Mr. Tess

Architecture & Design

Adapting Historic Buildings into Hotels

By John Tess, President & CEO, Heritage Consulting

Recently, HVS International completed a nationwide study of over 120 historic hotel properties with a total of 27,935 rooms, comparing their operating performance against national averages. Their findings: Historic properties have outperformed national averages in both occupancy and average rate levels. This performance is particularly evident in superior revenue per available room levels.

HVS ascribes this result in part to the more affluent nature of the patrons of historic hotels. Of particular value is providing a hotel alternative to "cookie-cutter" lodging experiences, often supported with added value by leveraging the historic character of the property with unique interpretive programs. This perspective is supported by a Travel Industry Association of America 2003 market study that noted a general increase in the travelers' desire to experience cultural, art, historic and heritage activities. The study revealed that 81% of travels who took a trip away from home in 2002 included at least one such activity in their trip.

As if a strong and affluent demand is not enough, to further entice property developers toward heritage properties are tax incentives for redevelopment. At the federal level, investment tax credits may be secured for up to 20% of the total rehabilitation costs. This credit is frequently complemented by state tax credits of a comparable amount or alternative incentives such as a property tax abatement.

While certain property developers have entered this market place full throttle, many are hesitant or downright stand-offish. Much of the reason is unfamiliarity with the process or a fear of government review. The purpose of this article is to perhaps allay some of those fears and to offer some insights as to issue areas. With nearly three decades of experience, my company, Heritage Consulting, has worked with property owners on tax credit projects worth over $1 billion, and have been specifically involved in securing tax credits in the development of boutique historic hotels since the early 1980s.

In any redevelopment project, whether using federal or state historic preservation incentives, the measuring stick for any rehabilitation work is The Secretary of Interior's Standards for Rehabilitation. There are ten standards - somewhat general in definition - but overall focused on understanding why a building might be historic, on what the features are that reflect that unique sense of history, and how best to maintain them. On a simplified level, what the standards seek to accomplish is to preserve the very drama that a property developer might feel upon first seeing the site. Equally simple, the more visible a particular element, the important its treatment.

In seeking federal tax credits, the reviewer is the National Park Service. Their decisions are made in part based on recommendations from the State Historic Preservation Office, who also is responsible for any state tax credits or incentives. In both instances, the person actually doing the review is likely to have a background in architecture or history. And in both instances, the focus tends to be singular - the treatment of the character-defining features of the building.

Many developers are hesitant to involve additional reviewers on their project and hence shy away from federal and state incentives. The fact is however that most urban areas today have a Landmark Commission or design review staff responsible for examining and approving local projects. And more often than not, their reviews are based on the same Secretary of Interior Standards used at the federal and state level. In very real terms, if the National Park Service accepts a particular design or treatment, the state and local reviewers tend to accept that decision. In fact, the federal review for the tax credits can often facilitate the local review or at the least assuage any local fears.

A second area where developers get nervous is with the fear that they will be required to restore lost features. Without question, the standards do not require restoration work. For example, historic photographs may illustrate a wonderful leaded glass entryway, dramatic chandelier or marble wainscot, but the features are long since lost to scavengers. To secure the tax credits, the property owner does not need to re-create these details. To the contrary, because of the importance of design precision and materials in recreating details, such efforts end up being overly expensive and only add to the project's complexity and cost.

A third area is a concern with time and process. Many think that the tax credit process is time consuming and disruptive to the development process. Certainly, timing is critical and certainly, project discussions with reviewers need to be strategic. Errors occur on both sides of the spectrum. Some developers invite the reviewers to look at the building before they have a well-crafted sense of their plans for the site with the result that the building ends up defining the design for the hotel. At the other end, developers wait until they have construction-level designs before submitting for review - only to discover that they have spent a great deal of money and time on specific details that are not fundamental to the core design but need to be altered for tax credit purposes. In the realm of time and process, the wise development submits plans at the concept or design/development stage. By so doing, design work may continue on an effective timetable while problem areas are identified through the review process in a timely fashion.

So what kinds of buildings lend themselves to being adapted as a hotel? The most obvious, and often overlooked, are old hotels. Particularly in the 1920s, there was an explosion of development nationwide that included new and different building products. One such was the rise of the specialized hotel properties. Many of these offered features that parallel today's boutique with a notable lobby, attractive public spaces and an efficiency of room design. These stood apart from the grand dame hotels of the turn of the century and responded to an increasingly mobile business and leisure class. Many of these buildings disappeared from the public consciousness in the post-war flight to the suburbs. For much of recent past, these properties might have been affordable housing in some form; yet now 80+ years old, they are in such code and mechanical disrepair that such uses have a finite future.

Paralleling the rise of the specialized hotel in the 1920s was the apartment house. Again, such buildings offered amenities as a dramatic entry, dramatic lobby and attractive public spaces - with often the added benefit often of a dining room and kitchen - yet upstairs the rooms often were efficient in size and finishes. Again, because of age, market trends and deferred maintenance, many of these properties may be tired looking but retain good "bones".

A third kind of property that parallels the apartment house and specialize hotel was the fellowship building. These were lodge halls that offered again dramatic entries, public spaces and large meeting rooms. Typically, the upper floors were used for offices and feasibly adapted for modern hotel use.

At the other end of the spectrum, buildings that are not easily adapted include large structures - most typically industrial. It is a premise of the National Park Service that modern uses must be compatible with historic character. Areas that typically cause problems include things such inserting new floors and cutting in new doors and windows. Many of the great industrial spaces are large open workspaces with high dramatic ceilings. From the Park Service perspective, it typically is not possible to take a volume 20-30 feet tall and make it more efficient with new floors. Similarly, it is not typically possible to take a building that has a small number of windows and significantly add to that number. Some things simply don't fit.

Finally, in nearly every project, there is a design tension. An architect wishes to add his or her own signature to a historic building, considering the historic fabric a jumping off point for a dramatic modern design statement. Sometimes the developer has a specific vision. Or there may be practical considerations, such as dilapidated windows, that need to be replaced to meet energy code or use requirements. And eventually there is the money challenge where design desires meet pocketbook realities. All of these items are frankly issues where the practicality of the tax credits abuts design preferences and most often are resolved through creativity and negotiations.

At the end of the day, there is a growing and affluent market of heritage tourist travelers out there - people who seek unique places and are willing to pay for the opportunity. Historic preservation incentives, led by the 20% investment tax credit, make the creation of such historic hotels attractive. While many are fearful of the process, the standards for review are pretty consistent on the federal, state and local levels and since local review is required, federal and state incentives often makes sense. By being strategic in when and how to engage the reviewers, particularly as the design-development stage, the process can be timely while fixable pitfalls can be avoided. Finally, there are a significant number of buildings in our urban core that both have the potential for being historic and for being effectively used a hotel. It makes all the sense in the world to seek after the heritage tourism market with new old historic hotels.

John M. Tess is President of Heritage Consulting Group, a firm that assists property owners, attorneys, accountants, financial institutions and investors maximize the value of historic real estate assets through the use of federal tax incentives and other tools. Heritage has represented projects totaling more than $1 billion. Heritage specializes in linking developers with corporate and institutional investors active in historic tax credits. Heritage Consulting Group is headquartered in Portland, with offices in San Francisco and Washington, D.C. Mr. Tess can be contacted at 503-228-0272 or jmtess@heritage-consulting.com Extended Bio...

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