Adaptive reuse — things like turning a shuttered school into a hotel or an abandoned warehouse into apartments — often demands an everything-including-the-kitchen-sink approach to financing. The array of incentives, funding sources and lending options required to support adaptive reuse is typically above and beyond the norm.
“Most of the time what you’re going to see with any adaptive reuse is a pretty complex capital stack,” said Patricia Frey, president and CEO of RePurpose Capital.
That’s because banks are often wary of the unique risks and challenges associated with repurposing existing structures and they expect building owners to assemble more of the necessary capital themselves.
But complex is not the same as impossible. Thousands of examples from across the country prove that adaptive reuse is a viable and desirable development strategy when the pieces — grants, tax credits, tax abatements, tax increment financing, loans from nonprofits, public policy changes — come together.
Targeted Lending
A former Coca-Cola bottling plant built in Gadsden, Ala., is a good example. Despite strong community support for saving the nearly 100-year-old building, the plant faced the wrecking ball before a developer stepped in three years ago.
Backed by a capital stack that included support from Main Street America, Downtown Gadsden Inc., RePurpose Capital and others, the developer is transforming the plant into a commercial and community center that includes an event venue and a growing number of businesses.
A nonprofit subsidiary of the National Trust for Historic Preservation, RePurpose Capital provides low-cost loans tailored to small adaptive reuse projects in underserved communities where access to conventional financing is especially scarce. It also provides technical assistance to its borrowers.
In the past, local and regional banks helped meet the need, but many of them have been swallowed by larger banks with bigger fish to fry. “[Big banks] are not going to touch those projects because they tend to be a lot of work for relatively little return,” Frey said.
Although still ramping up, RePurpose Capital envisions operating nationwide, offering pre-development lines of credit, construction loans that convert to permanent financing and, in certain cases, bridge loans. Besides focusing on small projects, it prioritizes energy efficiency.
“We take people through an underwriting process in the same way any bank would,” Frey explained. “The difference is because we are mission-oriented and are willing to take a closer look, are able to support [projects] that wouldn’t be able to access capital.”
Historic Credits
Adaptive reuse often goes hand in hand with historic preservation because many times the buildings being restored and repurposed are community landmarks. That’s why federal historic preservation tax credits are at the core of so many adaptive reuse capital stacks.
The federal historic tax credit awards qualifying restoration projects a 20-percent credit — awarded after the project is complete — based on qualifying expenses. Property owners can apply the credit to their taxes or sell them to raise funds.
“The historic tax credit absolutely makes certain projects feasible and it saves buildings that otherwise would have been torn down,” said Patrick Robertson, executive director of the Historic Tax Credit Coalition. When investors and developers learn about this credit, “they think twice about knocking down an old building versus going the adaptive reuse route,” he said.
The coalition is pushing for changes to the historic tax credit program that will make the credits even more appealing. The biggest change involves delivering the entire 20-percent credit in one year rather than spreading it across five years. The coalition also wants to lower the substantial rehabilitation threshold from 100 percent of a project’s adjusted cost basis to 50 percent in order to make more projects eligible.
The tax credit has helped rehabilitate more than 50,000 historic properties since being introduced in 1976, leveraging nearly $128 billion in private investment, according to the National Park Service, which administers the program in tandem with state historical preservation offices.
“I don’t think there’s a single incentive more effective in attracting private capital to [adaptive reuse] than the federal historic tax credit,” said Donovan Rypkema, principal at PlaceEconomics. “It makes a huge difference.”
PlaceEconomics is a consulting firm specializing in analyzing the economic outcomes of historic preservation and providing technical assistance to communities considering restoration policies and programs. In study after study the firm has found historic preservation creates jobs, generates income, enhances property values and increases local tax revenues.
The risk-reward is especially appealing in the 39 states that offer historic preservation tax credits of their own, sweetening the capital stack by another 10 to 25 percent of qualifying expenses on top of the 20 percent federal credit. “Now you’re talking about 40 percent or more,” Rypkema said.
Rigorous Standards
About 1,000 projects are awarded federal historic tax credits every year, but they aren’t handed out like candy. And neither are state credits. “The standards are demanding,” said Josh Cohen, president of development for Beacon Communities, a Boston-based multifamily housing developer.
For starters, buildings must — with few exceptions — be at least 50 years old, certified by the National Registry of Historic Places and operate as income-producing properties. Owner-occupied dwellings are not eligible.
Projects must also meet rigorous design and construction standards that require preserving the character-defining features of the building, the site and the environment. That can cause short-term pain for the developer, but in the end, it makes an important statement about the quality of the project.
Historic preservation can also open the door to a scale of development that might not be acceptable to the community if the building didn’t already exist and wasn’t deteriorating into an unwelcome eyesore.
“You’ve got an [old] factory … it is what it is,” Cohen said. “It’s been there 100 years. It is of the size and height it is and people tend to recognize [they] might never be able to find a new building owner or developer willing to incur the cost of tearing it down.”
That’s not a pleasant prospect. “Everybody suffers when a building is sitting empty,” said Rypkema of PlaceEconomics. “Not only is the city not getting much property tax revenue out of that building, it is reducing the property values and therefore the tax revenues from the buildings nearby it.”
Standout Example
Many of the properties in the Beacon Communities portfolio are the product of adaptive reuse. “Historic adaptive reuse is something we love to do,” Cohen said. “We take a particular joy in … taking existing buildings that have been important parts of the community’s history and bringing them back into use.”
