For a region facing a housing shortage and office market distress, flipping underused buildings into homes might sound like a silver bullet.
Thanks to a recent ordinance amendment that relaxes zoning barriers for property conversions, adaptive reuse is more accessible than ever in Los Angeles. An industry pulse-take shows developer and lender appetite is catching up slowly, dampened by scarce equity, uncertain economics and the city’s property transfer tax.
A lender with a front-seat view to development trends is Citizens Private Bank senior managing director Jeremy Cramer, who leads the bank’s construction financing and commercial real estate lending from Manhattan Beach.
Proposals for adaptive reuse developments haven’t flooded in since the updated policy went into effect in February, Cramer said. At least one new construction loan request hits his desk every day, but very few – almost none – have been for conversions, he said.
“I don’t think (adaptive reuse) is a very big part of the fabric of what’s going on in the redevelopment of L.A. at this time,” Cramer said.
Since 1999, the city has incentivized the reuse of unused or mostly vacant buildings into multifamily housing in downtown and other select sub-areas. Here and there, developers have undertaken office and retail conversions, but the whole of L.A. County has lagged behind the smaller, less-populated Orange County in adaptive reuse.
The latter, despite counting 6 million fewer residents, had 3.8 million square feet of office space converted or planned for conversion in last year’s fourth quarter, compared to 3.3 million square feet in L.A. County, according to CBRE data.
L.A., by far the most populous of the county’s 88 cities, hopes to move the needle. Its new Citywide Adaptive Reuse Ordinance expanded eligibility to buildings in any L.A. neighborhood that are at least 15 years old. The policy also allows for smaller unit sizes and loosens restrictions on adding floors to affordable housing developments.
Developers now have a much longer roster of possible conversion targets – a “super valuable” change, said Alex Hill, an accountant who advises firms on real estate projects and land sales as a partner at Pasadena-based Weaver.
“Now, you have people putting pen to paper, trying to figure out, ‘Hey, if I bought this property, could I make it work?’” Hill said. “’Let’s have a discussion with the current owner who can’t lease it up as an office property.’”
Conversations are starting, he said, but it’ll take time for the update to hit the project pipeline because “office-owners are not necessarily the same as these adaptive reuse developers, and so the properties are going to have to sell.”
In one pocket of L.A., the time lag Hill describes isn’t an issue.
Koreatown has been the site of more than 10 adaptive reuse projects by Jamison Services, the neighborhood’s largest commercial office landlord. Six more are on the way.
Jamison has gradually turned its existing portfolio of office buildings dating back to the 1950s and 1960s into residential developments. Converting properties it already owns put the firm on a fast-track and made it one of the city’s first developers to make use of the amended reuse policy.
Jamison Chief Executive Garret Lee – who took over the corner office from his sister, Jaime, earlier this month – said the ordinance’s eligibility expansion and unit size allowance are “monumental changes.” Lee’s team has already re-permitted several planned projects to add density under the new rules.
“We probably have projects in the pipeline that we’re going to use it on as well, especially in areas that were not as easily entitled or possible to entitle for adaptive reuse previously,” Lee said, pointing to target developments in the Park Mile neighborhood in the Wilshire Corridor as an example.
Select lenders in, equity is tougher
Jamison projects are often financed through a traditional debt and equity model, using various loans – construction, mortgage, bridge – and selling ownership shares. Lee said he’s seen “no shortage of debt,” which the developer sources from regional banks and debt funds.
But not all banks are eager lenders in adaptive reuse. Financing conversions can carry a great deal of uncertainty, said Cramer of Citizens Private Bank. Surprises can crop up in the original structure’s integrity, the true scope of required reconstruction and municipal codes, he said.
“Banks become more hesitant because the easiest thing to do is build something ground up from scratch, because it’s a blank slate, and adaptive reuse is the opposite,” Cramer said.
The banker’s team recently extended loans for an office-to-multifamily project in Orange County but made sure the developer had experience in adaptive reuse and was given a “longer runway” to success, he said.
“You set (adaptive reuse projects) up with a bigger contingency, because there’s going to be a lot more unknowns,” Cramer said.
Some local banks have dug out a niche in adaptive reuse finance. Pasadena-based East West Bank, for one, is a prolific lender boasting an active relationship with developer Izek Shomof, who over two decades has converted a slew of aging downtown buildings.
The bank plays a role in the layered capital stack required for Shomof’s projects, which often includes a mix of loans, tax credits, grants and other incentives.
“These projects are complicated,” said Robert Lo, East West’s head of commercial real estate banking, in a release. “The story looks great when the building is finished, but getting there takes the right partners.”
