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| Passion Investments: Property |
From the Ashes
Michael Verdon
12/01/2004
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One important step in
achieving adequate returns that Rothschild and other developers take is seeking
a rehabilitation tax credit offered by the National Register of Historic Places.
Buildings that meet certain standards for historical authenticity may be listed
with the National Register. When a developer completes a restoration of a listed
building, he may qualify for a 20 percent tax credit, meaning he can write off
20 percent of repurposing costs. The IRS also offers a 10 percent tax credit for
nonhistoric buildings erected before 1936. According to John Leith-Tetrault,
executive director of the National Trust’s Community Partners program, these
buildings do not qualify for the National Register list. “Essentially, that
means you don’t have to follow the Secretary of the Interior’s standards to get
the credit,” Leith-Tetrault explains.
VALUE JUDGMENT
Derelict factories and other industrial structures that have outlived their
usefulness are finding new life as repurposed commercial and residential real
estate. Though investors may take on considerable risk when renovating these
often-cavernous structures, with available tax incentives and the right
location, they can realize impressive returns. |
Following the National Register
standards, Rothschild notes, is often burdensome and leads some developers to
walk away from a restoration project. Increasingly, however, developers are
choosing to work within this framework. Leith-Tetrault says the growing number
of developers applying for historic tax credits is proof that the industrial
repurposing niche is thriving, and that the architecture of the past is creating
tomorrow’s wealth. In 1999, according to the National Trust’s figures,
developers of historic properties had expenditures of $945 million that
qualified for historic tax credits. By 2003, that figure had risen to $2.8
billion. The National Trust estimates that in four years the number will be
between $4.6 billion and $7.1 billion. Last year alone saw a 35 percent
year-over-year increase in money invested in completed rehabilitation projects.
Without these tax credits, the financial burden for many developers would be
onerous. Consider the current repurposing of the old St. Louis post office,
expected to cost approximately $40 million. “About $22 million of that will be
provided in tax credits,” Leith-Tetrault says. “It’s often the case with these
buildings that the developer needs the credit to do the deal. They can run into
costs that need to be defrayed by some sort of subsidy.”
 |  | | J. BRIAN O’Neill’s Millennium Complex, near Philadelphia, is changing 24
acres of abandoned steel mills, plants and foundries into a work, live
and play community. It is scheduled for completion in 2005. |
Success Factors
While tax credits loom large in the success of any factory
repurposing project, standard real estate market forces also come into play.
Buildings located in developing areas, or in areas with strong development
potential, hold the most promise. “Some people might fall in love with a
great-looking industrial building, but if it is not in the path where
development wants to go, it won’t be a good investment,” Rothschild says. “On
the other hand, you could buy an old, uninspiring building that’s not
structurally sound but on a well-located piece of land, and it could be a great
investment.”
Industrial buildings may be zoned in a way that is advantageous,
as is the case with the Tower on Narragansett Bay. “Factories tend to have dense
zoning because they employed so many people,” O’Neill says. “In the Tower’s
case, you couldn’t ask for a better situation for a luxury high-rise. You’d
never be able to get that kind of zoning in this waterfront location now.”
A
structure’s layout can also be crucial, Rothschild says. An open layout might be
more attractive to investors seeking historic tax credits, but could be
difficult to subdivide. As Leith-Tetrault explains, the National Park Service,
which oversees the National Trust, considers the historical elements of both a
building’s exterior and interior, and how they can be rearranged. “If there’s
nothing in the interior worth saving, that gives the developer freedom to
maximize the efficiency of the space,” he says. Developers planning to slice a
factory into 3,000-square-foot spaces for small businesses gravitate toward
these structures. But a building with a monumental lobby or auditorium that
cannot be subdivided might be suited for a higher-end tenant, such as a bank,
that requires 20,000 square feet of open space with no columns, he adds.
While zoning and design considerations are important, earning the goodwill
of a municipality is an absolute necessity for revitalizing an urban building.
“Before we proceed on any renewal project, we look to see what the city is doing
to accommodate urban growth,” says Rob Gentry, vice president of brewing
operations for the Gordon Biersch chain of brew pubs. “Is there an overall plan
for the city? If so, where will it be in five or 10 years?”
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