Transcript: Environmental Due Diligence Disasters
CLARICE: Good morning, everybody. Welcome to this week’s episode of Environmentally Speaking. Today I’m joined by Kerin.
KERIN: Hi.
CLARICE: And we are talking about a super exciting topic, at least for me. I am pumped for this. We’re talking about adaptive reuse, which on its face value does not sound super thrilling, but when we get into it it is my ultimate dream when I retire. Do you want to hop in and tell us what it is so we’re not teasing the listeners too long?
KERIN: So the idea of adaptive reuse [inaudible]. So you could have [inaudible] which we have plenty of [inaudible]. And, you know, I’m sure a lot of you have watched DIY shows and seen how, you know, it’s done. But on the business side there’s a lot of talk, you know, about converting buildings into residential whether it be an office building or retail because of the work from home era. I think we’ve also had a lot of people post COVID move away from the urban center because they are working from home, people ordering goods online. So the retail spaces have gone unused [inaudible]. And there’s been a lot of talk about a shortage of housing. So the idea out there now is taking those underutilized spaces and reusing them and converting them into residential.
CLARICE: I love it. I’m so excited about this. I think it’s — one, I think it’s such a good way to reuse what’s already there, especially if the spaces are — not abandoned but if they’re empty, if there’s nothing happening within them. And, two, I think you can get some beautiful residential spaces from it. I think there’s so much room for creativity, for uniqueness. You know, I think at this point our generation and younger are moving away from that idea of like the cookie-cutter neighborhoods where all of the houses are the same but in slightly different colors of beige and I think there’s such a big draw and appeal to this. So this came up because Rhode Island has — have they made new statutes or altered statutes? Which would be the better way of saying that?
KERIN: We’ve got a mix of both.
CLARICE: Oh, okay.
KERIN: [inaudible] significant overhaul of the land use regulations and laws in Rhode Island and a lot of those laws became effective just this past January. One of them being the adaptive reuse statute which we’ll talk about and then also several new statutes and changes that attempt to both increase the housing staff, make it easier to get building permitted and [inaudible].
[0:03:09] CLARICE: Cool. So that’s kind of what brought this topic to our minds to and why we’re talking about it, but it’s not that these new and altered statutes are creating this idea. This idea has been around much longer than that and, you know, it’s coming from this desire to convert and reuse like we had talked about. So what are some of — how would somebody even start this process? What are things that they should look out for?
KERIN: Yeah. So as an exciting of an idea that it is, it can be complex and it really comes down to the building that you have that you’re thinking about renovating. And then you’ve got to think about the hurdles involved with the land use process, permitting, architecture, building code, financing, honestly, all the stuff that you would think about if you were developing vacant land. But in this case you’ve got a building that already exists and the idea is to take a nonperforming asset, something that’s being underutilized, invest money in it to increase the performance of that asset.
So the other thing from a business standpoint is you’ve got to figure out whether or not the investment in the conversion, putting the money in, is going to yield the increased performance. If you don’t have that at the outset — you’ve got to pencil those numbers and figure out if that’s going to work and if you don’t have that then you want to hold off. And I think from my standpoint that’s something that I’ve been thinking a lot about in terms of we’ve got this identified, you know, shortage of housing in the news and we’ve got this pushed by the legislature to increase the adaptive reuse statute.
And, you know, the question on everybody’s mind is is it going to work. So, you know, the first thing after you identify the piece of property that might not be used completely or filled is [inaudible]. You know, if you’re thinking about this, does the zone of the property then even allow for residential. Does it have a historic designation. Now, both of those things — you know, if you come out clean and it does allow residential and historic [inaudible] but it’s not going to stop you from putting residential there. You know, if those things are hurdles, then you got to deal with them and that can be dealt with just by looking at the local ordinance. Most towns have online GIS. There’s usually a zoning layer or filter you can click on and that will tell you usually pretty quickly what the zone is.
[0:05:59] CLARICE: Yeah. I guess, I mean, that makes sense. Your first hurdle is, one, how much is this. Is this even feasible. Is this financially going to work out. And then, two, can somebody live here and if not what do we have to do, or is there something that can be done to get there. You had also mentioned permitting. And are you talking about current permitting, or is there research for past permitting and why?
KERIN: Yeah. So it’s really both, especially when you have, say, an older mill building or an older, you know, school perhaps, the thing you want to check out is what’s the permitting history. And usually the quickest way to find out is have an attorney run title. You know, most of the land evidence records in Rhode Island are online, so it’s pretty simple to have somebody search title. That’s not an end-all be-all. You know, I would — if you were really getting into it, I would probably take a step further and request the permitting history, a copy of the file from the city or town. And what that will do is it will tell you whether there’s been any prior zoning approvals [inaudible].
CLARICE: Ah.
