Adaptive Reuse Financing Game Plans

Creative funding strategies enable sponsors to transform vintage office, industrial and other properties into 21st-century multifamily communities.
The adaptive reuse of the Thomas Edison Invention Factory and Commerce Center in West Orange, N.J., introduced 334 rental units, 18,400 square feet of retail and a 630-space parking structure. Photo courtesy of New World Group

 

Six months ago, the Doyle Hardware building in Utica, N.Y., opened its doors following a $15 million adaptive reuse project that transformed the century-old factory in Bagg’s Square East into a modern mixed-use community now known as The Doyle. The project is just one of many conversions of former industrial properties financed by the Community Preservation Corp. Most are located in various upstate New York cities—such as the Dietz Lantern Factory in Syracuse, the 500 Seneca Street building in Buffalo, and the Carriage Factory in Rochester—and have remained landmarks within the communities they served, even after becoming vacant.

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Sadie McKeown, Executive Vice President of Construction, Community Preservation Corp.  Photo courtesy of Community Preservation Corp.

“A lot of these historic buildings used to be hubs of industry that defined the city,” said Sadie McKeown, executive vice president of construction lending and initiatives at CPC.  “Adaptive reuse keeps that connection to the past, while giving the building new life and a new purpose through the addition of new housing and economic opportunity.”

The main “catch” when it comes to adaptive reuse projects is their power to transform and revive a community. A well-executed redevelopment can spark economic regeneration around it, and this particularly applies to larger mixed-use developments.

“The best projects have a story associated with them, and the redevelopments can reinvent and transform areas that have missed the path of progress and growth, turning them into thriving, desirable destinations and communities,” said Edwin Cohen, principal partner at Prism Capital Partners.

Among the Bloomfield, N.J.-based developer’s recent projects are the renovation and reconstruction of the 100-year-old Thomas Edison Invention Factory in West Orange, N.J.—the largest non-waterfront adaptive reuse in the state—and the industrial-to-residential conversion of a former Wonder Bread factory in Hoboken, N.J. The latter is still work in progress. “For both projects, Prism successfully obtained construction financing based upon location, quality of product, strong relationships with lenders, and the established track record for quality of our organization and its financial partners,” Cohen added.

Who Will Finance Adaptive Reuse?

Will James, Vice President of Debt and Equity Production, Northmarq. Photo courtesy of NorthMarq

The first rule of financing an adaptive reuse project is finding an experienced first mortgage lender, McKeown says. That increases the chances of a smooth funding process, given the increased number of risks and challenges associated with such ventures. Lenders also look at the site’s former use, economics of the neighborhood, plans for preserving the physical structure and what else is happening in the area. However, even with thorough due diligence, some issues are impossible to spot before work begins.

“Many times, (adaptive reuse) includes unknown construction risks that are uncovered only after construction starts,” said Will James, vice president of NorthMarq’s Atlanta office. “Adaptive reuse frequently involves high-profile buildings left dormant, so from this perspective, lenders may gravitate toward having interest, but the risks are higher.” James’ portfolio includes arranging financing for several conversions of century-old industrial assets in Georgia and South Carolina. Usually, the funding includes a Historic Tax Credit component.

Given the complicated nature of adaptive reuse, the best financing sources would be non-recourse lenders such as debt funds and mortgage REITs, James explains. In recent years, many debt funds entered this niche market together with a select few non-bank/non-life company balance sheet lenders. Alternative lenders are known for their more flexible terms and agreements.

Which States Favor Adaptive Reuse?

Edwin Cohen, Principal Partner, Prism Capital Partners. Photo courtesy of Prism Capital Partners

Public financing sources also play a major role in the success of conversion projects. Besides the federal HTC program, developers can also tap into various forms of state funding sources: property tax abatements; brownfield, textile or mill tax credits, PILOTs (payments in lieu of taxes) or city and state grants such as New York’s Main Street Grant.

“How the HTC and property tax abatements interface with the value of the property are essential to a developer’s success,” James said. “The property tax abatement really doesn’t provide much at the construction phase, unless there is a HUD loan involved, but usually proves valuable for the refinancing/permanent loan phase of the project.”

 A prime example of a complex financing structure is The Community Builders’ transformation of a vacant seven-story riverfront warehouse in Troy, N.Y. The 1899 structure, formerly the home of the Wilbur, Campbell, & Stephens Co. factory, was redeveloped into Tapestry on the Hudson, a 67-unit affordable housing community that includes 19 supportive housing units for formerly homeless families.

As McKeown put it, the project illustrates the principle that “It takes a village to put the right financing together.” CPC provided the construction and permanent financing, and the project qualified for federal and state historic tax credits. Several state government sources also provided funding, the Department of Homes and Community Renewal, the Office of Temporary and Disability Assistance and the New York State Energy Research and Development Authority.

The downside of the public financing programs is the prolonged approval time, which can delay deliveries, Cohen points out. Overall, the advantages of public funding vary significantly from state to state. “Some states are more lucrative than others where mill credits and empty building credits are applicable if a project qualifies,” James said. “Others are so sporadic in their programs that it’s difficult for developers to rely on the state to routinely pass the same rules and regulations year after year. This means that some projects simply do not happen.” The NorthMarq vice president named Georgia as a state that, technically, does not have a tax credit in place for 2022, compared to neighboring South Carolina whose programs are “much more viable and valuable and create incentives.” 

Designed by well-known Utica architect Frederick H. Gouge and constructed in three sections between 1881 and 1901, the Doyle Hardware building in Utica, N.Y., is now a mixed-use community. Photo courtesy of Community Preservation Corp.

What are the Cost Considerations of Adaptive Reuse?

The cost of adaptive reuse can fluctuate considerably, depending primarily on the initial state of the property—asset class, the building’s age and quality of construction. If the project involves an office building that was built to the highest standards, a conversion could wind up costing less than ground-up construction, Cohen explained.

“On the other hand, if the project involves the adaptive reuse of an old industrial development to residential, costs can be well in excess of ground-up construction,” he said. He also emphasized the limited opportunities for ground-up development in tight infill markets as a key factor to consider.

The financial plan should also consider local housing needs and take a long-term view of costs specific to the long-term maintenance and operation. “Ornamental architectural pieces, 20-foot windows, exposed duct work or plumbing—all of those things are beautiful, but you should be aware of the costs of maintaining them,” McKeown pointed out.

“That said, these buildings also present a great opportunity to be creative with including retrofits or features that can make your project very energy efficient. There’s usually grant funding available depending on what you’re including or the level of efficiency you’re achieving. And importantly, a high efficiency building will help drive your operating costs down over the long-term.”

Read the December 2019 issue of MHN.