AN ABANDONED Kaiser Aluminum factory (top) is being turned into the Tower in Newport, R.I. Developer J. Brian O’Neill finds satisfaction—and financial reward—in transforming yesterday’s factories into today’s “gold mines.”

AN ABANDONED downtown trolley barn in Chattanooga, Tenn., was turned into the highly successful Big River Grille in 1993.

Taxing Work

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?”

Gentry and his partners asked those questions 11 years ago as they started their first venture in urban revitalization by transforming an abandoned trolley barn in Tennessee into the Big River Grille. The six-month project was a dicey gamble. Chattanooga, where the 12,000-square-foot brick building was sited, was a decaying steel town that the Environmental Protection Agency once called the dirtiest city in the United States. The city’s urban renewal plans were still in their infancy. A world-class aquarium had been built to attract visitors, but little else was happening downtown. “When we opened in ’93, there was only one other restaurant,” Gentry recalls.

Over the past decade, Chattanooga has embarked upon an ambitious makeover of its downtown and waterfront, filling once-blighted city blocks with hotels, restaurants, art galleries and a minor league baseball stadium. The Big River Grille has evolved into one of its commercial anchors, posting year-over-year profits since it opened. Gentry notes that the 1901 building is well-suited to life as a brew pub: The 30-foot ceilings and original brick walls accentuate the spacious feel of the 9,000-square-foot restaurant, while the 3,000-square-foot basement provides ample room for the brew tanks. Gentry estimates that the renovation cost between $80 and $125 per square foot.

The founders of Gordon Biersch, which Gentry and his partners acquired in 1999, followed a similar route in the late ’80s. They renovated the Hills Bros. Coffee building in San Francisco long before the warehouse district on the waterfront became a trendy nightspot. The company, now with 25 locations, has since transformed other older buildings into brew pubs. “We have suburban locations, but we’re primarily an urban renewal company,” Gentry points out. “We like to be the pioneers of downtown.”

Gentry estimates that general development costs range from $50 to $200 per square foot, depending on the building and its location. “The costs could change from a building that you are turning into a shell, with just walls and a roof, to a complicated warehouse with multiple stories,” he says. “And there is a big difference in price between San Francisco and Chattanooga in doing construction.”

Old industrial structures can be full of hidden financial land mines that can bring misery to developers on tight budgets. O’Neill says that dealing with hazardous materials such as asbestos can end up costing more than the building itself. “It’s expensive and tedious,” he points out. “Like brain surgery, there’s only one way to do it—the right way.” Yet, despite such potential pitfalls, Leith-Tetrault believes the mining of America’s former industrial sites will continue to intensify. “Many are spectacular buildings when they’re finished,” he says. “And they often have a catalytic impact on the community, promoting ancillary development.