Across the country, investors and property owners with similar visions of renovating grand old movie palaces, derelict factories and other forgotten commercial structures are taking advantage of tax incentives and favorable real estate dynamics to monetize their passion for architectural preservation.

"Many investors see it as a mix of realizing investment goals while revitalizing urban centers," says Ken Bernstein, director of preservation issues at the Los Angeles Conservancy, a local historic preservation organization. "They want to preserve the sense of place that historic buildings give to a city, a sense of connectedness between the past and the future. And," he adds, "these projects can also provide a tangible return on investment."

For the investor with an eye on local economic trends, this tangible ROI often goes hand in hand with the economic revitalization of neighborhoods. It also hinges on the often nostalgic value of architecturally significant buildings. "Any time you improve a building," says John Leith-Tetrault, the director of community partnerships at the National Trust for Historic Preservation in Washington, D.C., "the post-rehabilitation value will be greater. Plus, there is a long-term appreciation for the building, and consequently, buyers will pay more for the character of a ‘cool’ space." (Click image to enlarge)

Cool Spaces, Cool Tax Incentives As a purveyor of restored urban "cool" spaces, Tom Gilmore, a Los Angeles architect and developer, enjoys an almost messianic aura in urban revitalization circles these days. Over the past three years, Gilmore has successfully rehabilitated several once-beautiful, commercial buildings on a seedy stretch of Main Street in downtown Los Angeles, turning the Old Bank District into an urban-chic neighborhood of airy residential lofts and leisurely sidewalk cafes. More importantly, he did so at a profit, proving once and for all that architectural nostalgia and urban revitalization in Los Angeles can be money-making propositions. Thanks to Gilmore’s pioneering efforts, downtown Los Angeles is now the hottest residential real estate market in the city. Neighborhoods are being revived, property values are rising, and refugees from Los Angeles’ notoriously bland suburbs are paying top dollar for residential property in a true urban setting.

While across the country, restoration activities may vary in scope, detail and financial viability, their common ground lies in numerous tax incentives that make private investment in architectural rehabilitation possible.

The National Park Service currently administers the Federal Historic Preservation Tax Incentives Program that rewards private investment in rehabilitating historic properties. This program provides a 20 percent tax credit for the restoration of buildings listed with the National Register of Historic Places, and a 10 percent credit for noncertified buildings built before 1936. (Click image to enlarge)

According to Leith-Tetrault, there are numerous state and local incentives that may apply as well. "There are 23 states that have some form of historic tax credit," he explains. "You can use these together with federal credits and local credits."

On the local level, one will find any number of tax incentives and laws that apply to historic preservation, some that apply to particular rehabilitation tasks. An example is that for historic building restoration, most major cities provide property tax freezes that enable building owners to keep the same tax rate as long as they own the property.

According to Gilmore, the options for utilizing tax credits can become important, if complex, tools when securing financing for a restoration project. "In the Old Bank District, we spent $28 million to renovate three buildings. We were eligible for roughly 19 cents on the dollar in tax credits, which then sold to a tax credit partner for $4.8 million in cash," he explains. "This type of financing is extremely complicated, but at the end of the day, it is worth it."

The value of Gilmore’s properties has soared. "We bought
for $10 per square foot, and now the buildings are valued at $60 per square foot," says Gilmore. "When you do historic properties, you are betting on a 10-year plan. If you’re investing money in a restoration project, you can’t just buy into the economics, you have to buy into the broader vision as well."

The successful investor in a historic restoration project will have a broad vision not just for the building being renovated, but for the economy of the surrounding area. If a pioneering restoration project can inspire others to return to a given area, property values will rise and commercial activity will increase. The trendsetter who is first to invest in the neighborhood, and hence the first to benefit from tax breaks and low initial capital layout, is likely to lead the pack when it comes to returns. But it takes sheer guts to put these financing packages together, and the actual restoration work can prove daunting. "It can go wrong in a thousand ways," says Gilmore. "Buildings built in 1903 are fundamentally different from those built today. Also, working with bureaucracies on zoning and planning is challenging, to say the least."

This is where passion and vision come into play. "Your upfront investment will probably be higher because the local bank will doubt your vision and will only give you half the money you need," says Leith-Tetrault, who, as a former banker, financed numerous restoration projects before joining the National Trust for Historic Preservation. "But in the end, you have the vision to see something that others don’t."

Reinterpreting a building’s purpose as Napoliello and Moskowitz did is crucial to the success of most historic restoration projects. Tom Gilmore’s buildings in the Old Bank District in downtown Los Angeles had outlived their usefulness as office space, so they were transformed into residential space. The cavernous Bijou will never be able to compete with multiplexes and VCRs, so it now hosts a business to which its unique glamour adds value.

"If you’re investing money in a restoration project, you can’t just buy into the economics; you have to buy into the broader vision as well."

Like Gilmore, Napoliello and Moskowitz are pioneers and feel their vision, effort and investment will transform an area—not traditionally a destination for art lovers—into the next must-visit destination for art collectors. This goal, acknowledges Moskowitz, is not without risk. But, he adds, "We also know that in Hermosa Beach—a place that is beautiful beyond belief—where the city wants to revitalize the downtown, and where we found this incredible old building, what is missing is a great art gallery. So in the end, building this art gallery in this location made perfect sense."

The community apparently agrees. Since opening Gallery C’s doors in mid-2003, says Napoliello, more than a few locals who fondly remember matinees at the Bijou have stopped by to express their appreciation for saving the building. With this type of community support, Napoliello and Moskowitz remain confident that the restored vitality of the Bijou and of the dynamic gallery it houses can create a whole new cultural and economic dimension in this quiet beach town. Says Moskowitz, "If you make it beautiful, people will come."

Photographs by Erhard Pfeiffer