While debt has come rather easily for Jamison’s Koreatown projects, equity has been a challenge to secure, Lee said — despite burgeoning interest from institutional investors and dedicated adaptive reuse funds. Real estate investment firm Dune Real Estate Partners and New York City-based developer TF Cornerstone partnered to launch a $1-billion office-to-residential conversion fund in late 2024.
“There’s a lot of equity options out there, but it’s obviously harder to close those transactions,” Lee said.
More project options under L.A.’s expanded ordinance will mean more potentially attractive options for equity investors, he said.
“It would definitely open the door to equity and just financing in general,” Lee said, “especially because now, property owners don’t have to spend a year or two waiting for entitlements and spending money on it to find out if the project could move forward.”
As adaptive reuse projects pick up speed and processes standardize, the door to institutional capital could swing wider, said Jonathan Curtis, principal at development firm Cedar Street Partners based in La Cañada Flintridge.
“Financing is getting a lot easier for adaptive projects because lenders understand them,” Curtis said. “They’re going to look at the underwriting for the uses and the due diligence extremely, extremely closely, but you’re getting more interest.”
Hill, the accountant, said he expects lenders who’ve been discouraged by unstable occupancy and a flood of competition for multi-family developments in Sun Belt states like Texas and Arizona crawl back to Southern California.
“The best draw to L.A. is it’s more stable, so these adaptive reuse projects are exciting,” said Hill, noting interest from clients who lead private equity shops and debt funds. “I know there are a number of lenders that are kind of advertising toward the deals.”
Tax credits, public funding push needle
An emerging funding source for Jamison’s developments is the Low-Income Housing Tax Credit, the main federal incentive for new construction or rehabilitation of affordable housing. The firm hopes to close on its first fully affordable project supported by this summer.
“The combination of the credits and the tax-exempt bonds, a lot of times they cover most of the construction,” Lee said.
The Historic Tax Credit is another option for funding the rehabilitation and conversion of certified historic buildings like factories, schools and offices. Developers often partner with banks or other investors, who provide equity in exchange for the tax credit — equal to 20% of qualified rehab expenses.
Use of the federal incentive has not been common among L.A. adaptive reuse projects, according to an HTC equity expert at a leading bank. Many properties targeted for reuse in the area haven’t been old enough, as qualifying buildings must be at least 50 years old.
Michael Miller, the president of Bold Communities, said tax credits fill funding gaps in his affordable housing projects.
Miller typically secures construction and permanent loans from Citi Community Capital and turns to local and state agencies, plus federal incentives, for the rest.
The funding for Bold Communities’ latest developments, its first foray into adaptive reuse, will be far simpler. Miller was one of a handful of developers to receive funding from the newly established L.A. County Affordable Housing Solutions Agency, which doled out $102 million across 10 projects this month.
Thanks to the new, centralized model, more than 200 affordable housing units will soon sprout at former extended-stay hotel sites in Torrance and Stevenson Ranch. While adaptive reuse has seemed, in the past, to be a “headache” to Miller, these conversions’ low redevelopment costs and acquisition prices caught his eye.
“What I liked about both of these assets, these hotels, is they’re relatively turn-key,” Miller said. “My team has done a lot of acquisition rehab … I think these are in better shape, frankly.”
For its first application round, LACAHSA targeted projects that could start construction in the next year, making an adaptive reuse turnaround like Miller’s a winning proposal.
The agency’s funding comes in where conventional capital falls short, said Claudia Lima, managing director of strategic investments. Funded through Measure A’s halfcent sales tax, it put up a diverse pool of capital, including second-tier loans at a lower rate than equity investors charge — 3% fixed compared to rates in the low-to-mid teens.
“It was more important to make sure that we build units and so our capital is a lot less expensive and is very flexible and patient,” Lima said. “We don’t have to be paid back in five years or seven years.”
‘Speed bumps’ remain
While the adaptive reuse ordinance amendment opened opportunities citywide, a true surge in conversions would require more funding programs and development incentives, developers and lenders said.
And depending on a building’s age and how much reconstruction it requires, adaptive reuse projects can be challenging to undertake and need more capital support to make sense.
Measure ULA, also known as the “mansion tax” on all real estate sold at or above $5 million, has been a “political speed bump” to raising capital for adaptive reuse projects, Lee said. The tax, among others, has stalled acquisitions, sales and equity-raising, he said. But Jamison is still moving full steam ahead on conversions.
“We really like the outcome: seeing a building that’s already been in the community for so long transform into something that’s more useful, without the issues of new construction,” Lee said. “It’s a win-win.”
