Adaptive Reuse Financing - IFP EP66

Adaptive Reuse Lending Strategies

Creative funding strategies enable developers to transform vintage office, industrial and other properties into 21st-century multifamily communities.

Given the more complex nature of adaptive reuse, the best financing sources would be non-recourse lenders such as debt funds and balance sheet lenders. In recent years, many debt funds entered this niche market allowing for quicker project starts.

Depending on the location of the subject property. Sponsors could be eligible for tax credits, C-Pace and a few other funding options to add into the capital stack.

Quantifying Adaptive Reuse Activity

We estimate that the U.S. has an existing inventory of nearly 32 billion square feet of commercial office, retail, and industrial warehouse space. In addition, the U.S. has an estimated 11 million multifamily units and 2.5 million hotel rooms. Altogether, that amounts to an estimated 32.3 billion sf of core commercial real estate space. AdRu activity is commingled with, and thus hidden among, those billions of square feet.

Defining Adaptive Reuse

To develop a recommended industry definition for adaptive reuse, ACRE

and CCIM Institute interviewed a broad cross section of industry participants, including developers, brokers, municipal government leaders, CCIM instructors, Counselors of Real Estate, lenders, and investors. Utilizing their input, we determined that the following elements are necessary for a project to qualify as adaptive reuse:

Existing structure: While adaptive reuse projects may involve some level of new construction or an expansion/addition of space, they always start with an existing structure.

Functional and/or economic obsolescence: All adaptive reuse projects commence with a property in a state of disrepair, high rate of vacancy, or with highest and best use in transition. In essence, the old use is no longer productive or economically viable, and the tenants have left.

Change of use: The project/property must involve a repurposing of a prior structure and use, not a mere re- tenanting with tenant improvements. This key point distinguishes our methodology from other industry research on AdRu.

Economic viability: The new project/property must pass the ultimate test of highest and best use. Not only does the reuse need to be physically possible and legally permissible; it also has to be economically viable. Local government incentives are sometimes necessary to make a project economically viable due to the cost of assemblage, higher repurposing costs with a greater cost-overrun risk factor than new construction, and speculative lease-up risks.

Adaptive reuse is an emerging trend and will dramatically grow in the years to come. If you would like to review some financing case studies, feel free to reach out to us.

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