Spring 2014 Business Law Bulletin

A gun manufacturer now occupies an old automobile plant, a craft brewery and pub resides in a former warehouse, an abandoned church is a popular venue for live music, an indoor go-cart track occupies a recently-dark mall department store, and students now gather for classes in the anchor space of a revived shopping center–each of these transitions is an example of unlocking value in overlooked real estate. The concept is adaptive re-use, and governments and non-profits are partnering with private enterprise in exceptional ways to re-purpose and redevelop abandoned real estate assets for economically viable purposes (as opposed to mere historic preservation). Whether you are a property owner or an organization looking for space to grow, the prospects for taking an underutilized property and converting its use in new and innovative ways have never been more abundant. Remaining open to creative real estate projects may be a driver of your company’s success in a competitive marketplace.

The inventory of unused commercial buildings in cities and towns began to grow years ago as industrial concerns were forced to close or relocate operations and accelerated in the wake of the 2008 economic crisis. Once thriving areas in many cities and towns became dotted with empty warehouses, manufacturing facilities, shopping centers, and office buildings as struggling enterprises closed their doors. Federal, state, and local governments, together with non-profit organizations, have responded by making available numerous incentives and programs designed to encourage revitalization, investment, job creation, and economic growth. Counties and municipalities are offering flexibility with respect to zoning regulations to accommodate changing uses, are cooperating to solve parking needs, are providing more streamlined and expedited permitting processes, and, often, are making direct investments in infrastructure.

Redevelopment authorities have been organized and empowered to grant property and sales tax abatements and rebates, and to serve as a conduit for both taxable and tax-exempt bond financings, among other things. Tax incentives, such as the federal and state New Markets Tax Credit and Historic Tax Credit programs, can be instrumental in making a project financially viable. Likewise, non-profit organizations focused on revitalization efforts are active in many areas, and can serve as an agent in connecting project owners with available resources, such as grants and non-traditional sources of capital. In addition, programs like the Brownfield Redevelopment and Voluntary Clean-Up Program offer protections against liability for pre-existing environmental conditions that may be present on a site.

The most successful examples of adaptive re-use projects involve a proponent with both tremendous vision and the commitment to confront challenges that are unique to re-purposing an existing structure. Even though local governments are demonstrating a willingness to be flexible with respect to zoning and entitlements, the process for approval can still be time consuming and subject to public comment. Building codes present the most difficult entitlement issue, as retrofitting an older building to comply with current code requirements is often costly and presents practical difficulties. Other engineering hurdles may exist as well, such as improvements to increase energy efficiency, replacement of wiring and plumbing, asbestos remediation, and securing adequate parking. With proper due diligence and planning, and the input of an experienced team of design, construction, legal, and financial professionals, such obstacles can be successfully planned for and mitigated.

For proponents willing to undertake the extra complexity, however, the benefits of an adaptive re-use project can make the investment worthwhile. The costs can be substantially less than new construction. Governments and non-profits looking to promote economic revitalization efforts generate free publicity for the enterprise. A measure of goodwill is likely to result from reintroducing jobs to a depressed area, improving the vibrancy and marketability of adjacent properties, and creating a positive environmental impact by re-using existing materials and structures.

Consider the example of an abandoned grocery-anchored retail space on a major thoroughfare of a large metropolitan area. The space remained empty for an extended period of time, causing adjacent retailers and restaurants to lose business and eventually close. Without an income stream, the property owner could not invest in maintenance, and the center fell into disrepair, becoming an eyesore and threatening the value of adjacent properties. Where most people saw a problem, a higher education institution saw opportunity.

Rather than build a traditional campus, the school obtained a rezoning classification and assistance from local governments, leased the anchor space and several adjacent retail suites, renovated the façade, reprogramed the interior, and now operates a successful school. The success of the school and resulting traffic has rejuvenated the center, new leases have been signed, additional outparcels have been developed, hundreds of jobs have been created, the area is once again vibrant, and property values are increasing. The school, the property owner, and the local municipality benefitted by adapting to changing economic conditions and remaining open to a different model for how a traditional retail shopping center might be utilized.

Maynard draws on our depth of experience in multiple disciplines, including real estate transactions, zoning, environmental, tax credit programs, public and private financing and governmental incentives to efficiently and successfully serve our clients’ interests with respect to adaptive re-use projects.

Mel McElroy and Tom Clark are Shareholders in the firm’s Real Estate practice. Mel can be reached at 205-254-1174 or mmcelroy@maynardcooper.com. Tom can be reached at 205.254.1072 or tclark@maynardocoper.com.