Addressing the Top 3 Challenges to Revitalizing Upper Story Residential

01 Feb Addressing the Top 3 Challenges to Revitalizing Upper Story Residential

If you’re reading this, you probably already understand the importance of active upper story residential units to the overall health of your downtown’s economy. Successfully designed and managed upstairs residential units can subsidize the cost of operating a downstairs business, provide seasonal stability to offset retail revenue patterns, provide eyes on the street to increase safety, all in addition to providing critically needed rental and targeted market housing opportunities.

However, creating and maintaining the type of units which can convey these benefits is more difficult than it would appear. Three of the top challenges for someone trying to encourage successful renovation or conversion projects include property owners, architectural and code compliance, and funding.

Property Owners
Property owners are a necessary partner in a successful conversion project, but often times the unique mix of property owners in a community can present significant hurdles to project development. With excuses ranging from the practical ‘too busy’, pragmatic ‘too expensive’ and perfunctory ‘tenants are too much work’, landlords have innumerable excuses to avoid projects which would require investment of funds or time in their properties. Although in many cases a fairly straightforward business case can be made for a reasonable payback on investment, projects of this magnitude are difficult to describe and execute, and lumping in terms like ‘tax credit’ is enough to send all but the seasoned accountant running. While it would be most cost effective and impactful to renovate several properties simultaneously in order to develop economies of scale for construction and management, this is rarely an option. Instead, identifying one (ideally larger) property with a willing landlord to serve as a model and creating one ‘open-book’ pilot project that can demonstrate success and a personal testimony can be effective in generating a sustaining program.  For another example of a successful bottom-up education strategy, research the Upstairs Downtown program operated by the Illinois Historic Preservation Agency, which provides easily-understood educational materials on the complex transactions necessary to carry out this type of project. (//www.illinoishistory.gov/ps/upperstory.htm)

Architectural & Code Compliance
The second challenge addressed here, architectural issues and code compliance, is a significant enough topic to warrant a standalone article. The complex mix of local, state and federal zoning, land use, ADA and building codes, not to mention the age and architecture of individual buildings, make blanket solutions difficult or impossible to predict. However, if a target property is known to have structural, access or other functional limitations, it is advisable to call in the experts up front. Not only can these challenges result in a project becoming financially infeasible altogether, necessary modifications may exclude the project from receiving historic tax credits, and participation in other funding programs may require certain characteristics or revenue restrictions. Discovering late in the process that these objectives cannot be met can jeopardize the entire project. Necessary expertise can be solicited from developers with experience applying for and utilizing historic tax credits, for larger projects, and/or with experience renovating historic buildings. Contact information for developers with experience in your area and/or property type can be obtained from the Wisconsin Historical Society.

Funding
After convincing the landlord and determining the market and structural constraints for the project, the final difficulty is financing. While some larger and well-known funding types may be available depending on the structure and planned use (historic tax credits, WHEDA tax credits), smaller projects may not be eligible or cost effective candidates for this type of funding vehicle. Two locally-available strategies which may exist include the use of Project HOME and Tax Increment Financing (TIF).

  • The City of Oshkosh operates one example of a successful Project HOME upper floor residential program. Project HOME, which is funded through the US Department of Housing and Urban Development (HUD) is targeted at creating decent, safe and affordable housing, improving the appearance of older properties and stabilizing older residential areas.  Under these guidelines, units created through the program must comply with tenant income and rent restrictions set by HUD for a 5- or 10-year affordability period. While using federal funding sources requires strict compliance with building codes, and often more paperwork, the program can provide up to 50 percent of project costs, or $25,000 per unit created or repaired.
  • While downtown redevelopment projects are typically eligible for TIF assistance if a suitable district exists, a straightforward residential conversion on an upper floor may not produce sufficient increment to justify the type of assistance necessary to carry out the project. In these situations, communities can take advantage of the residential renewal clause in Wisconsin TIF statutes which allows communities to keep a district open for one year after it would be eligible for closure. Increment generated during this year can be used to facilitate improvements to existing residential housing stock anywhere in the community. Targeting these funds toward upgrading and/or restoring second story residential units provides greater flexibility in accommodating a variety of residential needs within a single program. The option also exists to use all or a portion of these funds to create a self-sustaining revolving loan program to incent this type of conversion, which can be repaid with no interest five or more years in the future, with payments coming from increased rents.

This article attempts to address at least three of the most common challenges impacting a newly envisioned downtown residential program. While any real estate project will have innumerable pitfalls, preparing for specific challenges most likely to impact the financial bottom line will keep the project afloat. Long-term, adding revenue to landlord’s pockets, consumers to merchant’s immediate trade area and increased eyes on the street to create regular activity represent one of the most impactful investments available to support downtown revitalization.

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