Multifamily Trends

Something Old, Something New

By Christine Rombouts

The phrase “something old, something new,” typically associated with weddings, can also refer to marriage of another sort – that of historic properties with new construction, creating residential and commercial projects that honor yesterday while embracing today.

Many communities across the United States are looking at historic preservation as a way to revitalize the economy and renew the downtown, while preserving the area’s character and cultural legacy. “As the historic renovation process began in St. Louis, Kansas City, and similar cities, the municipal and state governments, as well as the civic community, have valued the renovation of these historic properties,” says Kevin McGowan, CEO of St. Louis-based McGowan & Walsh Urban Developers. “The added benefits of creating new, quality housing at good prices while restoring vacant and underutilized historic properties have made historic and adaptive use a valued endeavor.”

Numerous challenges are associated with renovating older buildings, points out Thomas Cox, whose firm, Thomas P. Cox: Architects (TCA), is involved in several historic preservation and adaptive use projects in the Los Angeles area. These challenges include such issues as structural stability, toxicity, contaminated soils, and unforeseen conditions such as mold and water intrusion. He emphasizes the importance of conducting proper due diligence coupled with comprehensive design analysis in order to ensure that problems can be solved and buildings are suitable for the developer’s reuse plans.

Nevertheless, even with problems, Cox and other architects and developers say rehabilitating and revitalizing older or unused buildings can be well worth the effort. In many cases, Cox says, the necessary infrastructure is in place and traffic patterns are established. “Historic preservation and adaptive use are the ultimate in smart growth and the ultimate in recycling,” he notes. “When buildings are brought back to life through adaptive use, they revitalize neighborhoods by preserving the historic core architecture and create new housing and mixed-use opportunities, as well as increase public safety. Reuse of vacant or dilapidated buildings also enhances economic growth in urban and commercial cores. It’s the right thing to do.”

One of the biggest challenges is meeting fire and other safety regulations in older buildings, says Renata Simril, senior vice president with Forest City Residential West, who oversees development of Forest City’s historic preservation/adaptive use projects, such as the 80-year-old Subway Terminal in downtown Los Angeles, which the company renovated into luxury apartments. She urges architects and builders to conduct comprehensive due diligence and underscores the importance of working closely with fire, police, and other city departments, as well as planning and building officials. “Fire and life safety trumps everything,” she explains. “It’s also critical to make sure you have the proper technical expertise as part of your planning and development team, and, in the case of older buildings, consultants who know the ins and outs of historic preservation.”

Although historic preservation/adaptive use projects can have many pitfalls and are not always as successful as hoped, local governments and developers are increasingly committing to them. Consequently, a growing variety of toolkits with tailored programs and special mechanisms are available to help developers work through some of the more daunting issues, such as entitlement, planning, design, and financing. Among these tools are impact assessments, design standards, intergovernment agreements, and public/private collaboration on planning

Historic properties that become part of modem structures come in all shapes and sizes, from power generation stations to parking structures to soaring silos. In downtown San Diego, Burnaby, British Columbia-based Bosa Development is building a 43-story high-rise condominium called the Electra in the center of the long-abandoned San Diego Gas & Electric station, designated as a local historic landmark. Designed by Burnaby-based Chris Dikeakos Architects Inc., the 480-foot (146-m) condominium tower will overlook San Diego Harbor and include 248 units when completed next year

Mindful of the building’s value as a preeminent example of neoclassical and art deco architecture, the developer and the architect worked closely with the city’s Historical Resources Board to preserve the station’s facade and key structural and architectural elements, and incorporated them into Electra’s design. The give-and-take between the city and the developer over the generating station helped bring about both preservation of as much of the structure’s beauty and historic significance as possible, and integration of the new residential use, according to Dikeakos
The melding of the generating station and the new condominium tower presented Dikeakos with many challenges, not the least of which was having the board looking over the firm’s shoulder as it designed the high rise. “The board was involved at every stage of the project’s design and is now closely monitoring construction,” says Dikeakos, whose firm has designed several high-rise condominium projects for Bosa. “The board’s oversight is intended to ensure that the new structure does not compromise or detract from the architectural character of the historic structure. In many ways, it was comforting to have the board so deeply involved in the project design. Its guidance provided valuable input that resulted in a project that was not only acceptable to the city and the historic preservationists, but is also a unique architectural landmark on San Diego’s harbor.”

