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Owning, restoring and managing historic properties is a niche market gaining momentum. Historic properties promise numerous economic rewards, including increased property values, federal and local tax breaks and competitive rents. They also act as catalysts for rejuvenating cities and towns nationwide. Historic done well requires preserving the original characteristics of a property as much as possible while also providing high-quality finishes and technology equal to those in new construction. Part of the challenge involved with managing or converting a historic building is following the restrictions set by landmark commissions. In addition to satisfying official requirements, real estate managers of historic buildings must consider community concerns. Communities become heavily involved in historic building development and maintenance. Finding artisans skilled in preserving a building's history is crucial to operations. With the ability to save on development costs, qualify for federal tax breaks, be eligible for state property tax freezes and increase rents, more real estate professionals are considering restoration.

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Everyone has heard it before: What's old is new again-fashion, pastimes and most important, real estate. Owning, restoring and managing historic properties is a niche market gaining momentum. Building owners and property managers reap the benefits with every stride.

Historic properties promise numerous economic rewards, including increased property values, federal and local tax breaks and competitive rents. They also act as catalysts for rejuvenating cities and towns nationwide. If restored properly, historic buildings can define a city, said Donovan Rypkema, principal of Place Economics of Washington, D.C. He is also the author of "The Economics of Historic Preservation: A Community Leader's Guide."

"One of the most critical things for cities is to be competitive, and they have to differentiate themselves," he said. "There are many components to that differentiation, but among them, historic buildings are critical. A sizable portion of a sophisticated market-in growth industries particularly-is recognizing that."

Demand for history

The value of historic properties is not only recognized by real estate managers: Tenants and residents demand office and residential space in historic buildings despite generally higher rents and assessments.

Lorig Management Services in Seattle and Eugene, Ore., often converts old schools into office, residential and retail spaces-some of the company's hottest properties.

"We get better rent and stay fuller in historic properties than in anything else we have in the market," said Barry Blanton, CPM and president of Lorig. "There will always be those who have a thing for historic if it is done well."

Historic done well requires preserving the original characteristics of a property as much as possible while also providing high-quality finishes and technology equal to those in new construction, said Eric Blumenfeld, president of EB Realty Management in Philadelphia. The company converts historic manufacturing buildings into lofts. He said people want to live in spaces with character.

"The buildings differentiate themselves," he said. "You're not looking at a drywall box: They have architectural interest."

As a result, Blumenfeld said he is able to collect higher rent from such units, but a historic designation alone cannot justify increased rents.

"The average loft conversion appeals to a huge range of buyers," he said. "If a wonderful historic conversion is in the same location as a new construction you can command higher rents. But it does cost you as much-if not more-to build because it is just not as easy to do a historic conversion."

Landmark limits

Part of the challenge involved with managing or converting a historic building is following the restrictions set by landmark commissions.

When a historic building is designated a local or national landmark or when it is within a historic district, changes or improvements require an extensive approval process. A landmark board must approve any change or modification, whether for aesthetic appeal or necessary maintenance. The Secretary of the Interior's rehabilitation standards suggest owners restore rather than rebuild deteriorated historic features.

SL Green Realty in New York City owns and manages a number of local landmark buildings, including the News Building, and has worked with the New York City Landmarks Preservation Commission on building modifications, including façade, storefronts, signage, louvers and brick repair.

"There is very little you can do in a landmark building without getting approval first," said Edward V. Piccinich, SL Green Realty's executive vice president and director of property management and construction. "You can't just decide to screw something into the wall in a landmark lobby. It is different from a regular building because you have to submit a sample of what you're doing and get approvals on the best match to what was originally there."

Landmark slowdowns

Turnarounds for approval can take up to 90 days, according to information from New York City's landmark commission information. SL Green Realty executives said they often experience a six-to 12-week turnaround. If the board does not initially approve the plans, the time and money involved can be significant.

When Helmsley-Spear Inc., the Empire State Building's property management firm, replaced windows in the building in the early 1990s, the New York City Landmarks Preservation Commission was unequivocal in its expectations, and a lengthy approval process ensued, said John B. Trainor, Jr., the management firm's executive vice president.

"There are more than 12,000 windows in the Empire State Building, and it cost us $3 million in additional costs to have new windows designed," Trainor said. "Then, [commission members] still weren't approving them. Finally, we took one of the new windows and installed it on the seventh or eighth floor of the building next to one of the old windows and asked if [they] could tell a difference from the street."

Despite the hurdles preservation presents, SL Green Realty's Piccinich said he supports the designation and enjoys its benefits. He said the company understands the importance of the commission's work.

"The [landmark commission] is safeguarding the city's historic and cultural heritage," he said. "We truly believe it helps stabilize and improve property values. There is a premium you're going to pay when working on a landmark building, but the payback is much higher in terms of net effect through the building's other characteristics."

Community involvement

In addition to satisfying official requirements, real estate managers of historic buildings must consider community concerns. Communities become heavily involved in historic building development and maintenance. For property managers, success depends largely on open communication.

Blanton of Lorig Management Services said the company makes community outreach and communication part of its management regimen, keeping the community updated on the progress of the historic buildings it owns and manages.

