There are many reasons to choose to retrofit an existing building instead of building new. Adaptation and reuse of structures serves to preserve the historic fabric of communities. Perhaps even more importantly, the material, energy and embodied carbon impacts involved in new construction are enormous. According to a 2023 report from RMI, retrofitting an existing building emits 50 to 75 percent less carbon than constructing a new building.
“Reuse of existing building stock is increasingly important,” says Nate Gillette, AIA, president of Natura Architectural Consulting LLC and a retrofit editorial advisor. “Raw land costs are increasing at unprecedented levels and good raw land is hard to come by. We have so many structures that are underutilized. Why not take advantage of that? Assuming you have four good walls and a good roof to start with, it is much more cost-effective to reuse existing structures.”
Although it is obviously important from a sustainability standpoint to preserve and reuse existing buildings, developers always face the literal million-dollar question: Is it economical to pursue a retrofit? The answer is complicated and varies from project to project.
“When reusing an existing building, speed to market is a major advantage,” says Jennifer Picquet-Reyes, principal, director of Hospitality, Historic/Adaptive Reuse at Merriman Anderson Architects. “Depending on the age of the building, when it was last renovated and what the existing HVAC looks like, you may convert the building and have it occupied more quickly. Or you may have projects where you face challenges with floor plate and whether it’s converted easily to the use you need.”
Historic Support
One way to help tip the balance in favor of cost feasibility is to explore various local, state and federal incentive programs. For example, buildings that are at least 50-years old and could be added to the National Register of Historic Places may qualify for tax credits or other benefits.
“What we know now as the federal historic tax credit began as a deduction in the early 1970s and developed into a tax credit in the early 1980s. It really came into its current form in 1986,” says Albert Rex, principal of Historic Tax Credits at Ryan, a global tax-services firm based in Dallas. “Today, along with the federal credit, there are 37 states with historic credits available. These credits have been important in driving restoration and rehabilitation.”
“We’re really seeing a resurgence of state historic tax credits,” Gillette says. “Many states that had done away with them are bringing them back. But these are geared toward historic buildings. Another driver out there is the Low-Income Housing Tax Credit program, which incentivizes affordable housing. Developers that are pairing those credits with acquisition of an existing building are seeing lower costs than new construction by taking advantage of the economic incentives of the tax credits.”
“You can piggyback federal and state credits,” Picquet-Reyes adds. “The federal historic tax credit is 20 percent, and the states vary. Some cap their historic tax credit, which can make it more difficult to work with. Texas has a robust 25 percent historic tax credit without a cap. The state has found that it really spurs development and brings people back to the cities. This results in more jobs and a stronger tax base, so it really pays itself back.”
Getting the historic tax credit can be helpful to finance a retrofit; however, the federal tax code is an ever-moving target. Developers need to navigate the waters to find the best solutions for their projects and their bottom lines.
“Since COVID and all the supply issues and increases in labor costs, the need for historic credits grew. Many clients will look at using that historic credit, knowing they need it to pencil out the project,” Rex says. “There have been some changes in the tax code that have made the historic credit a little less valuable in recent years. In 2017, it went from being a one-year credit to a five-year credit. That brings the market for these credits down a little bit for investors because it spreads the benefit out over five years, but there are efforts underway at the federal level to potentially address this change in value.”
Energy Upgrades
Beyond historic tax credits, there are other federal tax benefits that can be reaped in a retrofit project. Efficiency upgrades are one of these to explore.
“It’s important to think about the inherent green nature of reusing the structure and the windows and envelope,” Picquet-Reyes says. “The savings in embodied energy and material is good for the environment.”
The Section 179D Commercial Buildings Energy-Efficiency Tax Deduction has incentivized building-envelope upgrades and other improvements common in retrofits since its adoption in 2006. The deduction was updated and enhanced as part of the Inflation Reduction Act (IRA), passed in 2022. There are provisions under the revised Sec. 179D that expand the opportunity for energy-efficiency retrofits of older buildings to become eligible for the deduction by reducing applicable requirements.
In the old version of the deduction, the requirement for 50 percent energy savings set a threshold that couldn’t be met by most retrofits. The update includes amendments that make it easier for these retrofits to be eligible for a deduction. A sliding scale starts the benefit at 25 percent energy savings and lowers the barrier to entry for retrofits. A base deduction begins at 54 cents per square foot if 25 percent energy savings has been achieved. An additional deduction of 2 cents per square foot up to a maximum of $1.07 per square foot is allowed for each additional percentage point of energy savings achieved.
There are other financial avenues that encourage building preservation and retrofits, but they require a little research and creativity to tap into the right resources.
“I think one of the better examples of other kinds of funding are in the rise of local land banks,” Gillette says. “Land banks can go after funding and incentives that are not always available to private developers, so we’re seeing more public/private partnerships on projects. In a lot of states, brownfield incentives can possibly extend to obsolete buildings and don’t necessarily mean they are environmentally contaminated.”
Penciling Out
Construction projects of any kind encourage developers and owners to find every avenue toward the best financing structure. For those who identify good potential retrofit projects, historic and energy-efficiency tax incentives can be extremely helpful. Retrofitting an existing building can be a win-win for the planet and the profit line.
“Often rehabbing a historic building into a hotel makes a great historic tax credit project,” Rex says. “Chicago is a good example. It was not a huge historic tax credit market for a long time, even with some of the best historic buildings in the country. But after the banking crisis of 2008, the Chicago market went crazy. Because banks weren’t lending 100 percent of the value of a building project anymore, they wanted to see some equity, and historic tax credits were a gap-filler.”
Although tax and funding support programs exist, they aren’t necessarily common knowledge and often aren’t sufficiently promoted. But for those who take the time to seek them out, they are there.
“There are many reasons to value and incentivize the utilization of existing building stock,” Gillette says. “It’s cheaper to renovate than build new and advantageous to communities to get buildings back on the tax rolls at the highest and best use of the property. We just need to figure out which financing mechanisms work and which don’t.”
RESOURCES
There are many incentives available for retrofit projects. Some are at the federal level, but many are operated by state and local governments. Following are a few examples:
- There are many facets to the federal historic preservation tax credit. Learn more on the IRS website.
- The federal 179D Commercial Buildings Energy-Efficiency Tax Deduction primarily enables building owners to claim a tax deduction for installing qualifying systems in buildings.
- The U.S. Department of Energy lists resources for funding retrofit projects.
- Check out the Low-Income Housing Tax Credit.
- RMI provides a list of resources.
- Land banks rehabilitate properties and then transfer them back to responsible ownership and productive use in accordance with local land-use goals and priorities.
- Brownfield recovery funds may be available for some retrofit construction.