Adaptive Reuse in Commercial Real Estate

What is Adaptive Reuse?

In commercial real estate, adaptive reuse occurs when an older building is adapted for a different use than it was originally designed for. Adaptive reuse can have a variety of advantages for commercial real estate investors and developers. Primarily, this comes in the form of significant savings; demolition and new building construction can be extremely expensive, and adaptive reuse can lead to substantially lower construction costs. In addition, many buildings targeted for adaptive reuse have a significant historic past and pleasing aesthetic qualities, which can often help attract and retain tenants.

Historic buildings that adapted for new uses can often take advantage of various state and federal tax credit programs, such as the federal Historic Tax Credit (HTC) program. In this article, we’ll take a deeper look at some of the reasons why adaptive reuse is growing increasingly popular in cities across the United States and how developers can use it to their advantage.  

Benefits of Adaptive Reuse

Adaptive reuse has a variety of benefits for both investors and developers looking to maximize the potential of their commercial real estate investments. However, to gain the most from an adaptive reuse project, developers must choose projects extremely carefully. Some of the most common benefits of adaptive reuse projects include:

  • Excellent Locations: Though not always the case, many older commercial buildings are located in highly desirable urban areas, such as city centers. Even if is not located in a city’s urban core, an older building in a neighborhood with rapidly increasing commercial rents may be an excellent candidate for repurposing and rehabilitation.

  • Superior Building Materials: While older buildings can have a variety of issues, many older structures are built with materials such as stone, which is incredibly sturdy and can lead to significant energy when compared with recently constructed buildings.

  • Zoning and Permitting Flexibility: Certain cities, such as Los Angeles, have special adaptive reuse incentive programs, which relax density, parking, and accessibility requirements, as well as other zoning ordinances, while also making it easier and faster for developers to obtain permits for adaptive reuse projects.

  • Historic Tax Credits: The federal Historic Tax Credit (HTC) allows investors who support the rehabilitation of eligible historic structures to deduct 20% of the project’s qualified costs from their federal income tax liability. In addition, many states have similar historic tax credit programs that can be paired with the federal HTC in order to maximize investment returns.

Challenges of Adaptive Reuse

While adaptive reuse projects can have a variety of benefits, they come with certain potential drawbacks, too. When rehabilitating an older structure, it may be extremely difficult to stay in compliance with building codes, especially those regarding safety and accessibility. In particular, older buildings may contain fire safety and life hazards, such as asbestos, and often lack modern fire safety systems and fire-resistant construction features. In addition, older buildings are less likely to have accessibility features such as ramps, elevators, and handicap parking. While it’s true that some cities are willing to relax zoning ordinances for adaptive reuse, investors and developers should still keep these potential challenges in mind when deciding to go forward with an adaptive reuse project.

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