Working closely with city officials and historic preservationists is key to the success of any historic/adaptive use project. A “respectful discussion” with a municipal code official is more productive than repeated requests for waivers from an appeal body, McGowan points out. “Demonstrating good faith in compliance on some important historic aspects in one part of the renovation process may earn a small break on another that is very difficult to meet on a given property,” he says. And
finding cost- and time-efficient solutions to problems faced along the way is critical to maintaining a project’s economic feasibility; without such efforts, the costs and time delays of historic renovation projects can quickly sink them, he says.
Deep due diligence and persistence were fundamental to Forest City Enterprises, Inc., during a landmark historic/adaptive use project in downtown Dallas. Forest City is renovating the historic Mercantile Tower building as part of a $250 million project that includes the nearby Continental Building and the four-building Atmos Energy complex. The former Mercantile Bank building, a downtown icon since the 1940s and a cornerstone of the city’s redevelopment plans, will see life for the first time in more than 20 years. Recognizing the importance of this architectural treasure, the city provided a $70 million subsidy to Forest City in the form of public incentives, including tax abatements and funds generated from a tax increment finance district

In August 2005, Forest City and Dallas, with unanimous city council approval, entered into a redevelopment agreement involving nine vacant buildings in downtown Dallas, including the Mercantile Tower. Forest City will convert the vacant office space into apartments and condominiums, with completion of the Mercantile renovation slated for spring 2008
“It took time, resources, and a lot of negotiations. This type of development is definitely not for the faint of heart,” says David Levey, executive vice president with Forest City Residential

A key factor in the formation of the Mercantile project, as with any real estate development, is location. “That is the number-one factor we look at, which is actually no different than new construction,” said Levey. “We try to find properties that are part of an urban fabric. So it’s critical to ask, are you in a good location? However, many of the older properties and historic buildings are in marginal locations, so then a developer has to ask, can we create value to make a marginal location a great location?” To put it simply, says Levey, a successful historic renovation project needs “good bones, good vision, good connections, and good support from the city.”

The four-building, 1.1 million-square-foot (102,000-sq-m) Mercantile Bank complex is in the heart of downtown Dallas, across from Neiman Marcus’s flagship store and the Bank One Center. The entire complex approaches 2 million square feet (186,000 sq m) of space. Plans call for preservation of the iconic 31-story clock tower within the complex, which will be redeveloped into 225 lofts and ground-floor retail space. The three remaining buildings will be demolished and replaced by retail space, a parking garage, and a new 16-story residential tower adjacent to the Mercantile Tower. The Continental Building will be transformed into a 170-unit condominium development. Plans for the Atmos Energy complex are still being developed. The project is expected to lure new office tenants as well as residents to the urban center of town, Levey says, and is viewed as a landmark project that will revitalize this area of downtown

Integration of older buildings such as the Mercantile Tower with new construction presents architects and builders with myriad challenges, not the least of which is whether the existing structure has the integrity to hold up under the intended new use. This was one of the overriding concerns for Baltimore, Maryland-based Turner Development Group, which converted an old silo farm into a new residential project called Silo Point along Baltimore’s waterfront. A 112-foot (88-m) grain silo serves as a historic icon for the development
Project architect Christopher Pfaeffle, principal and founder of Parameter Inc. in Baltimore, says that with the Silo Point project, Turner Development hired a testing agency early in the process to take core samples of the existing concrete in the grain elevator to verify that it was stable enough for development of the proposed condominium project, even though the new residential loads on the building would be a fraction of those for which it was designed. “It’s always a challenge with more antiquated materials,” Pfaeffle says. “There are always challenges associated with designing for an existing structure with regard to space, as you have a set of limitations imposed by the structure. The existing building type and interior spaces can be very inflexible and may not allow for a clear and consistent fit with the new use. Trying to fit one size of space into an existing space often requires creative design solutions.”

Pfaeffle points out that with the many uncertainties of adaptive use projects, decision making is difficult, as is the discovery process associated with planning and designing the transformation of an old building into something new. For example, blending historic and modern housing can change the structural makeup of a building in ways that may not be obvious. New floor openings, increased load requirements, and changes to the building’s overall framework often require innovative structural and mechanical design solutions. “This path can often be costly, difficult to manage and coordinate, as well as extremely frustrating,” he says. “Therefore, it is important to learn as much as possible during the early design phase so that any modifications can be made in the early stages of the project to minimize unknown tasks or surprise expenditures.”

