MIAMI—Columbia Residential knows all about adaptive reuse projects. The company has undertaken several challenging prospects, including the Imperial Hotel in Downtown Atlanta.

GlobeSt.com caught up with Jim Grauley, president and COO of Columbia, to his insights on when the adaptive reuse strategy works, why it works better in some markets than other, and some of the biggest challenges he sees with the strategy. Click here to read part one of this exclusive interview if you missed it.

GlobeSt.com: When does the adaptive reuse strategy work? When does it not work? What factors help you decide whether to pursue the opportunity?

Grauley: Principles that apply are the acquisition cost of building structure must be significantly lower than replacement costs. It's optimal when there are incentives and subsidies for renovation—such as state/federal historic tax credits, new markets tax credits. And the building must have spaces that are a fit for the reuse—so with housing, the building has to create desirable living spaces, with good light, volume, character, and connectivity.  

Not all buildings present this opportunity. Additionally, in our cases, a public-private partnership is usually vital to making a project work, so a building or proposed development must have the support of public sector to help create affordability and bring the renovation and redevelopment incentives to the project.

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

Grauley: Yes, this does vary my market, building, and location. The market rents are a big driver of what can be done. Also, higher rents drive acquisition, land, and construction costs higher, so in many cases reuse can be more feasible than new construction. In older cities or districts, there are often more incentives for preservation and reuse and redevelopment.   

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

Grauley: Probably the biggest risk is dealing with the unexpected in design, construction, and operations from older buildings. Therefore, you must plan for this to happen with contingencies and very substantial up front due diligence on the building. Failure to do so can bring big cost challenges.  

Another big challenge is the kind of spaces you can create and acceptance of the market of these alternative living spaces. Creativity and knowing the market are therefore key challenges.

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

Grauley: It varies widely. ROI can be very good, particularly if purchase price is favorable and if substantial subsidies for renovation or preservation. The subsidies do limit the re-sale timing and in some cases return, but are often necessary.  

Often reuse projects will have a larger portion of capitalization via equity sources, given the renovation risks or uncertainties and lender tendency to be more conservative with the unknowns  in underwriting. This results in less debt and higher equity requirement.

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

Grauley: Probably the biggest risk is dealing with the unexpected in design, construction, and operations from older buildings. Therefore, you must plan for this to happen with contingencies and very substantial up front due diligence on the building. Failure to do so can bring big cost challenges.  

Another big challenge is the kind of spaces you can create and acceptance of the market of these alternative living spaces. Creativity and knowing the market are therefore key challenges.

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

Grauley: It varies widely. ROI can be very good, particularly if purchase price is favorable and if substantial subsidies for renovation or preservation. The subsidies do limit the re-sale timing and in some cases return, but are often necessary.  

Often reuse projects will have a larger portion of capitalization via equity sources, given the renovation risks or uncertainties and lender tendency to be more conservative with the unknowns  in underwriting. This results in less debt and higher equity requirement.