, he says.
The need to bring a building from the 20th century or even the 19th century into compliance with 21st century building codes adds another hurdle to the physical aspects of reuse. For example, says Rabun, if you renovate more than 50 percent of a commercial building or spend more than 50 percent of its value on renovation, you usually need to bring the structure into compliance with the Americans with Disabilities Act.
Zoning requirements can be another barrier to reuse in downtown locations. We actually had to contract for parking spaces in a nearby surface lot to meet local zoning when we adapted the CenterPointe condominiums, even though only about 25 percent of our residents have cars, says Michael Schaffer, managing member at C.A. White Co. Inc., which developed the 83-unit New Haven property.
Yet some cities are becoming more flexible. In 1999, Los Angeles helped set a new bar when it passed special Adaptive Reuse Zoning Incentives to encourage residential redevelopment in its downtown core. Incentives included breaks on parking requirements, lot line setbacks, and density.
Matching the Use to the Market
While the physical limitations of a project will in part dictate a building's final use, market demand is just as critical to consider. That might seem obvious, but sometimes buyers or community stakeholders get excited about the possibilities and lose sight of the practicalities. You'll go talk to a neighborhood group about reusing a site that could support a grocery, and they'll want you to bring in a Nordstrom, says Clarke, who's advised several local governments on reuse projects.
That's when you have to bring it down to dollars and cents using a market study with costs and demographics, says Clarke. In some cases, stakeholders' desire or political pressures on local government may override market data. Then you have to tell the community to hit up the city council and get the extra public funding needed to make that use viable, Clarke adds.
Finding Funding for Reuse
Perhaps the biggest advantage of adaptive reuse projects these days is that they're often easier to finance than new development. Federal stimulus funds slated for state governments will probably provide more money for public-private partnerships to revitalize downtowns.
Governments are the new sources of money, says Larry Kosmont, CRE, president of Kosmont Cos. in Los Angeles. Among the public-sector sources for reuse financing are Historic Tax Credits, which will pay up to 20 percent of rehab for qualified historic structures; New Market Tax Credits, which are available for redevelopment in economically depressed areas; Recovery Zone Bonds, which can provide funding for economic development in areas of high unemployment; and Small Business Administration loans, which can be used to rehab or improve energy efficiency in commercial buildings used in part by the buyer's business.
Tapping into these funds can require a little research and a little showmanship. Sometimes there's a clear local development itch waiting to be scratched, a hole in the planning board's agenda that you can fill, says Kosmont. Other times, developers have to be willing and able to advance funds for planning and design to prepare effective presentations that will stir the public sector's interest. Otherwise, the project often dies in the initial review, says Kosmont.
Clearly, adaptive reuse isn't for the faint-hearted or the impatient. But if you're willing and able to tackle the challenges, it may be one of the best opportunities in commercial real estate today.