Guest column by Dan Hampton, Managing Director and Head of Commercial Real Estate, BMO Harris Bank
As developers and city governments look to revitalize older urban areas, an increasingly popular tactic is adaptive reuse, adapting an old building or larger site for a new purpose. Adaptive reuse provides opportunities for commercial real estate firms. But you also must be aware of the risks involved.
Several Midwestern cities have used adaptive reuse to their advantage. In Milwaukee, the site of the old Pabst brewery is gradually being redeveloped, part of which includes the new Brewhouse Inn & Suites boutique hotel. Indianapolis is currently converting the old Bush Stadium minor league ballpark into an apartment complex called Stadium Lofts.
As more people are moving from the suburbs to urban centers to be closer to jobs and cultural amenities, cities are turning to adaptive reuse as a sustainable form of development. Repurposing historic sites provides several advantages, including:
- Preservation of an area’s historical legacy while creating valuable new use.
- Location. Sites and buildings targeted for adaptive reuse are typically located in the center of large cities.
- Buildings may be located in designated historic preservation zones, which means developers can’t tear down the structure just to get to the land. Developers must purchase the structure as an adaptive reuse project to preserve the building’s exterior historical characteristics.
- The buildings typically feature historical period details, such as ornate concrete work and brick molding, that provide an architectural value often not available through new construction. This can be particularly appealing to the hospitality, office and retail industries.
The financing options for adaptive reuse can also be advantageous to investors. If the city owns the property, it may be willing to sell it for a nominal sum in the hopes that the redeveloped property will generate tax revenue. Alternatively, the city may provide tax increment financing (TIFs) as an incentive for adaptive reuse projects. Additionally, federal tax credits may be available for developing affordable housing. Such financing structures can lessen the financial burden for commercial real estate investors.
Choose the right partners
Because city governments view adaptive reuse favorably, it provides more opportunities for developers and commercial real estate investors. While the positive aspects are clear, investors should also be aware of the risks.
My colleague Devon Osborn, BMO Harris Bank managing director of U.S. commercial real estate, points out that gutting an old building can be more expensive than new construction. Also, the costs of refurbishing an existing structure are not as predictable as they are in new construction projects. Older industrial properties, for example, may have been exposed to certain environmental risks.
That’s why it’s important to make sure you’re working with developers experienced in navigating the risks and costs involved in adaptive reuse projects. Gorman & Company, an Oregon, Wis.-based developer that has completed 22 adaptive reuse projects — including the Pabst Brewhouse Inn & Suites — certainly knows about the risks involved.
“It isn’t for those that aren’t experienced in that area and don’t have tolerance for risk,” says Gary Gorman, chief executive officer of Gorman. “It’s often a complex political and financial process you have to go through.”
Gorman notes that the only certainty in the process is uncertainty. It’s knowing how to deal with the fluid nature of adaptive reuse projects that instills confidence in investors.
“One thing that is predictable is that there will be surprises and cost overruns in the rehab process,” Gorman says. “What helps us is that we have a track record of completing projects independent of whether we take hits in terms of cost overruns or other surprises. If you have that track record, then investors are more comfortable with a developer.”