Historic preservation and adaptive use projects come in all shapes and sizes. In some cases, an entire structure is refurbished, and in other instances, only a portion may be preserved. In Pasadena, California, a parking structure built in the mid-1920s has the place of honor in a mixed-use project called Trio. “Many cities see preservation as a way to improve their economy and revitalize their urban character while saving their sense of history and architectural heritage,” says Aram Chahbazian, a principal with TCA, which designed Trio
Developed in the Pasadena Playhouse District by Shea Properties, Trio houses 304 apartments including affordable units, and 14,500 square feet (1,347 sq m) of retail space. To provide space for Trio, several nonhistoric existing buildings were removed from the site. However, a major portion of a historically significant, two-story concrete garage with an Italianate facade was preserved to become part of a new apartment building and will serve as the leasing center. Chahbazian says diverse structural and architectural measures were used to retain the historic integrity of the garage and ensure that the new designs blend with the existing homes and structures in the Playhouse District “Compatibility is always important with these projects,” he explains. “Mixed-use communities like Trio can be even trickier because it is extremely important to ensure that the retail and residential designs work well together. When designing the new portions of Trio, we also had to be respectful to the historic building, but we could not copy or mimic it.” This is a requirement of the U. S. Secretary of the Interior Standards for Rehabilitation, which projects must meet in order to qualify for tax credits. Although Trio did not receive tax credits, Pasadena required the design/development team to adhere to these standards because “they’re good guidelines on how to deal with historical buildings, and we were happy to do it,” said Chahbazian

Major constraints on historic/adaptive use projects usually relate to construction and budget, compounded by the desire to maintain the building’s historic character in order to generate needed historic tax credit equity. Successful planning and ensuing development of these projects require a careful balance between preserving the historic integrity of the buildings and effectively and aesthetically integrating the new uses

According to McGowan, whose firm has developed hundreds of housing units in historic structures, there is no simple way to balance these interests. “There is no single remedy,” he states. “Every building is different, unfortunately, and each uncovered problem requires a fresh solution. The issues simply need to be addressed one at a time, whether it’s being addressed with a municipal, state, or federal government entity; a utility company; a material supplier (for example, finding historic replacement windows that are energy efficient); a lender or investor, or some other entity.”

As important as the exterior treatment of a historic property may be, the interior is also crucial and requires creative design and special care, points out Jarrett R. Cooper, principal in charge of Rosemann & Associates of St. Louis. “In designing residential units, it’s important to consider what the space was originally designed to be,” he explains. “If the space was designed for office use, it was probably built with lower ceilings and clean finishes. These buildings usually have smaller-depth floor plates and support a clean, finished unit design with ample opportunity for most rooms to have windows.” A warehouse building typically has much greater mass on each floor plate and usually has taller ceiling heights, he points out, thus allowing for a raw, open, loftlike space that shares the light from a single large bank of windows. However, he warns, “It’s extremely important to consider the target market before selecting a building and starting the design process, whether interior or exterior.”

Environmental and contamination problems often arise in older buildings, surfacing during construction as the structures are stripped to their core. Adding to the complexity is the fact that municipal codes have most likely been updated significantly over the years: adapting older buildings to meet modern codes is not always easy and is frequently expensive.

Because reusing an older building is always challenging, a developer needs to plan early and properly in the construction cycle if the goal is to keep costs below what they would be for a project starting from scratch with raw dirt, says Mark Weinstein, president of Los Angeles-based MJW Investments, a pioneer in historic/ adaptive use projects. For instance, structural upgrades, especially in a seismic zone, will add costs and require careful planning. Sometimes a building may be beautiful, but is not suited for efficient residential layouts. It can be difficult to incorporate into projects such amenities as pools, gyms, conference rooms, recreation rooms, and parking. The biggest challenge usually is providing adequate parking for all units.

“Many older buildings are simply no longer safe for occupancy and cannot be rehabilitated without a significant investment to improve the building’s structural integrity,” says Ellen Berkowitz, a partner in the real estate and land use group in the Los Angeles office of the Manatt, Phelps & Phillips LLP law firm. Moreover, during the rehab process, builders may uncover unexpected problems that can significantly increase costs. Berkowitz, warning developers to be mindful of hidden costs, says budgeting properly for these contingencies is key to making a project pencil out.

Unknown conditions will always exist no matter how many tests and studies are performed, Forest City’s Levey says. “Pay special attention to structural issues, elevators, and windows, which usually have to be custom made,” he suggests. “That’s why it’s important to have a contingency in your budget to account for these unknowns.” He recommends that the budget include an additional 5 to 10 percent after the guaranteed maximum price to deal with contingencies

In some cases, a complete redesign may be the only way to address problems that arise, notes Nat Bosa, president of Bosa Development. “Historic preservation and adaptive use is a different type of development process because you have to be ready to respond to anything,” he says. “You may have to make adjustments at every stage. It might be during due diligence, demolition, and even in the midst of development, but there’s always a certain amount of discovery that may require substantial redesign. You make decisions based on the information available, but the plans and, of course, the budgets are always subject to change.”

