MJW Investments

Adaptive Reuse: Preserving History
Not for the faint of heart, historic preservation and adaptive reuse are worth pursuing, say developers

By Katelyn Lee

THEY WILL NEVER BE EASY, BUT HISTORIC preservation and adaptive reuse are becoming increasingly popular in Southern California-and nationwide-as developers seek ways to utilize existing structures for new and more profitable uses. As its popularity grows in concert with urban development, government agencies are cooperating by offering a spectrum of tools that can be utilized by developers and cities to redevelop and rehabilitate aging and underutilized buildings. This can thereby re-energize communities and neighborhoods, while preserving local cultural heritage, architectural character and a community’s historic legacy.

“A number of municipalities in California and nationwide endorse the historic preservation and reuse trend,” says Linda Dishman, executive director of the non-profit Los Angeles Conservancy, the leading advocate of historic preservation in the Greater LA area. “As added incentive, there are a host of local, state and federal programs that offer funding for rehabilitating older buildings that still have life left in them. In many cases, local officials will work with developers to find new uses for historic buildings.”

Since its founding in 1978 as part of the community effort to save the LA Central Library from demolition, Dishman’s organization has been a strong proponent of and expert resource for historic preservation in the greater LA area.

In Los Angeles, three projects developed by LA-based Forest City Residential West have garnered numerous accolades and awards. They are Metro 417, a historic preservation/adaptive reuse project that rehabilitated the former Subway Terminal Building in Downtown LA into a vibrant mixed-use property; I 100 Wilshire, a long-vacant high-rise office building adjacent to the 110 Freeway that was redeveloped into a luxury condominium tower: and the Mercury at 3800 Wilshire, the former corporate headquarters of Getty Oil, which is also being redeveloped into luxury high-rise condos.

Dishman says these projects represent the effectiveness of the City of Los Angeles’ pioneering Adaptive Reuse Ordinance (ARO), which was enacted in April 1999 to encourage the conversion of underutilized commercial buildings into residential uses. The success of this land-use policy helped solidify the Downtown LA renaissance by providing thousands of apartments, condos, live-work spaces and artists’ lofts now being built in the Downtown core. By so doing, the city’s goal to revitalize the lackluster Downtown area is being achieved.

Thomas Cox of Thomas P. Cox: Architects, who is also involved in the above-mentioned projects, points out that there are numerous issues associated with renovating older structures. They include structural stability, toxicity and contaminated soils, and unforeseen conditions like mold and water intrusion. He stresses the importance of proper due diligence coupled with comprehensive design analysis to ensure that these buildings are suitable for the developer’s reuse plans.

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

Cox also emphasizes that architects and developers learn the newest trends in designing and developing historic/adaptive reuse projects, and the intricacies of planning tools such as special ordinances and zoning for these projects. “This is not a business for the faint of heart,” he states, “so it’s critical to be well informed and well armed before starting down this path.”

Sometimes the benefits of an existing structure outweigh the possible pitfalls. At 1100 Wilshire, Kevin Ratner, president of Forest City Residential West, says the spectacular views were one of the main reasons Forest City was so interested in acquiring the 37-story office tower.

With the potential for multiple unknowns, Renata Simril, senior vice president of Forest City Residential West, who oversees development of Forest City’s historic preservation/adaptive reuse projects, says one of the biggest challenges that these projects bring is satisfying fire and life/safety regulations in buildings such as the 80-year-old Subway Terminal, as well as in 1100 and 3800 Wilshire, since both were originally designed as office buildings. “Fire and life/safety trumps everything,” she states. “It’s also critical to make sure you have, as part of your planning and development team, the proper technical expertise and in the case of older buildings, consultants such as the LA Conservancy who know the ins and outs of historic preservation.”

Echoing Cox, Simril 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.

In Downtown San Diego, Bosa Development is transforming the former San Diego Gas and Electric Co. Generating Station 8, which has been designated an historical landmark, into a luxury, for-sale residential tower called Electra. With 43 stories and 248 units, Electra will soar to new heights as San Diego’s tallest residential landmark. The original two buildings on the site were designed by Eugene Hoffman in 1911 to house the boilers and turbines for the San Diego Electrical Railway Co.

The San Diego Gas and Electric Co. then purchased the property and engaged William Templeton Johnson to expand the existing facility to meet the city’s increasing energy needs. Further expansions by Johnson and other architects occurred between 1939 and 1941.

