MJW Investments

Spring 2007, Vol. 20, No. 2

EVALUATE
Like any deal, adaptive reuse projects are evaluated using financial assumptions aimed toward getting a great return while minimizing risk. The biggest difference between such deals and others is that, with adaptive reuse, it’s critical to understand and factor in neighborhood quality both before and after the project is done so that unit pricing is not estimated too highly. Often, reuse projects are in less-desirable areas that do not catch up to the value of established communities in the same town or cannot sustain that value. In an urban setting, comparable studies need to be evaluated block by block. What seems to be selling or renting at a high rate six blocks away may not translate into the same kind of sales at your project’s location. Because adaptive reuse projects are a unique type of project, it may take extra time for the market to absorb the available units. The best mitigation for this situation is to have the developer design and deploy smaller units. Resisting the urge to create “grand lofts” reduces the length of time on the market. This is because many loft buyers are first-time home buyers for which the price point is not value per square foot, but rather the overall sales price. For this reason, the million dollar loft condos should be saved for the beach where the buyers expect to pay more for location.

FINANCE
Historic tax credits can be used for rental properties in a variety of ways. They can serve as equity for developers or as construction funds for rehab. Provisions such as the Mills Act in California are often overlooked. The act can provide building owners 50 to 70 percent potential savings on their tax bills. Project developers need those breaks because a myth in the industry is that it costs less to do an adaptive reuse project than to create a new building. Adaptive reuse projects costing as much or more than new construction are common because of rising land costs and the complexity of the projects. Structural upgrades, especially in a seismic-zone, will add costs and require careful planning.

REUSE
Reusing an old building is always challenging. Sometimes a building may look beautiful and seem to be posed for residential reuse, but it 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. And the biggest challenge usually is providing parking for all units. A custom reuse of basements can create parking areas, but usually at a very inefficient rate – sometimes doubling the space needed for one stall because of building constraints. The best advice is to consult with those in the know such as land use experts, historical societies that know about the tax benefits and investment advisors about the practical realities of the site.

These points were prepared by Mark Weinstein, President, MJW Investments (www.mjwinvestments.com). The firm specializes in revitalizing urban neighborhoods with adaptive reuse projects that incorporate housing with retail components. Weinstein was the first developer to use the historic Mills Act on downtown Los Angeles to get tax breaks for the buyers of loft/condo units. He can be reached at (310) 395-3430 or mweinstein@mjwinvestments.com.