KERIN: And sometimes what will happen is the town or the city had granted a special use permit in the past and on that special use permit there could be conditions or restrictions. You know, it could say no residential ever. You also want to look at those types of restrictions and what we talked about before. Like on the zoning history there could be things in the deed. I’ve seen things, especially old mills, the mill has to have a certain name forever. You can’t ever have —
CLARICE: Wow.
KERIN: You can’t ever have something, I don’t know, parking out front. You know, those are the things you got to look at to see if there’s anything you have to clear out. And if you do have something on title, especially if it’s like a special use permit or a permit from the town, you know, you have to go back to the town and ask that that be changed. Once that’s done at some point down the road — and I think we’ll talk about this — is you’ve got to go forward with the future permitting. It’s likely that any sort of conversion like this you’ll have to go to the town to get approval before you get [inaudible].
CLARICE: That makes sense. I couldn’t understand why we would look at the past, but now, yeah, you have to see what are any restrictions that are going to hold you back and how long can they last, so that’s a great note that I did not think of. So, next, all right, so you’ve looked at your property. You figured out your budget. You’ve checked your permits. I imagine from there you’re going to want to get your team together. You know, we talk about those DIY shows where it’s a couple coming in or it’s just two people in this gigantic warehouse. And while that makes for great TV, that feels pretty infeasible and the idea that it’s just them by themselves, I have some serious doubts.
[0:08:59] KERIN: Right. It never is. There’s usually a team of people and I’ve worked with some incredible teams over the years and it really does make a difference when you have a good team put together. You want professionals who have experience in the type of work that you’re doing. A lot of the projects that I’ve worked on have been very complex both from a site standpoint and also a building standpoint and you want professionals that have that experience.
So if you’re doing an adaptive reuse, say, a mill conversion, you want an architect or an engineer or a lawyer that has done that kind of work before and understands the potential pitfalls and what to navigate and what to be thinking about and that really is key. And those are the — the people you want to plug in early. And oftentimes when you call an attorney that has done this work before, they also have a network of engineers and professionals that they can pull in if you don’t have somebody and it’s usually someone they’ve worked with in the past [inaudible] they know knows how to navigate [inaudible].
CLARICE: Oh, I like that. I like that little tip of, you know, once you find one person ask them. It’s going to be like one trusted person and they can help you navigate this because that’s something that these folks — you would hope and you’re looking for somebody who lives in this who does this repeatedly versus us. Maybe not you because you also live in that space, but for me it would be my first time, so I wouldn’t know who to call, who to go to, so lean on those experts.
KERIN: Right. And oftentimes I have clients who really want to be the hub, right. They really want to take the lead and that’s great. That’s fine. I have other clients who would prefer to just let the team handle it and then they ask any and all questions whenever they have them. It works either way depending on what the client needs and wants. Oftentimes our office will serve as that hub and we will coordinate with the team members and keep everybody involved. We’ll plug the town in or the city in as necessary and then update the client with, you know, every time we have a substantial movement in the right direction or the wrong direction, so it can work either way.
CLARICE: So how involved is this sort of — and I have this idea that, you know, certain members of the team are — everybody’s sort of brought in at the beginning and then as the project progresses some folks are no longer needed and step back. So is this a thing where your attorney or — does your entire team stay with you for the whole process? Is your attorney involved at the very end when like the Sheetrock’s coming up and you’re starting to think about the furniture that’s going to be moved in?
KERIN: So if you’re talking about moving from the permitting phase over to the building phase, normally the entire team is together for the whole planning and permitting phase. And the idea is that the team is all focused on — at least the teams that I’m involved with, we’re all focused on getting to the [inaudible].
[0:12:11] CLARICE: Okay.
KERIN: [inaudible] get those approvals in hand. And we are assembling basically a presentation to give to the city or town permitting authority to get the approval that we need and we’re all working together, so we all have that depth of knowledge when it comes to the time to present. And then we go before the board, hopefully get the approval. And once the approval is done, the client or the engineer usually takes up going to get the building permit. They get the building permit —
CLARICE: Okay.
KERIN: — knowing that if something happens either with the building permit or going forward with construction some of the team members will drop off, lawyers.
CLARICE: Okay.
KERIN: And they only get involved if another issue comes up. They don’t usually. If everything’s done well and done correctly and everybody, you know, is paying attention, usually it proceeds into construction and you move on. And then lawyers would drop out of that unless needed.
CLARICE: That makes a ton of sense. And talking about permitting and that kind of is a nice segue into these new changes and additions to the law. Do we want to hop into that?
KERIN: Yeah. So and we talked about it before. A lot of changes going on or have just become effective January 1 in Rhode Island. One is the adaptive reuse statute. This law makes it easier for existing structures such as mills, churches, schools to be redeveloped into housing and that’s, I think, kind of exciting. It’s caused a lot of — well, the changes as a whole have caused a lot of discussion and ripple effects through all the cities and towns. At this point I think most cities and towns are still trying to get up to speed on all the changes. This is a big one. I’ve got a project right now going over adaptive reuse. We’re going to convert a mill into mixed use which is going to be commercial on the first floor and residential upstairs which is —
CLARICE: Very cool.
