Lending on Adaptive Reuse Projects: Tips & Examples

Adaptive reuse projects have become a popular development option in recent years, especially with the impacts of COVID-19 making the future of certain property types uncertain. Adaptive reuse projects are defined as the process of renovating an existing building to fit a new purpose. For example, projects include converting an office building into a multifamily complex or a mall into an industrial distribution center.

As the adaptive reuse definition implies, these projects are great for preserving storied local architecture and present a clear opportunity for sustainable development, which is generally more environmentally friendly.

But they do present some unique challenges for commercial real estate financing.

This article will provide important tips lenders should keep in mind when lending on adaptive reuse projects and a few examples of projects that have knocked the concept out of the park.

Tips for Lending on Adaptive Reuse Projects

Aside from the typical due diligence that you would do on any project, adaptive reuse projects require an additional level of analysis to make an educated lending decision. We’ve outlined four tips that lenders should use to successfully lend on an adaptive reuse project.

Understand the Project Through the Developer’s Eyes

Understanding a ground-up development is relatively easy and comparatively straightforward; projects start with a blank slate and then essentially follow the same basic steps. Whether it’s a new office building or a new apartment complex, it’s easy to imagine those projects going up on an empty lot.

In contrast, adaptive reuse projects require the lender to see the project through the developer’s eyes and understand their vision for the end product. It can be tough to envision a decrepit, derelict old factory converted into creative office space, so the lender must be on board with the financials driving the project and the vision behind it.

Look Into Zoning Regulations

Zoning regulations can make or break an adaptive reuse project, so it’s in the lender’s best interest to do their research and due diligence to confirm that the proposed project will be allowed. Because adaptive reuse isn’t the norm, most cities haven’t gone about creating zoning regulations that would account for, say, a shopping mall converted into an industrial distribution center.

Even those that do could require months of paperwork before the zoning change.

As adaptive reuse projects become more common and successfully completed, this issue should, in theory, become less of a concern. In the meantime, lenders need to pay particular attention to the risks here because mistakes can be costly.

Account for the Potential Construction Risks

Depending on the type and age of the existing building, naturally, construction can be a major risk factor in an adaptive reuse project. If you’ve ever watched one of those home reno shows on TV, you know that many unexpected – and often expensive – issues can pop up once you start taking down walls.

To avoid this, lenders must confirm that the developer has done their due diligence and fully understands the building’s current state. From wiring to water pipes and construction materials, the lender must be assured that every potential problem is accounted for and its associated costs.

In short, history can take a toll, so verify that the bones of the building are a solid foundation upon which to build – or that the costs to fix issues are factored in.

Confirm the Numbers Make Sense

Lastly, and perhaps most importantly, lenders should be careful not to be drawn too far into the excitement of an adaptive reuse project. Let’s face it; these projects tend to be inherently cool. It’s genuinely exciting to play an active role in converting a historic building into something rejuvenated and useful; however, loans should not be extended if the financials highlight too much risk.

To help with this, lenders should regularly be asking themselves why adaptive reuse is being pursued rather than ground-up development. Or whether the project is the best use for the site and how the market will react to the project once it’s complete. If there is any uncertainty around these questions or the financials backing the project, the lender should take a step back and analyze it further.

As Simon Sinek famously says, start with why – and continue asking until you’re sure.


Examples of Adaptive Reuse Projects

Now that you understand a few of the tips and tricks to keep in mind when analyzing adaptive reuse projects, here are a few examples of completed projects. You’ll find a variety of projects across different use cases.

Denver Union Station

Located in the historic LoDo district of Denver, Union Station was a once bustling transportation hub for trains that slowly declined in use. The Beaux-Arts style building was revitalized and opened as a mixed-use space in 2014, housing retail and office space, chic restaurants and bars, and an upscale hotel and remaining a hub for buses and trains.

Brewers Hill

Brewing beer was once a big business in Baltimore; renovation and adaptive reuse keep that legacy alive with the revitalization of two breweries – Gunther Brewery and National Brewery. The Brewers Hill project is mixed-use, with two million+ sq. ft. of office, retail and residential space across 30 acres.

The Momentary

A 63,000 sq. ft. Kraft cheese factory in Bentonville, AR, closed up shop in 2013. By 2020 it had reopened as The Momentary, an impressive contemporary art space topped with a stylish bar.

Preserve at 620 

Located in Austin, Texas, Preserve at 620 was an adaptive reuse project that converted an old Walmart SuperCenter into 200,000 square feet of creative office space. The project has received several awards, including ULI Austin’s 2021 Best Project Innovation and the Austin Business Journal’s 2020 Rehab Project of the Year. 

Photo of an office complex called Preserve at 620
Source: CoStar 

Ponce City Market in Atlanta 

Ponce City Market is a mixed-use development that includes retail, restaurant, and office space along with high-end apartments. Originally a Sears distribution center built in the 1920s, the warehouse had been used by the City of Atlanta as a city hall until Jamestown Properties purchased the building in 2011. By 2012 the project had secured its first tenant, and today the developers have plans to add 500,000 square feet to the existing 2.1 million square foot redevelopment. 

Photo of the Ponce City Market in Atlanta
Source: Jamestown Properties 

Wonder Bread Factory in D.C 

As the name suggests, the Wonder Bread Factory redevelopment was a project undertaken by Douglas Development to convert an unused factory into high-quality office space. After sitting vacant for more than 20 years, Douglas began work on the project in 2012 and delivered the completed product in June 2013. The project now offers 98,000 sf of loft-style office space. 

Photo of Wonder Bread Factory in D.C
Source: Douglas Development 


Adaptive reuse architecture is not a new phenomenon, and in fact, these types of projects are only picking up steam. We’ve seen them happen across the country, from San Francisco to Atlanta and DC. Consider cities like Detroit, which has thousands of abandoned structures, some of which will surely see reuse. The adaptive reuse process is as dynamic as it is challenging and with that comes rich rewards for developers and the lenders who are to make solid lending decisions when underwriting a commercial real estate loan.

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October 20, 2021