Keep history alive by investing in an adaptive reuse project

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Ask a Lender
July 26, 2017 | Updated September 6, 2017


Key Points

How to finance an adaptive reuse project

  • Adaptive reuse projects convert older properties for new uses.
  • Identify any structural concerns or zoning and regulation constraints before buying.
  • Government grants and tax credits exist for adaptive reuse projects.
  • Financing is often through a mix of private and government loans.

Convenient public transport, greater cultural offerings and affordable rents have made downtown cores popular real estate in many American cities. Yet municipal revitalization has not always kept pace with the demand for urban living. Former schools, hotels and industrial buildings often lay in disrepair, ripe for adaptive reuse.

What, exactly, is adaptive reuse? Unlike renovation, which aims to restore a building to its original state, adaptive reuse converts a property for a completely new purpose. Changing a former factory into multifamily housing units or an abandoned warehouse space into commercial offices are examples. Typically, an adaptive reuse project preserves the unique design elements that gave the original structure its character.

Purchasing a property for adaptive reuse can be a rewarding investment. While it is not without risks, many local governments offer incentives for urban revitalization that could make your project financially viable.

Conduct due diligence

A beautiful building alone does not guarantee a successful investment. It is necessary to do your due diligence when considering investing in real estate for adaptive reuse.

  • Demand. Think about how the property will be used and how it will fit into the local economy. Is housing at a premium in the area? Is there a demand for commercial storefronts or office spaces?
  • Building condition. While renovating a property is far less expensive than a new build, you will need to assess the health and safety risks that an older building can pose for the project’s anticipated use. Not all structures can be suitably rehabilitated for the purposes of housing or food service, for example. Hire a trusted professional developer or contractor to assess the building’s structural integrity and internal infrastructure to see what original features can be kept and what will need to be replaced.
  • Location. Consider the property’s connectivity to public transport, housing and commerce. The neighborhood’s development progress will influence whether people will want to live, dine and shop in the area.
  • Zoning. Beyond its location, identify how the property is zoned — for example, residential, commercial, industrial or mixed-use — and if you’ll need a special permit for the planned project.
  • Regulation and codes. The property may need to comply with various building codes, the Americans with Disabilities Act and certain environmental regulations. The original structure was likely not designed with these considerations in mind. Compliance could be expensive and challenging, given that the features that provide much of a building’s character — doors and windows, for example — may need to be replaced to meet regulatory requirements. 
  • Community input. Consider how the project may affect the local community, especially if the property has historical significance or is an important part of the local culture. Working to gain the public’s support for the project often is worth the effort in the long run.

Research local programs

State and city governments are interested in supporting the growth of underdeveloped neighborhoods and may offer municipal bonds or city redevelopment funds for adaptive reuse projects. Many cities also offer special programs, tax credits and grants for development projects. These include tax-free renaissance zones to attract investment in underdeveloped neighborhoods and adaptive reuse ordinances that ease zoning and building code requirements and help expedite approval procedures for old and historic property redevelopments.

Your state historic preservation office has resources on federal and local regulations for adaptive reuse projects, as well. If your community or municipality is recognized as a Certified Local Government by your State Historic Preservation Office, it is eligible to apply for Certified Local Government Grants toward research, survey, preservation planning and rehabilitation work that could help fund your project.

Federal grants and tax credits

A number of federal programs exist to help finance historic renovation or adaptive reuse projects.

  • Historic Preservation Tax Credit. Sometimes called a rehabilitation tax credit, this program grants a 20 percent income tax credit for the rehabilitation of income-producing buildings that are designated “historic” according to the National Park Service’s National Register of Historic Places. For non-historic properties built before 1936, a 10 percent tax credit is available for non-residential rehabilitation projects. Specific Standards for Rehabilitation must be followed to qualify. If your property is not designated as “historic,” you can nominate it for evaluation through your State Historic Preservation Office.
  • Federal Low-Income Housing Tax Credit. If your adaptive reuse project creates affordable housing, it may be eligible for federal low-income housing tax credits. This program subsidizes the financing of affordable housing projects by granting investors dollar-for-dollar federal tax credits. The planned development must meet low-income housing qualifications to be eligible.
  • Brownfield redevelopment. According to the U.S. Environmental Protection Agency, a brownfield is a property where redevelopment activity may contaminate surrounding areas with pollution or hazardous substances. Brownfields can be large-scale areas such as former military bases or smaller properties such as a factory or gas station. While there are federal laws governing how brownfield redevelopments are executed, the EPA also provides several different grants for the assessment, cleanup and revitalization of brownfields.

Adaptive reuse projects are often funded through a combination of municipal bonds, tax credits and traditional financing. Identify what government programs you may be eligible for before comparing lenders to get the best loan conditions.

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