Notable Old Properties Offer Unique Opportunities to Preserve the Past.
Historic properties may present commercial real estate professionals with many challenges, but they also offer both tangible and intangible rewards. While brokers and developers may have to meet current building codes and obtain government approval for redevelopment projects, they can enjoy incentives ranging from tax credits to relaxed building codes.
For some, the personal satisfaction of saving a piece of history is all that matters. "I would rather go restore a historic building than build a Jack in the Box in the suburbs," says Craig Woolmington-Smith, CCIM, director of Catalyst Investment Group in Orinda, Calif. "I’d rather leave something to the community that is an asset. [A historic building] is something you can drive by and point to and be proud of."
Retail Rises in Historic Bakery
Redeveloping a historic property for the first time can be a daunting task for commercial real estate professionals. "This is intense," says Louis Sinclair, CCIM, owner of Sinclair Properties in Raleigh, N.C. "There’s a surprise every day." When Sinclair bought the 72,000-square-foot, two-level Royal Bakery in 1996, he was more interested in the building’s location than its history. "It’s centrally located for a lot of action that goes on in the area," he says. "It looked like it was right for retail development."
However, the 57-year-old bakery was an important piece of Raleigh’s history. Sinclair says bakery tours often were the local students’ favorite field trip and people enjoyed the scent of fresh-baked bread that wafted through the city. For years it was one of Raleigh’s treasured attractions, so Sinclair decided to nominate it for the National Register of Historic Places (see sidebar). It was placed on the register in 1997.
The building’s historic designation from the federal government meant that the Advisory Council on Historic Preservation had to review Sinclair’s redevelopment project before he began. "Some of the things we asked for we didn’t get," he says, including the approval to cut doors into certain exterior walls. "They want to maintain [the exterior appearance] as close as possible."
Sinclair was allowed to turn the basement into a parking garage and add a deck to the rear of the building and patios to the sides and front. He also had to address some environmental concerns, including removing underground oil tanks and asbestos.
Inside, Sinclair divided the open area into 24 stores, each less than 2,000 sf for a total of 28,460 rentable sf. He predicted that 85 percent of the space would be leased by the mall’s January opening.
Average annual lease rates are $17 per sf triple net, which is typical for the area, Sinclair says. He can’t charge more than the market’s average lease rates because some tenants are apprehensive that the building’s historic designation could hinder any improvements, he says.
Sinclair says he enjoyed redeveloping the Royal Bakery because there’s usually "very little different from one development to the next." This project presented many unknowns and forced him into "creating on the fly," he says.
Looking for City Support
Historic properties of all types — hospitality, industrial, multifamily, office, and retail — are found throughout the country. Historic designations are assigned by the federal government as well as state and local governments. Sometimes communities declare a property historic based on its age without going through a formal designation process. Nonprofit organizations also exist to help preserve old properties.
Properties granted historic or landmark status by the federal government are eligible for federal tax benefits — including up to a 20 percent investment tax credit — and federal assistance for preservation projects when funds are available. State and local governments also may offer tax credits to improve historic properties. Sinclair received a 5 percent tax credit from North Carolina on his bakery conversion. "[The tax credit] really makes a project worthwhile because there’s a lot of additional costs in rehabbing an old building," Sinclair says.
Woolmington-Smith agrees that redeveloping historic properties can lead to unexpected construction expenses. "You never know what you’re going to get when you open the wall," he says. "They’re not cookie cutters."
Woolmington-Smith started working with historic properties about seven years ago when he became involved with downtown redevelopment projects. Last year, his company purchased the 10,000-sf, two-level Masonic Temple in Concord, Calif. Built in 1927, the building features 20-foot-high beamed ceilings. The company originally intended to acquire adjacent properties and convert the block into a retail entertainment center.
One of the advantages of working with historic buildings is that cities tend to grant developers some leniency in bringing them up to code, Woolmington-Smith says. "You get a lot of city support," he says. For example, if the Masonic Temple wasn’t a historic property, it would be expected to meet current regulations including the Americans with Disabilities Act, and electrical and fire codes.
