Promoting Preservation

Financing Incentives Help Brokers Restore and Reuse Historic Buildings.

By Christine Rombouts

In the past, many U.S. towns and cities demolished historic areas in the name of urban renewal and replaced them with housing developments and strip malls. But today, preservation has become the new ethic, the key to creating many small and mid-size markets' cultural identities. Thanks to the diverse array of historic preservation financing programs, commercial real estate professionals may find new profit-generating opportunities by reusing old buildings and revitalizing neighborhoods, while earning public support and favorable media coverage at the same time.

Federal, state, and local government agencies provide a host of historic property rehabilitation tax incentive programs, making such projects viable for profit-minded developers that might otherwise opt for more-secure ventures. In choosing to revitalize rather than raze, commercial real estate professionals also improve the nation's social and economic health by preserving history while bringing new life to commercial and residential areas.

Financing and managing historic preservation and adaptive reuse projects requires intensive planning and entails significant risk. Thus, private companies often collaborate with public and nonprofit partners to pursue creative financing. By working with organizations experienced in philanthropies such as affordable housing or energy conservation, developers may discover opportunities to combine incentive programs.

Currently, the 20 percent federal historic preservation tax credit provides significant tax breaks for rehabilitating income-producing historic buildings listed on the National Register of Historic Places or certified by the National Park Service. (See sidebar for specific qualifications.) The low-income housing tax credit provides a similar incentive for affordable housing developments. These two credits often are combined to leverage private-sector investment. In addition, developers can use incentives for energy conservation, public transit, and child-care facilities, as well as state and local programs, with historic tax credits to achieve the financing necessary for rehabilitation projects. 

Money-Saving Methods Historic preservation's downside for commercial developers is the controls and regulations, which can increase costs. But keeping down costs to meet historical standards is essential — not only to qualify for tax credits but also because the majority of financing goes into updating buildings' plumbing, heating, and electrical infrastructure. In fact, many projects require new construction to create financially viable developments.

Some companies use techniques that save money while maintaining a building's historical look. For example, Style Interior Design of Irvine, Calif., uses modern technology and materials to manufacture furniture, light fixtures, and other hardware that mimic older pieces at affordable prices.

“It's hard to tell the difference between replicated products and authentic pieces that have been reconditioned,” says Greg Currens, the company's principal. “A skilled craftsman would be able to tell the difference, but to most people they are indistinguishable. There are a number of ways to match the look of the original building or fixture with a method or product that is less expensive.”

Redeveloping historical properties also requires an understanding of the planning and entitlement processes. “Like any project, this kind of development requires good, thorough due diligence, but it's a much more intense process,” says Jeff Cronin, principal planner for design and historic preservation for the city of Pasadena, Calif. “Depending on the circumstances of the site, there may be demolition and remediation, which can be costly. The entitlement process can be more extensive. The due diligence period is often more intense before the land is purchased to ensure the project is going to be financially viable.”

But “it makes sense to use the existing building stock and the tax credits attached to it, and it sustains a sense of character and cohesiveness in a community,” he adds.

The following two case studies illustrate how developers are using tax credits and other financing programs for historic property redevelopment projects.

The Hoover Hotel Historic adaptive reuse is an opportunity to revitalize blighted areas for new businesses and homes. LINC Housing, a Long Beach, Calif.-based nonprofit organization that builds affordable housing, renovated the aging Hoover Hotel in Whittier, Calif.'s downtown area into seniors apartments. This rehabilitation is in conjunction with Whittier's plan to increase its low-income housing supply as well as to revitalize its central business district.

The $7 million project included seven levels of financial assistance from public and private sources, including historic tax credits, low-income housing tax credits, the Whittier Redevelopment Agency, and Los Angeles County Industry Funds. (See chart.) To compete for federal low-income housing tax credits, the project's funding had to be in place; however, the application processes for two potential loans began much later than the tax credit process. Therefore, the city redevelopment agency's participation was critical to fill the financial gap and to provide a financing backup in case the money was not available on a timely basis.

The project didn't encounter any notable problems with buying or acquiring the land, but there were some challenges with relocating residents during construction, according to Hunter L. Johnson, president and chief executive officer of LINC Housing. “With rehab projects such as these, it helps to keep costs down by implementing construction plans in phases so that residents can stay in the complex, thus reducing relocation expenses,” he says.