KERIN: — pretty cool, pretty cool. The other big change is — one of the other big changes is something called unified development review. So what the legislature has decided is, you know, it just might take a little too long to get these projects through the permitting stage. And what I hear from my developer clients is, you know, time is money.
CLARICE: Yeah.
KERIN: So if they locked in financing and they’ve got a rate and we know rates are going up and it takes a really long time to get your permits, that can put a project at risk.
[0:14:56] CLARICE: Uh-huh.
KERIN: So in response to that, the legislature has said, listen, previously if you needed planning board approval and zoning approval — so say you’ve got this great project you want to put forward, but you also need some zoning relief. You’d have to go to planning. Then you’d have to go over to zoning. They don’t meet in the same night, so you’re waiting. You’re going one month. You’re scheduled for the next month for zoning. It’s coordinated. You get your zoning and then you have to go back to planning, so you’re bouncing back and forth.
And what unified development review does is it says, okay, if you’ve got a project and you need both planning and zoning you now stay with the planning board [inaudible]. So the planning board essentially steps in as a zoning board. You go forward with your project, your proposal, and then you also go forward with your zoning review and one board will grant or deny both. [inaudible].
CLARICE: So is this coming from a new rush to get these projects done, or is this sort of addressing a systemic issue that’s been happening? Do we know what caused that shift?
KERIN: The shift is, in my opinion, coming from the legislature. It’s coming from a desire to make permitting a little easier, a little faster to hopefully spur development, commercial growth, and residential housing [inaudible]. I don’t know that cities and towns necessarily agree with speeding it up, right. Most of these boards are volunteers. They have full-time jobs.
CLARICE: Yeah.
KERIN: And to say let’s go faster can give some of these cities and towns a little agita. You know, they kind of like to take their time and you can’t blame them. They want to make sure the things that they’re approving are right for their municipality.
CLARICE: Yeah. That makes sense.
KERIN: There’s a little bit of [inaudible].
CLARICE: You know, as we talk about these spaces, these aren’t small spaces. We’re not talking about like a single-family home or, you know, that trend that kind of peaked and went off of tiny homes. These are mills, warehouses, office — like these are big spaces, so I feel like the decision and the impact of that conversion is going to be felt on a larger scale for that municipality.
KERIN: That’s right. But right now what’s interesting is that what the research seems to indicate is that it really is — it’s not your one-family home, but it’s your smaller, primarily vacant, more than 50 percent office buildings in urban areas built before ’85.
CLARICE: Okay.
KERIN: [inaudible]. Or it’s warehouses. Those two types of properties are seeing the most success with adaptive reuse and there are some reasons for that. You know, if you’re pre ’85 in an urban setting, usually your windows are operable. And as you get into bigger buildings, the floor plates are usually an issue, meaning you usually have your stairs and your elevator running up the middle which causes [inaudible] —
[0:18:18] CLARICE: Oh.
KERIN: Floor plate, for example.
CLARICE: Yeah.
KERIN: It changes with every property, but this is just one basic example. So when you try to put residential units on that type of a floor plate, you’re limited. You’re limited with lights. You’re limited with egress. So that is something that the industry really hasn’t figured out a way to combat, to make adaptive reuse for a larger office building, as well.
CLARICE: That’s something to — it’s funny. I didn’t yet think about the idea of the existing floor plan. I was always kind of envisioning it as a shell and the inside could be worked around, but, yeah, there are some pieces that would make sense to keep and some pieces that is going to provide some additional hurdles, especially that doughnut shape.
KERIN: That’s right. And I think what you’re talking about more is the warehouse-type building. Usually you’ve got a big open space —
CLARICE: Yeah.
KERIN: — which is a little bit easier to convert into individual units and you’ve also got building systems. You know, you’ve got plumbing, heating. Certainly a warehouse system is probably not going to be amenable to residential.
CLARICE: Yeah.
KERIN: But converting that system over, research has indicated that it’s usually a little bit easier in the warehouse concept versus the office building concept. Now, I say that with a little bit of hesitation because every single property is different.
CLARICE: It’s going to be different.
KERIN: Yeah. You really got to look at the individual property that you have and either do some analysis yourself or have some professionals look at it for you so that you know ahead of time. An engineer and other professionals can tell you pretty quick what you need.
CLARICE: Yeah. That makes sense. What are some like typical signs of — are there typical signs of success, things that you should strive for? I mean, of course obviously you want to make sure you have the permits, you have the funds. Those things are a given, but what are some other things that are kind of cues that you’re going in the right direction?