While the hurdles may be numerous, so are the opportunities for financial assistance in the form of tax credits and other programs that reduce the risk and improve the odds of success. “A key component in successfully rehabilitating a historic building in an advanced state of dilapidation is a clear understanding of the financial adversities inherent in rehabilitation,” states Randall Alexander, president of Madison, Wisconsin-based the Alexander Company. “The state of decay and contamination in some projects requires extra attention and additional funding tools, such as federal and state historic tax credits and tax increment financing, that would not otherwise be necessary.”
Creative financing coupled with multiple funding sources was the foundation for the Alexander Company’s renovation of the Professional Building in downtown Kansas City. The 16-story modernist building, constructed in the late 1920s, features a decorative terra-cotta facade with art deco styling. Placed on the National Register of Historic Places in 1978, the building was left vacant more than a decade ago and swiftly fell into disrepair as roof leaks allowed water to penetrate all the floors and flood the basement.

The extensive reconstruction concluded in October 2006, with the new Professional Building Lofts adding 132 workforce housing units and more than 10,000 square feet (930 sq m) of retail space to downtown Kansas City. The Alexander Company used an intricate structure of state and federal historic tax credits, state and federal affordable housing tax credits, tax abatement, community development block grants, HOME funds/loans, tax-exempt bonds, and an economic development initiative to finance the renovation.

In California, the use of special tax credits and programs is growing along with the popularity of adaptive use for historic structures. “A number of municipalities in California and nationwide endorse the historic preservation and reuse trend,” says Linda Dishman, executive director of the nonprofit Los Angeles Conservancy, the leading advocate of historic preservation in Greater Los Angeles. “In many cases, local officials will work with developers to find new uses for a historic building.”

To provide incentives for reuse of historic buildings, a variety of tax incentives and other tools are available to developers, says Dishman. At the state level in California, the State Historic Building Code provides flexibility in meeting building code and life safety requirements. From the federal government, there are investment tax credits for rehabilitation work and tax benefits for donating a facade easement. Los Angeles also offers such incentives as the Historical Property Contract Program, also called the Mills Act, which provides the potential for property tax reduction for owners of historic properties in the city.

Weinstein was the first Los Angeles developer to use the Mills Act to secure tax savings for individual homeowners in a historic/adaptive use loft project in the heart of the Fashion District. Like any real estate deal, adaptive use projects must be evaluated using financial assumptions that paint a realistic picture of a project’s potential return while minimizing risk, he says
“The biggest difference in understanding the viability of an adaptive use project is factoring in the neighborhood quality, before and after the project is complete, in order not to overprice the project,” he says.

The securing of financing presents one of the biggest hurdles for such projects, and requires superior projects and superior salesmanship, says Pat Turner, president of Turner Development Group. “For example, when you go to a bank and say that you want to turn a grain elevator into luxury, high-rise condominiums, they are taken aback because it’s never been done before,” he recalls of his quest to find funding for Silo Point. “But once we convinced them of its feasibility by building a great team of experts to bring it to reality, we were able to sell them on the idea.”

The federal historic tax credit provision of the Internal Revenue Code provides a 20 percent credit over five years to redevelopers of historic properties, McGowan points out. These credits are transferable to corporate and some private investors, which adds equity to projects and improves affordability. Several states, including California, Missouri, Kansas, Maryland, and others, offer additional historic preservation tax credit programs that parallel the federal credit and provide an additional source of capital to such renovation projects.

States also use environmental tax credit programs for adaptive use project funding because many renovated buildings, such as warehouses, require some environmental remediation work as part of the interior cleanup. Cities have enacted or made use of tax abatement and tax increment financing incentives as a means to add local incentives to the acquisition and renovation of these properties. “These incentives enable developers to keep the prices they sell units for affordable in local marketplaces and at the same time make a profit that enables them to take on additional projects,” McGowan explains. “Solid pro formas using these programs are also the basis for providing the sorts of guarantees that financial lending institutions and investors expect.”

The main problem with many financing programs is the disconnect between the amount of time a developer has for due diligence and feasibility analysis, and the time it takes to get approval for these programs, says Justin Shelby, founder and principal of UrbanFx Development. “There would be a much greater benefit to these programs if there was a faster approval process that was less subjective,” he states. Programs such as historic tax credits also have a “high degree of subjectivity” associated with approvals, he points out, as well as uneven allocations across the state that result in one area receiving more funds than it can use while another area is denied awards due to a lack of funding.

For developers such as Levey, the future looks bright for historic/adaptive use projects. “People want to live downtown and local governments want to revitalize their downtowns,” he notes. “This has been a trend we’ve seen for several years, and I expect it will continue. Of course, there are only a finite number of buildings to convert, but there’s still a good pipeline of properties to develop.” There is a movement across America, he states: more and more, people want to live, work, and play in that “urban fabric.”