Adaptive Re-Use: A Guide to the Real Estate Industry's Latest Trend

Adaptive Re-Use: A Guide to the Real Estate Industry’s Latest Trend

It’s no secret that the modern industrial style of architecture and design has been widely adopted in the commercial real estate industry. Easily recognizable by its brick walls, cement floors, exposed timber beams, high ceilings and sleek lighting, the style is nearly impossible to miss these days. Restaurants, hotels, apartments, offices and retail shops alike are increasingly focused on “industrializing” their space in order to create an authentic and nostalgic ambiance.

While the trend is booming and becoming ever-present in today’s society, it is far from a new concept. The first spaces to pilot this type of style were the result of a strategic type of re-development called adaptive re-use. This is the process of retrofitting an old building with underutilized space to an entirely new use that fits the needs of present-day occupants.  In other words, the building maintains its form while changing its function to meet today’s standards.

Adaptive re-use can be an excellent strategy for building owners looking to revitalize their real estate investments, especially when based upon a strong vision, creative solutions and careful execution.

Why Re-Use Old Buildings?

Environmental Sustainability:

Re-using an existing building is arguably the most sustainable type of development by extending a building’s life, recycling existing energy and materials, & avoiding demolition waste. When a building’s original structure and some of its materials are able to be re-used, a significant amount of materials and energy is conserved. On the other hand, demolition and new construction require substantially larger amounts of energy usage (and costs!) through the procurement of new materials, assemblage of new supplies and extra man power on board.  

Financial Sustainability:

There are often considerable historic tax credit opportunities for the adaptive re-use of a historic building. The federal Historic Tax Credit (HTC) program was initiated to encourage the rehabilitation and preservation of historically significant buildings. This includes a 20% tax credit of Qualified Rehabilitation Expenditures (QREs) for any costs incurred during the redevelopment phase of historic structures.  While the rules for taking those credits are complex, and most individual investors cannot utilize the credits, there are syndicators who will provide equity in return for the credits especially for larger projects.   Minnesota has a companion 20% tax credit against state income tax that is a refundable credit, which can be utilized for individual investors.

Cultural/Social Sustainability:

Historic buildings often contain historical details and finishes that can no longer be replicated with modern construction methods. The transformation of vacant or under-utilized buildings can spark community revitalization efforts . A well-done adaptive reuse project has the opportunity to promote social cohesion, inclusiveness and a sense of cultural & historical pride within a community.

Challenges to Consider with Adaptive Re-Use Projects:

Hidden Conditions:

Hidden conditions will be an ever present challenge when dealing with an older historic building. Whether it is structural deficiencies or environmental hazards, there’s rarely an adaptive re-use project that doesn’t run into unanticipated surprises somewhere along the way. For example, contamination due to years of prior industrial use could require extensive clean-up efforts for asbestos, mold or lead paint, or even venting systems to address vapor issues. In order to avoid costly surprises, it is vital to take note of the building’s structural capacity and current conditions during the due diligence and planning phases in order to assess the project’s financial feasibility and success

Modern Building Code Requirements:

Complying with modern building codes is one of the biggest issues to consider when planning an adaptive reuse project. In most cases, historic buildings pre-date current building codes and are likely not in compliance. This can lead to major challenges if not detected early on in the due diligence process, as it may require substantial upgrades to bring the building up to code. A few key examples to watch out for include fire ratings and exiting requirements, ADA compliance, energy codes, electrical codes, environmental requirements, and sound separation between floors.  The specific issues can also vary based on the age of the building; a pre-1938 brick and timber structure will present distinctly different challenges than a 1960s era warehouse.   An experienced architect will be able to utilize the conservation code to navigate the balance of meeting code requirements and preserving the historic nature of the building.

Complex Financial Modeling:

Federal Historic Tax Credits are the best way to get the most financial return out of an adaptive re-use project, but they require in-depth knowledge and expertise on the inner workings of these complex programs. While these incentives are a major benefit for this type of project, they also tend to be one of the most complicated pieces to understand. Assembling an experienced team that includes a development consultant, architect and tax accountant that have experience dealing with the historic tax credits is key to making realistic financial assumptions and understanding the process.