Mindful of the building’s value as a preeminent example of neoclassical and art deco architecture, Bosa is preserving the station’s facade and key structural and architectural elements, integrating them into the high-rise structure. The company is also donating commercial space along Broadway to the San Diego State University Art Department to install an art gallery. The Electra is slated for completion in early 2008.

Electra represents the finely tuned give-and-take that attempts to preserve as much of a structure’s historic significance as possible when it undergoes a new use. Nat Bosa, president of Bosa Development, points out that it also “has to fit within the context of the surrounding neighborhoods and community and, most important, work financially for the developer.” A complete redesign may be the only solution in some instances. “It’s a different type of development process because you have to be ready to respond to anything,” Bosa 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 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.”

Ellen Berkowitz, a partner in the Real Estate and Land Use Group at Manatt, Phelps & Phillips LLP, contends that historic preservation and adaptive reuse are useful methods for Los Angeles to add badly needed housing to its inventory. “Downtown Los Angeles has tremendous untapped potential for a number of reasons,” she says. “One key reason is that, because Downtown is not a residential neighborhood in the traditional sense, there should be little community objection to high-rise and other residential.”

She also points out that some of the markets offer an economic advantage to developers who could (at least theoretically) experience some savings by reusing existing buildings rather than relying on more expensive new construction. As a result, thousands of units have been constructed, providing housing where many vacant offices and warehouses previously existed.

While revitalizing Downtown LA has been a good thing, Berkowitz says that the rebuilding process, due to construction and material costs, has required higher prices of the housing that is replacing the older buildings, which pushes up the rental and sales prices of the new stock. The result is a chipping away at affordable housing options, requiring the lower income residents to find housing elsewhere–or not at all. “In Downtown today, where people of vastly different socio-economic groups live next to one another, the need for more affordable housing is hard to ignore,” she states.

Mark Weinstein, president of MJW Investments, was the first developer to use the Historical Property Contract Program, also called the Mills Act, to secure tax breaks for one of his pioneering projects. He says that like any real estate deal, adaptive reuse projects must be evaluated using financial assumptions that paint a real picture of a project’s potential return while minimizing risk. “The biggest difference in understanding the viability of an adaptive reuse project is factoring the neighborhood quality, before and after the project is complete, in order not to overprice the project,” he explains.

Adaptive reuse projects in less desirable areas may not sustain the value as well as an established community in the same market area. Weinstein says comparable projects need to be evaluated on a block-by-block basis in an urban setting. “What might seem to be selling or renting at a high rate six blocks away from an adaptive reuse project may not translate into comparable sales performance,” he says. Because an adaptive reuse project is unique, additional time may be required for the market to absorb the available units.

Because reusing an older building is always challenging, Weinstein says a developer needs to plan early and properly in the construction cycle if the goal is to keep costs below what they would be starting from scratch. For instance, structural upgrades, especially in a seismic zone, will add costs and require careful planning.

Nevertheless, a historic building may have distinct architectural elements that make it special and worth the additional effort and costs. “Even if the character-defining features are confined to the exterior, an historic structure may have a better chance of standing out in the marketplace, giving it an advantage over [itsl competitors,” Weinstein says.

Sometimes a building may look beautiful and seem to be poised for residential reuse but is not suited for efficient residential layouts. Amenities, such as pools, gyms, conference rooms, recreation rooms and parking are sometimes hard to incorporate into projects.

The biggest challenge usually is providing adequate parking for all units. Depending on the circumstances, adaptive reuse projects can cost as much as or more than new construction due to the raising land costs and complexity of the projects.

“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,” she says.

Moreover, during the rehab process builders may uncover unexpected problems that could significantly increase costs. Berkowitz warns that developers should be mindful of hidden costs, and budgeting properly for these contingencies is key to making the project pencil out.

To deal with the structural unknowns, design constraints, entitlements and other challenges, Dishman points out that developers have a variety of tax incentive and tax credit programs available to lessen the burden of historic preservation and adaptive reuse.

Along with the Adaptive Reuse Ordinance, the City of LA offers such incentives as the Milis Act, which provide the potential for property tax reduction for owners of historic properties within the city.

On the state level, there is the State Historic Building Code, and from the federal government there are investment tax credits and facade easements.

“It’s important for developers to work with local planners and government agencies, as well as with historical societies, community groups, and state and federal agencies to get these projects off the ground and completed,” Dishman concludes. “A willingness to work in concert with public and private interests, coupled with necessary knowledge and expertise, are vital to the success of these projects.” -socal