However, cities may be more willing to compromise with developers of historic properties. For instance, if a developer builds a structure to code adjacent to a historic building, then the city may waive the requirement that the developer bring the historic structure entirely up to code, Woolmington-Smith says.
Despite this potential leniency, Woolmington-Smith says he wants to see more city involvement in preserving historic properties. Catalyst had to put the Masonic Temple up for sale after being unable to acquire a nearby property. Woolmington-Smith says the city could have intervened on the company’s behalf. "There has to be a willingness to use eminent domain," he says. The company now is trying to ensure that the Masonic Temple is sold to a developer that will preserve it.
Sometimes, city involvement can complicate a project. The John Buck Co., a Chicago developer, originally intended to tear down the 16-story McGraw-Hill Building to make way for a retail entertainment complex, according to the Chicago Tribune. The city, however, had different plans for the art deco structure.
Built in 1929, the building’s limestone-and-granite façade features 40-by-40-inch panels with Greek mythology and zodiac figures carved into them. Recognizing the architectural significance of the façade, the city declared it a landmark, which rendered the developer’s plan to tear it down obsolete.
After two years of negotiations, the city and developer reached an agreement: The developer could tear down the building, but only after removing the façade. Once construction of the new building was complete, the developer would have to replace the façade.
This first-of-its-kind project was started in 1997. The 1,400-pound stones were removed from the building by chipping away the interior walls. Once removed, the stones were cataloged and shipped to a storage yard. While in storage, the panels were inspected for any damage — either from the removal process or wear and tear over the years — and repaired.
At least 75 percent of the original 2,200 stones must be replaced in order for the building to retain its landmark status. If the developer fails to meet that percentage, it will be assessed a large fine by the city. The expensive and time-consuming project is expected to be complete by the end of this year.
In Tupelo, Miss., a successful cooperative effort between private developers and the city revitalized a historic neighborhood that had declined over the years, says C. Kelly Cofer, CCIM, owner of the Cofer Group LLC in Tupelo. The neighborhood had several single-family homes that were built around the turn of the century. During the last 20 years, some developers purchased these homes and illegally converted them into multifamily properties, Cofer says. "The city had no record that they were converted from single to multifamily properties," he says. Soon after, the properties began to deteriorate due to neglect, and the neighborhood followed suit.
In an effort to redevelop the adjacent downtown, Cofer says his company decided to work on revitalizing the older neighborhood. "We sort of viewed this as something that had to be done," he says. "We felt like there was a broader issue at hand."
Cofer met with the mayor, city planner, and representatives from the building-code department to discuss the importance of the historic neighborhood. "We wanted them to also be a partner in this," he says. After much negotiation, the city declared the neighborhood a historic district in 1997.
The Cofer Group has invested $1 million in the neighborhood since then, mostly buying multifamily properties and rehabbing them. Cofer says he markets the apartments to young professionals who like "the location as well as the character and charm of the units." Monthly lease rates for two-bedroom units can reach $725, but average $525. One-bedroom units lease for about $400 per month.
Cofer says Tupelo’s cooperation in this redevelopment has helped make it successful. The city’s No. 1 priority has been enforcing building codes more diligently, which prevents illegal conversions. The city also froze property taxes for seven years in the historic district and waived permit fees for certain redevelopment projects, he says.
In addition to redevelopment projects, several other opportunities in historic properties exist for commercial real estate professionals.
Called the Eighth Wonder of the World when it opened in 1902, the West Baden Springs Hotel in West Baden Springs, Ind., is famous for its six-story domed atrium. Measuring 100 feet tall and 200 feet wide, the glass-and-steel structure was the world’s largest clear-span dome until the mid-1960s.
Many years removed from its heyday, the building and grounds rapidly deteriorated after it became vacant in 1983. Still, the U.S. secretary of the interior granted the building a National Historic Landmarks designation in 1987, citing it as "a major feat of engineering." A $37 million project undertaken in 1996 by the Historic Landmarks Foundation of Indiana in Indianapolis and a corporate benefactor partially restored the property to its former glory. The 338,000-sf building and surrounding 250 acres went up for sale during the restoration and it is still on the market.