Projects range from a former shovel factory to a former school to a former power plant. The repurposing of a tinsel thread plant in Windsor Locks, Conn., is a standout example of the many facets involved in a historic adaptive reuse project and earned an award of excellence from the Urban Land Institute.
Located along the town’s main Street, Montgomery Mill was in operation from 1871 to 1990. In 2008, the town began laying the ground work for policies that would encourage historic adaptive reuse of old buildings as an economic development tool.
In the following years, the town approved a main street overlay zone that promotes adaptive reuse and established a tax increment financing district that uses expected increases in future property tax revenue to fund a tax credit developers can use to generate upfront funding.
With those incentives in place, plus reduced sewer connection fees, Beacon announced plans to convert the mill into 162 units of mixed-income apartments, assembling a $63-million capital stack that included $12 million in state historic tax credits and $11 million in federal historic tax credits. The largest funding source, however, was a combined $17 million from the federal Low-Income Housing Tax Credit program and the state Housing Tax Credit Contribution program.
Housing Credits
Low-income housing credits can make all the difference for adaptive reuse projects that provide affordable housing. State housing finance agencies funnel the federal credits to developers based on allotments from the U.S. Department of Housing and Urban Development. The total amount available to each state is generally based on population. The size of the credits awarded to individual developers reflects formulas designed to subsidize qualifying construction costs by 30 or 70 percent — depending on the type of credits — to ensure that rents for a certain percentage of units are below market rate. State credits are awarded separately but are often tied to federal credits.
As a nonprofit dedicated to providing affordable housing, Archway Communities has long leveraged low-income housing credits, but the Lakewood, Colo.,-developer never attempted an adaptive reuse project until recently when it transformed four college dormitories into 154 units of housing.
The project also was the first time Archway used historic tax credits. “The historic credits were really essential paired with the low-income housing tax credits,” said Sarah Blanchard, director of real estate. Together the credits accounted for more than half of the project’s $70 million cost.
The apartments are part of the Mosaic Community Campus, most recently the home of the Denver campus of Johnson & Wales University but originally the home of the historic Colorado Women’s College, which opened in 1909.
Archway leaned heavily on an experienced design and construction team as well as a historic consultant and the Colorado State Historic Preservation Office to navigate the National Park Service historic tax credit requirements.
“It was quite an endeavor to search through the archives and [document] the story of the original use of this campus,” Blanchard said
Revolving Loan
The entire campus is one expansive adaptive reuse project led by the Urban Land Conservancy (ULC) in partnership with Denver Public Schools and the Denver Housing Authority, with each owning different parts of the 25-acre property.
The ULC was able to tap a unique funding mechanism for purchasing the Johnson & Wales campus. The Metro Denver Impact Facility is a $75-million, revolving-loan facility created by the by that enables the conservancy to borrow, repay and borrow again as needed. Local lender FirstBank provides half the debt through discounted bank loans. The other half is low-cost funding from nonprofits, public agencies and philanthropic organizations.
“I don’t feel like it’s rocket science, but having low-cost capital, patient capital, is really critical,” said Aaron Miripol, the conservancy's president and CEO. “It’s what allowed us to buy Johnson & Wales University, which is now Mosaic Community Campus. Without that, we would not have been able to move quickly enough to purchase that.”
ULC is a Denver nonprofit that secures land for uses benefiting the community such as clinics, schools or affordable housing. Frequently applying the community land trust model, the conservancy retains ownership of the land through long-term leases while the buildings on the land or the development rights to the land may be sold to users.
“Because we own the land, we are protecting the community,” said Miripol.
Tax Abatements
Empty and underused office buildings are a growing concern in many downtowns. Converting them to housing is a logical answer, but the costs often make for tough sledding even if the plan is to rent units for market rate.
D.C. streamlined the process of obtaining office-to-residential building permits.
“Adaptive reuse, especially for office buildings to residential, requires the sort of nimble and creative approach to financing that affordable housing developers have always had to do,” said Maya Brennan, chief housing officer for the Coalition for Nonprofit Housing and Economic Development, which works to advance equitable community economic development solutions in the District of Columbia.
The district is at the forefront of the office-to-residential movement. In an effort to add more housing and revitalize downtown D.C., the district offers a 20-year property tax abatement to projects that include a certain percentage of affordable housing. It also offers a 15-year office-to-anything tax abatement for conversions to hotels, retail, entertainment and other nonresidential uses. So far, the abatements — which are awarded on a competitive basis — have been awarded to at least three office-to-residential conversions with more in the pipeline.
Recognizing the potential of adaptive reuse to address housing shortages nationwide, the federal government now offers a number of new funding sources for office-to-residential conversions.
These include: 1) direct funding through community development block grants and low-cost loan guarantees from the Department of Housing and Urban Development; 2) low-cost financing for conversion projects located near transit services from the Department of Transportation; and 3) loan guarantees and tax incentives from the Department of Energy to pay for renovations that reduce emissions and make green upgrades.
Regulatory Relief
Funding isn’t the only obstacle facing office-to-residential conversions. Regulations can also be a burden.
D.C. now allows developers to convert commercial buildings to residential properties without the time and expense of applying for a zoning change. It also streamlined the process of obtaining office-to-residential building permits.
But more could be done to help developers meet the challenges of office-to-residential conversions such as how to satisfy natural light and ventilation requirements in buildings with deep interior spaces.
“We have been talking a lot at the coalition … about what sort of changes we might need to make to building codes and permitting processes to bring costs down in general for buildings but also make this particular approach more viable,” Brennan said.
