What to know about property taxes for commercial adaptive reuse projects
Reuse / recycle is a great mantra when it comes to sustainability. These principles are central to the commercial real estate practice of redeveloping aging buildings, also known as adaptive reuse. This practice is especially popular in the industrial sector.
Retrofitting an older commercial building makes sense for many reasons. It can cost less than demolishing an existing structure and constructing a new building. Upcycling materials is environmentally friendly and reduces the cost and resources needed to purchase and ship new materials. It can lower construction time.
For commercial property owners, adaptive reuse can be an attractive way to refresh and extend the life of existing buildings. When you embark on a project like this, however, it is important to consider how the property’s real estate taxes will be affected.
In commercial real estate, not all square footage is equal. It seems it would be straightforward to consider two buildings with the same square footage as equal in value. An assessor may look at it that way. However, that is not the case. A building’s real value is based on so many details.
Two buildings with the same square footage may not have the same usable space or comparable features. Older office buildings are facing fast-paced obsolescence. Modern offices require buildings that meet energy standards, with lower carbon emissions. High-speed internet, video conferencing capabilities, and security needs are prerequisites. If office buildings can’t be adjusted to meet these requirements, they are at a distinct disadvantage.
Offices built 30 or more years ago typically have a limited number of small windows and floor space separated into numerous closed-off offices. Companies are looking for offices with open floor space and larger windows that bring in a lot of natural light. Windows are a feature that is not easy to adjust without major reconstruction. Newer office buildings are built to allow for flexible reconfiguration and often have all-glass exteriors. It can be hard to compete with that, even after retrofitting an older building.
Modern intelligent building solutions promote occupant health. Outdated HVAC systems have poor ventilation and were not designed to allow for natural airflow through the building. They are inefficient and can harbor mold and mildew. Indoor air quality is an essential indicator of building health, one that modern companies will not compromise on.
Smart building monitor and control systems are not always backward compatible. The layers of technology needed for smart buildings – from IoT sensors to smartphones and other devices need constant connectivity and security. They also require a lot of data processing. This can all place a lot of pressure on the IT infrastructure of a building. Even something as simple as cell phone reception can have a big impact on a building’s ability to meet state-of-the-art standards. Older buildings can be brought close to state-of-the-art, but they will always inherit limitations from their previous use.
Older office buildings, especially in cities like NYC where there is limited space, often store the mechanicals in the basement. This below-ground placement is obsolete design in a climate where hurricanes and superstorms are becoming far more common. Flooding and moisture issues can lead to a total loss of the building’s mechanical infrastructure – including elevators, heating, and air conditioning systems. Even if the equipment is still functional, residual water from flooding could have toxic substances and mold can grow. Water damage can loosen asbestos and create much larger problems.
There are so many different aspects to an office building that could be functionally obsolete. Older buildings often have poor insulation. Outdated elevator systems are slow and can be inconveniently located. Electrical systems are likely not up-to-date and inefficient. Structural requirements for fiber optic cabling and wifi routers are important considerations. Even if these can be made to fit in an older building, ease of use and functionality will not be comparable to buildings that are designed around these systems.
When you embark on an adaptive reuse project, you need to consider how it will affect your property taxes. The assessor may look at your adaptive reuse project against comps with the same square footage and decide the valuation is the same. Compared with a new building constructed to state-of-the-art requirements, a renovation does not have the same market value. Adaptive reuse projects have their benefits, but when it comes to valuation, you are inheriting the market limitations of retrofitting an existing building. The nuanced difference in values with these constraints can have a big impact on the valuation.
Retrofitting a retail building has many of the same issues as office property, but retail has its own unique needs. Buildings may have code violations that are grandfathered-in and therefore technically allowed, but any aspect that doesn’t meet current codes can still cause problems. ADA compliance is one area where buildings must be current. Curb ramps, the width of the building entrance and aisles, accessible parking spaces, accessible retail counters, and ADA-compliant public restrooms all have specific requirements that need to be met. If buildings are not up to ADA standards, owners can be sued.
For retail stores to remain competitive, pivoting to a hybrid structure is key. Retail stores need to be reconfigured to allow for customers who order online but come to a brick-and-mortar location for in-store or curbside pickup. Items purchased online usually have options to be returned or exchanged in person. These transactions, both the customer service aspect and the storage space necessary for them, need to be accounted for in a store’s layout.
Modern retail stores now also act as shipping / receiving centers. Fulfilling requirements for loading docks is crucial when deliveries are coming in several times a day. Loading docks need easy access from the road and have to accommodate different-sized trucks. Features like covered loading docks and secure, dedicated docks are important to retailers who have goods that can be damaged by weather or are at risk of theft. Column spacing needs to allow for merchandising, customer flow, and storage.
Modern shoppers will research product features, check reviews and compare prices online, and will then visit a retail store to see the merchandise or try it on in person. This practice of “showrooming” is something that retailers have accounted for in trying to build more in-store purchases. Implementing high-tech fitting rooms, hospitality lounges, coffee bars, free wifi, and other in-store perks bring more shoppers into stores, but they have attendant functional building requirements.
The evolution of the retail experience requires a lot of technology – including transactional point-of-sale systems, customer data collection, inventory management, tracking pick-ups and deliveries, marketing, and customer management systems. These all need to work seamlessly and they put heavy demands on IT infrastructure. Retail stores that were built when the highest-tech item was a cash register cannot meet these needs without substantial changes.
When retrofitting a warehouse, owners will find they need to work with existing constraints like ceiling height and column spacing. Non-ideal placement on the lot can affect key requirements such as distance from the road to the loading docks. You can put a lot of work into upgrading elements of the property to be almost as good as new. But chain businesses typically have fixed requirements for ceiling height, distance from the loading dock to the curb line, and column spacing. Unless you are building new, there might be no way to fulfill these requirements, which means the property is not eligible to be used by these businesses. This can affect marketability and rental income, which in turn, affects valuation.
The assessor may not delve into the difference in value, especially if you have done a great job in retrofitting and the building looks almost as good as new. However, it is unlikely that a retrofitted building will have the same market value as a new building, with every aspect built to spec. The taxing municipality must take this into account when they assess your completed adaptive reuse project. You should not be valued the same, and therefore pay the same commercial property taxes, as a building built for current market needs. That is not fair, as it is not an apples-to-apples comparison.
Many commercial real estate property tax grievance consultancies will not do the extra work that it takes to lay out a detailed case as to why the property assessment for a redevelopment project should be lower than a comparable, new building. At RTC, we are the best in the business at valuation. We are experts in the variety of factors that can affect a commercial property’s value and how to highlight the difference between your adaptive reuse project and newly constructed buildings to the assessor.
When commercial property owners take on an adaptive reuse redevelopment project, they need to get the most economic value out of the project, from all aspects. Working with an expert property tax consultancy like RTC will ensure that you take strategic advantage of this property tax reduction opportunity, rather than being possibly blindsided with a much higher tax bill once the project is complete. Contact us today for a free consultation so we can leverage our expertise and help you save money on your adaptive reuse project.