Editor’s note: In this three-part special report, Inman News examines the challenges and rewards of pursuing property conversions in today’s market, a case study of conversion-frenzy-gone-wrong, and marketing techniques developers and agents use to sell these properties. (Read Part 2, “Speculation in condo conversions: South Florida’s cautionary tale,” and Part 3, “Marketing converted properties as stylish and practical.”)

The ancient Greek philosopher Heraclitus said, “The only constant is change,” and nowhere is that more visible than in the thousands of real estate conversion projects in cities and towns throughout the country. Imposing brick structures that once shuddered from the industrial age’s heavy machinery now house sedate offices and high-priced condos; train stations have become shopping malls, while schools, theaters and churches are subdivided for various purposes.

While new construction developments — particularly home builders — are suffering doubly from gluts and market declines, conversion projects may offer compensating advantages for the prudent developer. Most obviously, the existing structure may have usable systems and amenities available for far less than their replacement cost. But often overlooked are the political and financing benefits gained from revitalizing a declining neighborhood — benefits that can translate into expedited permitting, grants or tax credits. However, experts warn that such projects must be well-planned, well-executed and cognizant of market cycles.

Further, conversions can give a declining asset new life as demands change. Jeff DuFresne, executive director of the Urban Land Institute’s Atlanta Council, said, “There’s a quote, ‘1/2 of the supply of real estate in the year 2030 has not been built yet.’ But the other half is still going to be around! It has to be economically viable and functional, and a lot of it is going to need adaptive reuse.”

The easiest conversion project is in turning apartment buildings to condos, a task that can require no greater physical change than an upgrade to “owner-quality” amenities. Kevin Brangers, director of acquisitions and brokerage at Kairos Development Corp. in Atlanta, said, “A lot of people who do conversions on the residential side say you can just put a fresh coat of paint on it and say, ‘Now it’s a condo.’ ”

Florida-based market researcher Jack McCabe points to a financial reason such conversions are easier than new construction: “Apartments are an existing asset that generate cash flow. A new condo construction project won’t make any money until you close, and you’re potentially vulnerable to changes in the market.”

On the other end of the complexity spectrum are projects that require extensive subdivision and upgrades. For example, many old industrial buildings have been converted into condos — indeed, such conversions in New York’s SoHo district in the ’60s and ’70s are credited with starting the loft-condo industry, and hardly an old American city today lacks a “loft district.” While these “original” conversions were often simply big, empty spaces repurposed as residences, modern conversions from such sources require new walls, electrical, plumbing and heating systems.

But even properties with existing small spaces can be difficult for other, subtler reasons. DuFresne points to the Glenn Hotel, a former office building recently converted to a 110-room boutique hotel. “A hotel needs more ‘back of the house’ activity — storage, kitchen and places that you’d need to accommodate guests. The Glenn Hotel was challenging, but it worked.” And although the Hudson Hotel in Manhattan started its life in 1928 as a residence, its three-year renovation cost $125 million.

Why such a high cost? Besides the need for newly created systems and amenities, upgrades may be necessary to bring the building in line with modern codes — potentially at the expense of the historic features that give the building marketable charm.

Corning, N.Y.-based Preservation Architect Elise Johnson-Schmidt described one such mixed-use project: “We needed to install (fire-retardant materials) between two floors with different uses, but the ground floor had a really nice tin ceiling. We took out the floor (upstairs) and put the fire rating between the joists. Typically you would remove the tin ceiling, put in the fire rating, and replace the tin, but doing so would have possibly damaged the ceiling.”

For those interested in doing such conversions, Johnson-Schmidt recommends getting local government involved early. “People often perceive code problems as being unsolvable,” she said. “But the key is to really engage the code enforcement official right from the get-go. Oftentime with historic buildings, you have a fair amount of variance. Work with the code official. Going by the code books isn’t always the solution: Try to capture the intent, rather than the letter, of the code.”

While code enforcers could present hurdles to conversion, other government officials may welcome adaptive reuse, especially if the property is in an underused area. Speaking about a Savarino Companies project near Buffalo’s stadium in the old “Cobblestone District,” Executive Vice President Eva Hassett said,  “… The city loves it. There’s [currently] not a lot happening around us — unless there’s a hockey game. We are the new uses.”

And of course, local community members need to know about intended changes of use from the beginning. As DuFresne said, “Folks always resist change where a new use might add more traffic or change the character of the area; if neighbors learn about it in the paper, that’s a recipe for disaster. They need to know about it beforehand and participate in the process. I’m not saying that they drive the process, but they need to be educated and have involvement. A big problem is not knowing the benefit to their community. Certainly a ghost mall doesn’t do anything. At a minimum, putting a police station or something like that in there might not be an economic home run. But it’s better than a vacant mall!”

Renovation projects may offer some financing benefits over new construction as well. The federal government offers tax credits against income tax for historic preservation work: 20 percent of the cost of certified rehabilitation of a “certified historic structure,” or 10 percent to rehabilitate a nonhistoric building built before 1936. States and local governments may offer additional credits. Meanwhile, conversion projects are eligible for most of the assistance programs that new buildings enjoy, such as the HOME Investment Partnerships Program for low-income housing, or from Community Development Block Grants.

But regardless of such financing assistance, DuFresne reminds that the fundamentals remain essential. “You have to meet market demands: The project has to have the right location, be priced right, and offer the right amenities.”

Ultimately, he points to the advantages of one of the most common types of conversion: the mixed-use infill. “Often you’ll see conversions of office building into mixed use, with retail on the ground floor and residences above. With more people wanting to live “in town,” it can be very successful. But you have to do it right, and it can be challenging.”

Tom Geller is a freelance writer in San Francisco.

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