Tina Connor, director of marketing at the Historic Landmarks Foundation of Indiana, understands the time and money that the property requires may hinder its sale. In addition to the $37 million sale price (both parties would like to recoup their investments), prospective buyers are made aware that millions of dollars in improvements still are necessary.
"We recognize it’s not the right kind of property for everyone and it might take a while to find a buyer," says Connor, who is handling the sale. "[But] you wouldn’t be interested in it if you didn’t value the landmark status."
Last summer, the West Baden Springs Hotel was designated as an official project of the Save America’s Treasures program. Save America’s Treasures is a public-private partnership between the White House Millennium Council and the National Trust for Historic Preservation. Founded in 1998, the program’s goal is to save the country’s historic and cultural legacies for future generations.
Preservation, conservation, and restoration projects of all types are eligible for the official project designation. Approximately 233 historic buildings, sites, monuments, artifacts, and documents have been recognized by Save America’s Treasures. Among the other designees are the Washington Monument in Washington, D.C., and Walt Whitman’s birthplace in West Hills, N.Y. All official designees are eligible to compete for grants.
J. Reid Williamson, president of the Historic Landmarks Foundation of Indiana, is confident this designation will bring West Baden Springs Hotel recognition from potential buyers. "The publicity received from associating with a national program will strengthen our efforts to find a buyer who can complete the restoration and make the old hotel vital again," Williamson says.
About seven years ago, Julie Johnson, CCIM, a health-care group specialist for CB Richard Ellis in Phoenix, was hired to handle the leasing for the Lois Grunow Memorial Clinic in Phoenix. The 48,000-sf structure, built in 1931, features ornate carvings around its doors and windows and hand-painted murals of famous physicians in the main lobby. It was placed on the National Register of Historic Places in 1985.
When the current owners, Carlsberg Properties Ltd. in Phoenix, bought the clinic in the early 1990s, the building had deteriorated slightly, Johnson says. Since then, the company has spent $1.5 million on renovations, including asbestos abatement, a new roof, and updated electrical and plumbing systems.
In addition, some structural changes were made to attract tenants. "We had to cut new windows in the walls to accommodate our tenants’ desire for that natural light," Johnson says. But the building’s original design never was compromised. "We’ve maintained the character and integrity of the building," she says.
Johnson says she is using the clinic’s historic status as a marketing tool. "I think this building has a lot of character," she says. "There’s nothing else like it. It’s nice to represent a building that’s unique."
So far, 98 percent of the building has been leased at an average rate of $17.50 psf. Johnson says this rate is comparable to other medical offices in the area.
Valuation. Joe W. Milkes, CCIM, owner of Milkes Realty Valuation in Dallas, has encouraged the redevelopment of several historic properties through his role as a valuation consultant. Milkes uses his expertise in local market conditions to assess historic properties and determine the feasibility of potential projects.
When valuing historic buildings, Milkes looks at the location, economic environment, and reuse potential. "When you market the property to developers and buyers, they can see the opportunity," he says. "You can bring out the value."
Milkes conducted the initial valuation study for a conversion project proposed by the Bennett Miller Co. in Dallas. The developer wanted to convert a factory built in 1911 into loft apartments. Milkes says a certain amount of risk was involved in the project because it was the first of its kind in the area. "At the time, it was hard to know how deep the demand would be" for lofts, he says.
Despite the risk, the developer went ahead with the project, which was completed in 1993. Milkes says the 80-unit building has proved successful for the company with average monthly rental rates of $1 psf. The building also was placed on the National Register of Historic Places in 1994.
In addition to valuing historic properties for developers, Milkes serves as an expert witness in lawsuits involving them. Recently, he gave testimony in a suit filed by the owner of an old feed mill against an insurance company.
The mill accidentally burned down during redevelopment and the owner believed the insurance company should take its historic features into account when settling the claim, Milkes says. "The dispute is over the value of the property," he says. "Is it a run-down mill or a historic property that had the potential to be more?"
While historic properties may present commercial real estate brokers and developers with questions and challenges, they also provide professional and personal benefits.