The adaptive reuse of vacant or underused real estate can have a transformative effect on cities across the United States. The preservation of iconic, even historic, properties can help to strengthen the fabric of a community and act as a catalyst to reinvigorate areas suffering from economic stagnation. Adaptive-reuse projects aren’t just good for communities. They represent an excellent opportunity for developers, particularly given the fact that there is often less competition compared with new construction of affordable and mixed-income housing.
With interest in adaptive-reuse projects continuing to grow, below are three key guidelines for developers to consider:
Assessing a Property
Potential real estate targets for adaptive reuse include unoccupied schools, mills, office buildings, and factories in a variety of urban and suburban settings. When assessing a potential property for adaptive reuse, here are some key questions and criteria to keep in mind:
· Will the project meet the local market’s affordable housing needs? Demand for housing is clearly a key component of any residential development decision. Developers should consider whether a mixed-income or 100% affordable project makes sense in the context of the local market. Other considerations include the need for housing targeted to specific generational cohorts, environmentally conscious residents, and/or job-specific interests (e.g. teachers, health-care workers, etc.);
· Does the property offer access to parking, transportation, and tenant amenities like grocery shopping? These elements are instrumental to the livelihood of the potential property’s occupants, who, for example, may need access to public transportation to go to work;
· Is the project in an area that includes predominantly vacant Class B, C, and D properties? Conversions, which bring properties up in value, can have a catalytic effect on the local community;
· Does a conversion make economic sense? For example, are there physical restrictions to the building? What larger costs do developers need to understand from the upfront?;
· Are there any environmental hazards that remain from old business use of a property? Environmental hazards that remain from old business enterprises can have an impact on the adaptive reuse of old buildings. Developers must be careful around environmental due diligence before embarking on a project; and
· Does the municipality have a defined redevelopment strategy? With these types of developments, partnership between public and private entities is instrumental to develop and sustain affordable housing properties and the surrounding community.
Financing a Development
Understanding a municipality’s defined redevelopment strategy is an important step in financing a development. Because adaptive-reuse projects help communities achieve many goals, developers are often eligible to receive low-income housing tax credits and grants from local, state, and federal policies designed to support affordable housing and/or economic development. Credits and grants sometimes relate to historic preservation or environmental benefit in addition to the creation of affordable housing. Two important questions to ask are:
· Are there subsidy resources available?
· Who will be the financing partners?
The Bank of America Merrill Lynch team recently financed the conversion of a former shoe mill built in 1896 in Middleborough, Mass., into 25 multifamily housing units that will be restricted to residents earning less than 60% of the area median income. The project was supported in part by $1 million in subsidy funding from the state in addition to federal housing tax credits that the bank purchased. This project is a good example of what can be accomplished through a combination of private and public support when clear community development goals are set beforehand.
Developing a Reuse Project
There are many partners involved in a reuse project, including developers, community representatives, state and/or local elected officials, state and/or city housing or economic development agencies, lenders, investors, and subsidy providers. To successfully manage an adaptive-reuse housing project, sponsors must get the support of all stakeholders and keep them informed throughout the course of the property’s development.
Developers should also clearly articulate the benefits to both the site and the community. For example, a conversion of Class D office property to Class B residential property can not only create more safe, affordable housing, it can also create real economic and social value for the community.
Vacant buildings, great opportunities
Great opportunities can exist wherever there is underutilized real estate. Bank of America Merrill Lynch recently provided $7 million in construction financing and $7 million in low-income housing and historic tax credit investments to help turn an abandoned high school into 48 affordable senior housing units in Augusta, Maine. Other examples of projects that have helped to transform communities include the conversion of a textile complex into 62 new affordable housing units and the conversion of a vacant office building into 112 mixed-income units.
In addition to understanding and applying the basic adaptive criteria outlined above, it’s also important to team up with experienced partners, including legal counsel, tax advisers, and other professionals in evaluating and structuring these projects. Using this guidance effectively, developers can help contribute to the economic revitalization of communities across the country.
Todd Gomez is a senior vice president and market executive in Community Development Banking at Bank of America Merrill Lynch.
General disclaimer for Bank of America Merrill Lynch.