KERIN: Yeah. So like I said, if you have an older pre 1980, ’85 office building, smaller, smaller floor plates, working windows, you want something more in a downtown or urban area. This also can increase the likelihood of government incentives and policies like tax incentives or abatements. Usually [inaudible] urban centers and less so in suburban. And you want a building that is [inaudible] so CBRE, Coldwell Banker [inaudible] who specializes in commercial real estate service and investments, some of their research indicates that you want more than 50 percent vacancy rate. If you’re talking about a conversion of warehouse to residential, can be easier because of the layout.
[0:21:29] CLARICE: Uh-huh.
KERIN: Usually they do also have higher ceilings, open floorplans. That makes it easier to redesign and, also, warehouses are usually zoned for mixed use or residential, so you — if that’s the case it makes the permitting process a little easier.
CLARICE: Yeah. Oh, I didn’t think about that idea. I love that. So are there any practical tips that folks can — can take away that are going to help them get started if they have the same dream as me as hitting the lottery and buying up old buildings?
KERIN: Yeah. Right. So you want it to be successful.
CLARICE: Yeah.
KERIN: So the first and most important point is it’s all about justifying the cost of conversion.
CLARICE: Of course.
KERIN: Yeah. Your net operating income and the property valuation gap between existing building and residential has to cover the cost of conversion. And what I mean by that is, generally speaking, right now when you appraise a property there is a gap between commercial property valuations and residential property valuations. Residential property is generally valued a little bit less than commercial property. And because of that, right, you’re going to go from a higher value property to a lower value property if you’re going from commercial to residential, so you got to make sure that it [inaudible], that the numbers will work in the end.
Consider warehouse for loft conversion over a commercial office over other commercial property, smaller commercial office or offices are better. Also, consider mixed use developments. What that is is it integrates both residential, retail, and office within the same building. Like I said, small building I’m working with now, they’re going to put some commercial on the first floor and residential units upstairs. That can maximum your use efficiency and bring an increased quality of life to tenants depending on what kind of retail, restaurant, office you’ve got downstairs. You’re bringing different functions together. The other thing that I’m seeing in terms of development for some space is including flexible space, right, because in the end you’ve got to rent or sell these residential units.
[0:23:46] CLARICE: Yeah.
KERIN: What do people today want? They seem to want flexible spaces for co-working, co-living. Large existing spaces, say, like a hotel conference room, if you’re going to convert a hotel or an event space, those can be reused for residential amenities. Technology is highly desired by today’s renters especially, so adding technology to a space to do some sort of like what we’re doing with podcasting, dedicated areas for video conferencing, that will make it easier for residents to work from home. That’s a big one. Recreational amenities have always been big.
CLARICE: Yeah.
KERIN: What I’m seeing as the new hot ones are putting greens.
CLARICE: Really?
KERIN: Yeah. Basketball courts. And I love this one, spin studios. So those are — you know, you’ve seen the typical gym and the [inaudible]. Now it’s putting green, basketball court. Spin studios are coming in hot. The other thing is that people today really want to see some green spaces.
CLARICE: Yeah.
KERIN: So, generally, green spaces do enhance the quality of life and it gives the property also a better presence in the community and that attracts and maintains tenants.
CLARICE: Yeah. I mean, green spaces make tons of sense. You want to know that you can leave your unit and maybe go for a walk, have a space to sit outside. I mean, a lot of these units don’t come with yards. You don’t have a back yard, so to get that back yard feeling, that’s going to be super important. And, frankly, for the rest of the town, you don’t want to look at something that just looks like a concrete block, so.
KERIN: Right.
CLARICE: On some level it’s got to be appealing.
KERIN: Right. Sometimes it’s not even the ability to take advantage of the space. Like a big open walking path might not be possible [inaudible].
CLARICE: Yeah.
KERIN: But having some sort of greenery on or around the building can set the building apart and be part of — almost part of the architecture, part of the identifying feature of the building.
CLARICE: I love it. So I guess some of the big takeaways are, you know, those things to consider and definitely talk to the team that you build. Consider building a team, relying on them and they’ll help you navigate those sort of tips for success.
[0:26:19] KERIN: Yeah. It’s not as easy as it seems. The idea is a positive one and a good one, but you need to do your homework, I guess is the takeaway.
CLARICE: I love it. What a cool topic. Thank you so much.
KERIN: You’re so welcome.
CLARICE: So if you have any questions, comments — do you live in an adaptive use space? Let us know. What’s your putting green like? That’s a cool question. Reach out to us. Let us know. Where can they find you, Kerin?
KERIN: You can e-mail me, info@DesautelBrowning.com
CLARICE: Awesome. And you can hit us up on the socials. We are on Instagram. I hate to say it, X, used to be Twitter, and Facebook. So thank you so much, everybody.
KERIN: Thank you.