Renovating the 70-year-old hotel into independent seniors apartments required replacing all of the building's mechanical systems and reconfiguring the floor plan from 100 hotel rooms into 50 living units. Special features such as drop-down seats and grab bars in showers were added to the original bathrooms. In addition, the Hoover's common areas now accommodate wheelchairs and walkers, hallways have grab bars, and the upper floors are elevator accessible. Each living unit is equipped with an emergency pull-cord system that connects residents to a 24-hour paging and emergency response operator, and five units are fully accessible for disabled residents.  

The rehabilitation also included preserving the structure's size, ornamental exterior, and interior features. Specifically, the Spanish-style red tile roof, terra cotta tiles, ornate wrought iron details, lead-panel windows, and large entry arches either were restored or recreated to match originals.

“The Hoover … blends the restored charm of its period's architectural detail with modern features and amenities geared toward seniors. Particular emphasis was placed on providing amenities that allow seniors to age gracefully in their homes, not an easy task in an old building,” Johnson says.  

Trio Apartments More than 50 properties in Pasadena are listed on the National Register of Historic Places, including the world-renowned Rose Bowl and Pasadena Playhouse. The city also is home to one of California's oldest historic preservation organizations and has extensive historic preservation services for both commercial and residential owners.

One historic redevelopment currently underway in Pasadena is the Trio Apartments, a $70 million mixed-use project located in the popular Playhouse District. When completed in 2005, Trio will contain 304 apartment units, 14,500 square feet of street-level retail space, and an underground parking facility. When the project was entitled, Pasadena required all housing developers to set aside 6 percent of their projects' total units for affordable housing; this number has since risen to 15 percent. “This is an opportunity to bring housing and retail to [the city] … [and] emphasizes Pasadena's commitment to smart growth,” says Don Gause, senior vice president of Aliso Viejo, Calif.-based Shea Properties, the project's co-developer along with Capital and Counties U.S.A.

The developers razed several non-historic buildings and are reusing two historic structures. The eight-story First Trust Bank will remain a multitenant office building and about 14,000 sf of a 1920s two-story garage with an Italianate façade will morph into the project's leasing office and a community center, topped by five loft-style rental units.

New construction, necessary to create financial viability, makes up the balance of the project. “Great measures were taken to retain the historic integrity of the two-story garage and ensure that the new development harmonizes with the existing homes and structures located within the Playhouse District,” says Aram Chahbazian, a principal with Thomas P. Cox Architects, the project's designer. “Compatibility is always important with these projects. When designing the new portions of Trio, we had to be respectful to the historic building, but we could not copy or mimic it,” he says.

As these projects illustrate, developers can turn historic property redevelopments into profitable ventures by partnering with public or nonprofit organizations to take advantage of financing programs and maximize tax credits.

Christine Rombouts is a Costa Mesa, Calif.-based free-lance writer.

The 70-year-old Hoover Hotel in Whittier, Calif., received a $7 million rehabilitation that transferred it into affordable seniors housing while preserving the property's ornamental exterior. In 2002 the property was added to the National Register of Historic Places.
credit: Nina Dooley

Qualifying for Credits
The National Park Service administers federal historic preservation tax incentives in conjunction with the Internal Revenue Service and state historic preservation offices. In addition to offering a 20 percent tax credit for certified historic structure rehabilitations, the program offers a 10 percent tax credit for rehabbing non-historic commercial buildings built before 1936.

Buildings listed individually on the National Register of Historic Places already are certified to qualify for the 20 percent credit. Buildings located in registered historic districts but not on the National Register must obtain certification or at least a preliminary determination of significance before starting a rehabilitation project. Owners should contact their state preservation office to start the tax credit application process.

To qualify for the tax credit, the NPS must certify that the rehabilitation meets historic standards. The rehabilitation also must meet the following IRS qualifications:

• the building must be depreciable;

• the rehabilitation must exceed $5,000 in a 24-month period; and

• the building must be returned to use in the year the tax credit is granted.

In addition, the owner must hold the building for five years after completing the rehabilitation or pay back the credit in full or in 20 percent increments depending on the length of ownership.

The 10 percent tax credit only applies to nonresidential properties, which includes hotels but not multifamily buildings, according to NPS rules. To qualify for the 10 percent credit, buildings must meet physical standards including maintaining 75 percent of the internal structural framework and 50 percent of the external walls.

For more information on using federal historic preservation tax credits, visit the NPS Web site at www2.cr.nps.gov/tps/tax or contact your state historic preservation office.