Nine Adaptive Reuse Considerations Property Owners Should Know

Real Estate

President, Chief Appraiser at Argianas and Associates, specializing in the valuation of complex institutional quality properties.

As society has evolved from a predominantly rural population to an increasingly urban one, real estate trends have responded. In 1800, approximately 6% of the human population lived in cities; by 1900, this number jumped to 40%, and today 82% of the world’s population is urban dwellers. By 2050, as much as 90% of the population will reside in urban areas. The trend to urbanization, along with the impact of the Covid-19 pandemic, will undoubtedly force property owners to reconsider how they operate and develop new properties.

One solution is adaptive reuse, the renovation and use of a preexisting structure for a purpose other than that for which it was built. Here are nine things to consider when investigating adaptive reuse for your next real estate need.

1. Financial sense: Lending institutions are in the business to make money, and any adaptive reuse must make economic sense. Although an old cathedral may make a beautiful space for your next venture, the details of the loan must demonstrate to lenders an acceptable level of risk. For proposed adaptive reuse projects, the engaged appraiser will complete a comprehensive market study to understand the market, target users, target rent, absorption, proposed tenant mix and other potential uses for the property that will assist you in qualifying the risk for your lender.

2. Highest and best use (HBU): Conclude the wrong HBU, and the rest of the report becomes a great paperweight. To determine the HBU, an appraiser will assess if proposed developments are legally permissible, physically supported, economically feasible and maximally productive. HBU considerations pose an opportunity for critical thinking. As with Chicago’s Main Post Office, some properties may be too attractive to ignore.

3. Land availability: In urbanized areas, vacant land is difficult to find, and the costs of demolition may outweigh the costs to renovate. Even with the pandemic, downtown areas remain attractive for industry, living and workspaces. Adaptive reuse, therefore, serves as a solution for limited land within high population bases.

4. Community buy-in: The conversion of a property from one approved use to another will likely require zoning approval or variances. It may also entail reviews from appearance and other boards and local and state regulatory bodies. If there isn’t a shared vision that the new use will benefit the neighborhood, lackluster support by community members, politicians and other influencers will complicate your efforts.

5. Due diligence: Preconstruction services with contractors, land planners, architects and engineers will help establish the feasibility of your vision before signing a lease or purchasing a building. These services are imperative and can prevent costly mistakes later.

6. Environmental conservation: We can’t discuss adaptive reuse without mentioning the benefits it poses for the planet. The majority of waste in construction comes from the demolition of existing properties. On average, it takes approximately 65 years for a new energy-efficient building to save the energy expended in demolishing an existing building. And building-related demolition debris accounts for more than 90% of waste, while construction represents less than 10%. Adaptive reuse is obviously an important measure for limiting these waste streams.

7. Don’t confuse reuse with preservation: Adaptive reuse is not historic preservation (restoration of buildings to their former character). Adaptive reuse focuses on taking an aged building and renovating it for new purposes in line with current technological and social needs. The payoff? Unique features and hard-to-come-by materials because the character found in historic buildings is often difficult to replicate in their modern counterparts. While many historically significant buildings sit vacant because of economic or functional obsolescence, adaptive reuse brings these structures and the character they possess to higher and better uses. While your appraiser will consider any potential functional or physical obsolescence, these issues may be able to be corrected, albeit for a price.

8. Not all properties are good candidates: Structural characteristics that support adaptive reuse include natural light, tall ceilings, large open spaces and strong shells. Red flags include water damage, mold, carbon monoxide, oxidized iron, and faulty electrical and radioactive sources, as well as harmful building materials such as asbestos, lead, mercury, etc. Architecture is also essential; an old grocery store may make an excellent outpatient center, but a church may not make the best housing development because much of the interior would require significant alteration.

9. Incentives: Federal and state tax credits may be available for adaptive reuse. The Federal Historic Rehabilitation Tax Incentives Program can provide up to a 20% tax credit on applicable structures. Factor in local tax credits, and the savings can be considerable. Adaptive reuse can significantly decrease new construction costs and eliminate the purchase of vacant land. A 2016 case study of the revitalization of downtown areas by the National Trust’s Research & Policy Lab found that new commercial development costs approximately $92 per square foot compared to $37 per square foot for the rehabilitation of existing buildings.

Vacant shopping centers and malls, old factories and railyards, grocery stores and restaurants will likely flood the real estate market as the strain of the Covid-19 pandemic takes its toll. As we emerge, property owners may find adaptive reuse the most compelling path forward.

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