Oldie But Goodie - Tackle your next historic rehab project with fewer headaches and greater ease.
By Margot Carmichael Lester
Taxes, legal issues, and bureaucratic red tape are three things most developers want to avoid like the plague. Historic developers, however, actually choose to tackle these challenges head-on. You may call them crazy, but these historic rehabbers are saving landmark buildings and breathing new life into cities across the country.
While the obstacles are many, there are smart, effective ways to navigate the tedious redevelopment process. A thorough title search, valuable tax credits, and the help of preservationists can make redeveloping historic properties—even those with deed restrictions—more lucrative.
“Using the tax credits makes the project more painful—not less,”says Ted Hamilton, president of Dallas-based Hamilton Properties Corp., which has done about $200 million of historic preservation work in North Texas. “But it is worth going through the brain damage because of the economic benefit to the project. In fact, none of our historic projects would be feasible without tax credits.”
Every developer has to evaluate the budget with a magnifying glass, but when the site is historic and potentially environmentally sensitive, the expenses can quickly add up. Environmental reviews, deed restrictions, and the full remediation processes add time—and money— to the process. And since most historic redevelopments are handled by small- or medium-sized firms, managing the wallet is even more crucial than it may be for larger companies with deeper pockets and better economies of scale.
“People don’t think much about it, but it’s hard to fit an apartment building into an old office building,” Hamilton says. “It opens you up to all kinds of structural and environmental surprises. It’s hard to forecast where your budget’s going to end up. Without historic tax credits and some incentives from the City of Dallas, we couldn’t make our projects pencil out.”
FINANCIAL BOOST
Most cities and states offer their own historic tax credit programs. Plus, the federal government offers a hefty 20 percent federal tax credit for rehabilitating historic buildings. For Hamilton Properties’ latest rehab project, the $100 million, seven-story penthouse Mosaic, the company received $18 million in federal tax credits. “There is no state income tax in Texas, so no state tax credits,” Hamilton explains.
Still, getting historic tax credits isn’t easy since developers are required to work with a number of preservation organizations that have say-so over the projects. For example, a developer must abide by the guidelines of the National Park Service to receive federal tax credits. The agency reviews plans to make sure the design—including exterior materials and features, finished and unfinished interior spaces, and even stairways and structural features—meets the Secretary of the Interior’s Standards for Rehabilitation.
“Twenty percent of the total capitalization of a project is great, but the hardest part is submitting your plans to the state and the National Park Service and waiting,” Hamilton says. He estimates the process added six to 12 months to Mosaic’s full timeline.
Fairfield, Conn.-based Becker + Becker Corp. felt the same pain when it redeveloped The Octagon, a former asylum on Manhattan’s Roosevelt Island, into a 501-unit apartment complex. The design for the $160 million project had to be approved by the New York City Landmarks Preservation Commission, Roosevelt Island Historical Society, New York State Historic Preservation Office, and the National Park Service.
“This project took nine years, seven of which were spent planning and designing,” says Bruce Redman Becker, president of the planning, design, and development firm. “It was challenging to get every agency on the same page because there’s no ‘correct’ approach to preservation.”
“It’s important to take an iterative approach to developing a preservation plan that meets budget constraints and also satisfies preservation objectives,”Becker adds. “The approach that preservation agencies prefer is often not financially feasible, so it is important to be creative during negotiations to balance reservation and budget demands.”
KNOW YOUR LIMITS
Following the rules is critical to getting a historic rehab off the ground. In particular, it’s essential to find out whether the desired site has a deed restriction, which controls the future use of properties even after the parcel has changed hands. Deed restrictions are becoming a painful thorn in an increasing number of developers’ sides as more urban infill redevelopment projects hit the pipeline.
These restrictions are most frequently used when environmental contamination has occurred to protect the previous owner from future litigation and future users from potential harm. “The state or federal government agrees on the environmental standards that must be met, and if you leave the property contaminated, you have to notify future developers,” explains Mark Manewitz, environmental partner at Herrick, Feinstein law firm in Newark, N.J.
If you do your due diligence, deed restrictions are easily uncovered during a title review. “They’re in the deed book, not hidden in an esoteric back room somewhere. Any competent attorney will find them,” Manewitz says. “If you find one, you need to evaluate how it impacts your development.”
Proceeding with a project is often a question of pricing. “Costs that might seem prohibitive can be mitigated by creative use of what the project’s going to be and combining that with the environmental cleanup,” Manewitz says. “For example, if you’re already excavating, you’ll be removing several layers of soil anyway. The only question then is what you have to pay to dispose of it.”
Because of these challenges, taking on historic properties, especially those with environmental issues, isn’t for the faint of heart, Hamilton says. “It’s definitely harder than new construction on a greenfield, and that’s why a lot of big companies don’t do it,” he notes. “You can’t replicate it from one project to another.” Despite that, he says, when you see a dormant property come alive, “it’s worth the labor of love it requires.”
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Historic Hints
Whether you’re facing environmental remediation or deed restrictions, these tips will help your historic rehab go smoothly.
■ Involve preservationists early. Yes, it will add time, but it can reduce heartburn. “We involved preservationists and showed them that we were committed to completing a historic renovation that was faithful to the original design,” says Bruce Redman Becker, president of Fairfield, Conn.- based Becker + Becker, a design, planning, and development firm. “Once they were on board with our plan, they were big supporters.”
■ Hire a great general contractor. “The contractor is the one who keeps the budget intact,” says Ted Hamilton, president of Dallas-based development group Hamilton Properties Corp. And once you find a great one, hang on tight. “We used the same team for the last two jobs and could hit the ground running, even with a $6 million asbestos abatement,” he adds. “You need the right people coordinating such a huge project.”
■ Don’t be cavalier with restrictions. If you’re looking at a property with a deed restriction, don’t messaround. “You need to work with a good environmental lawyer and consultants who have done this before,” notes Mark Manewitz, environmental partner for Herrick, Feinstein in Newark, N.J. “Violation of deed notices and restrictions is a crime.”
