MIAMI—When it comes to multifamily adaptive reuse, what are the biggest challenges? And how does ROI play into the mix? We caught up with Walt Mercer, executive vice president and head of the Commercial Real Estate Line of Business for SunTrust Banks to get his take on the issue. (Be sure to check out part one of the interview, where Mercer discusses the impact of interest rates on SunTrust lending.)

GlobeSt.com: Does adaptive reuse tend to work better in some markets than others?

Mercer: Higher-population, urban core areas are typically better suited for adaptive reuse developments.

GlobeSt.com: Do you have your hand in any multifamily adaptive reuse projects?

Mercer: Among many others, we are involved with Union Mill, a development in Baltimore that was completed in 2011. Built in 1866, Union Mill was originally an industrial factory and one of the largest producers of cotton duck in the world. We worked with Seawall Development Co. on the financing, which involved multiple layers of capital, including Historic Tax Credits and New Market Tax Credits.

The development is an excellent example of a successful adaptive reuse project—it is in a dense, urban area of Baltimore near public transportation and other amenities. It's a mixed-use space with over 25,000 square feet of office space for nonprofit organizations, and 56 units of affordable housing for Baltimore teachers.

GlobeSt.com: What are the biggest challenges with adaptive reuse projects?

Mercer: There are a number of pitfalls you have to avoid when considering an adaptive reuse project. If the development is too small, the cost can be high relative to the number of units, increasing rents above the market rate. The total cost is also harder to predict because it's difficult to know what's behind the walls, so to speak, of a historical structure. Underwriting the deal typically requires significantly higher contingency, which is a concern. Finally, the floor plate is already set so the adaptability of the layout to multifamily units can be problematic.

GlobeSt.com: How does the ROI pan out on an adaptive reuse project compared to ground-up construction or renovation?

Mercer: From our perspective as a lender, we are more focused on whether there is a sustainable cash flow to service debt and maintenance. But even more importantly, we are looking to see if the development fits with the neighborhood, complements existing businesses, draws retail dollars to the area and ultimately helps create jobs.