Adaptive Reuse Projects

Churches turned into art centers, factories into microbrew pubs, and shopping malls into medical facilities are just a few examples of adaptive reuse, the term used to describe the repurposing and transformation of an existing structure. While adaptive reuse is not new, changing business and social factors are driving renewed interest. These factors include a hybrid workforce, supply chain disruptions, increased interest in green construction and a lack of affordable housing. The result: more opportunities for commercial real estate brokers to think differently about the highest and best use of a property.?

With the current volatility in the construction and real estate markets and the?new administration’s ambitious commitment?to reduce greenhouse gas emissions, now is a good time to revisit adaptive reuse. Not only is adaptive reuse a more sustainable way of building, but breathing new life into existing and unused structures can meet the changing needs of urban areas, revitalize neighborhoods, and help address the nation’s housing shortage crisis.

Trends in Adaptive Reuse

Housing shortages are making conversion to residential use the most popular type of change. Rent Cafe reported that 2021 was the most successful year for apartment conversions, with more than 20,000 units coming online and an additional 52,700 units expected to become available in 2022, many created from former office buildings and hotels. However, opportunities for adaptive reuse projects aren’t limited to residential. Existing commercial structures are finding new life as health care facilities, logistics warehouses and mixed-use suburban centers.

Grow Your Business Through Adaptive Reuse Strategies

Given the potential time and cost savings, savvy investors will continue to be drawn to adaptive reuse versus new construction. Governments reward the green construction aspect of adaptive reuse with tax incentives, and communities welcome opportunities to reinvigorate or transform neighborhoods by repurposing at-risk structures.

If eligible, developers may also benefit from tax savings in adaptive reuse projects, the most significant of which is the?historic rehabilitation tax credit?that allows for a 20 percent credit over five years.

Expect Challenges

Taking the plunge in an adaptive reuse project is much like approaching urban infill development. No matter how much you plan for anticipated challenges, expect the unexpected. You never know what you’ll find behind the walls (cue the construction horror stories).?

Some of the most common considerations when evaluating a potential adaptive reuse site and building include:

• Safety

Thoroughly review all renovations required to bring the structure up to code to ensure a safe and healthy living environment. Many older buildings include hazardous materials like asbestos, lead paint, and high VOC paints and sealants that must be removed and replaced. Environmental cleanup may also be necessary.

• Accessibility

Proper access for people with disabilities must be included in any adaptive reuse project. Creating access points for emergency and delivery vehicles is also required.

• Building Code Uniformity

Uniform building codes establish minimum requirements for safety, and unfortunately, nothing similar exists for adaptive reuse construction. Some of the first states to implement adaptive reuse building codes are Massachusetts, Maryland, and New Jersey. More regions should adopt a similar system to tackle these unique projects with varying needs.

Financial Assistance From The Government For Developers Doing Adaptive Reuse

There are tax-credit programs that can be used to help with the renovation and adaptive reuse of these buildings, including Low Income Housing Tax Credit (LIHTC), New Markets Tax Credit (NMTC) and Historic Tax Credit (HTC).?All the tax credit programs along with the funds provided by investors buying these credits are make-or-break for these projects. Without these programs, these projects would not happen, because they may not otherwise be economically feasible. Without these programs, a lot of buildings would just be demolished.

In addition, the government might freeze the taxes for a period of time, or the state could incentivize environmental cleanup with brownfield tax credits. Tax Increment Financing (TIF) is also an integral part of funding for these types of buildings, but is not available in all cities.?

Tips for Brokering Adaptive Reuse Projects

While each conversion type calls for a unique strategy, keep these general tips in mind:

Assess the market. Is there a need, and can the property be used to fill that need? Keep in mind the highest and best use calculation.

Know information relevant for adaptive use. The total square footage may be less important than where that square footage lies. Physical plant details often outweigh revenue data.

Sharpen your skill set. Conversions often attract large corporate buyers, with corporate attorneys. Being prepared will give you confidence in negotiating a deal.

Expect surprises. If possible, negotiate for the unexpected, such as the cost of construction increases.

Consider public transportation. Residential conversions, especially workforce housing, benefit from nearby public transportation.

Involve the right players. Bring in others to fill expertise gaps when marketing and negotiating for different uses.

If you’re evaluating a site or considering an adaptive reuse project, contact me here or call 305-922-3370 or email me to [email protected].