"Every time you do anything to the building, it gets scrutiny because there are a lot of key stakeholders," he said. "It's not just the owners, the tenants or residents. It's the community, the historic review board, the landmarks board and the businesses in the area. Everyone has a stake in it being successful or not."

Specialized services

With so much at stake and challenges like outdated systems, complicated designs and specialized service needs, a dedicated, competent on-site staff is necessary for successful day-to-day operations, Blanton said.

"You have to have people working on the building who love it, care about it and are enthusiastic about it," Blanton said. "If they don't like historic buildings, put them in a different building."

Finding artisans skilled in preserving a building's history is crucial to operations. Rather than outsourcing standard services, many management companies have specialized in-house staff for historic properties.

Having the right workers is essential to successful management, and familiarity breeds efficiency when it comes to historic buildings, said Michael Brown, director of operations for Spinnaker Real Estate Partners, the owner and manager of the Lock Building-originally a lock factory, constructed in 1856-in Norwalk, Conn. The building now houses studio, gallery, office, restaurant and retail space.

"Managing historic buildings has to be done differently," Brown said. "You do not do a typical bid situation where you always look at the bottom dollar. Instead, you look for the contractors that develop a relationship with the building and get to know the building's procedures and quirks."

More work, less taxing

The differences in operating a historic property and other properties can affect taxes. The federal government encourages historic building preservation through tax benefits.

The National Park Service's Federal Historic Preservation Tax Incentives program offers private investors a tax credit of 20 percent of the cost of renovation to rehabilitate a historic building. Since its inception in 1976, the program has helped rehabilitate more than 32,000 historic properties and has stimulated $33 billion in private investment, according to information from the park service.

Buildings are eligible for the incentives if listed as National Historic Landmarks in the National Register; if they contribute to National Register Historic Districts and certain local historic districts; and if they will produce income and be rehabilitated according to the Secretary of the Interior's Standards for Rehabilitation.

Applying for the tax credit is complicated and should be weighed by interested investors, said Tay Via, a Partner at San Francisco law firm Coblentz, Patch, Duffy & Bass, which specializes in real estate law. She said if going for the tax credit only requires meeting the mandated federal standards already included in the landmark commision's conditions for approval, going for the tax credit makes sense. However, if the federal standards are in addition to the commission's standards, adding more requirements and expenses, she said make sure the scope of the project is worth the labor and money.

State property tax freezes

In addition to federal incentives, approximately 30 states offer a property tax assessment freeze for historic rehabs. The programs encourage the flow of private capital into historic buildings and give investors tax breaks for a certain number of years while the building establishes a tenancy and the surrounding market improves.

Rypkema of Place Economics said if a building hypothetically has had no reinvestment for 40 years and is on the tax roll for $100,000, it will require $2 million in rehabilitation. He said in normal circumstances, the property taxes would go up the next day because the property is going on the tax roll from $100,000 to $2 million.

But with a historic property attached to a property tax assessment freeze, the increase is not the case. If a historic building is rehabilitated based on the state and local standards, the assessment will be frozen for a certain number of years on the pre-rehabbed assessment value, according to regulation.

Advantages abound

Communities are also often eager to restore historic properties to gain the dual benefits of preserving history and avoiding additional taxes.

"From any kind of fiscal responsibility standpoint, when you re-develop where infrastructure already exists, it saves taxpayer dollars," Rypkema said. "That way taxpayers don't have to pay for extending the water lines and sewer lines out in the middle of God knows where."

Saving taxpayer dollars is always a plus, but redevelopment can make a project run smoother for building owners and managers for other reasons, too. EB Realty Management's Blumenfeld said community conflicts and zoning roadblocks decrease when rehabilitating a historic property rather than starting new construction.

"The advantage is that these structures already exist," Blumenfeld said. "You can avoid confrontations with neighborhood associations about sight lines and setbacks."

Restoration can also save money. SL Green Realty's Piccinich said the cost to upgrade is less than the cost to replace. According to his calculations, upgrading a historic building costs approximately $75 to $125 per square foot, but rebuilding costs about $300 to $350 per square foot. Additionally, a rebuilt property loses an equivalent of three years of income during the demolition, design, bidding, and building periods.

With the ability to save on development costs, qualify for federal tax breaks, be eligible for state property tax freezes and increase rents, more real estate professionals are considering restoration. Preservation of such buildings also often brings community support and goodwill.

With the growing popularity of historic buildings, property managers and building owners can take part in a new, sophisticated market and reap economic and civic benefits along the way.

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[Sidebar]

The opening of the Savannah College of Art and Design is also credited with the city's success. The school buys at-risk buildings, and the historic preservation and architecture students help rehabilitate the buildings as campus buildings.

The 1979 founding of the school began the college's tradition of renovation, said Gregory Hazelden, sales associate at Cora Bett Thomas Realty Company LLC, in Savannah.

"A lot of investors bought historic properties and renovated them into apartments for the students," he said. "That has had a dramatic impact on the economy and property values."

Historic preservation is imperative to the city's economy. The city attracts 5.8 million visitors and $1.1 billion in direct tourism spending annually, according to information from the Savannah Area Convention & Visitors Bureau. Meanwhile, Savannah moves forward in step with its history.

"It's not static and unchanging," said Brian Robinson, a professor in the historic preservation department at Savannah College of Art and Design. "The buildings are not just preserved in a jar to look at; we use them every day."