Navigating the Future of Real Estate: Adaptive Reuse, Tax Strategies, and Financing Innovations

Navigating the Future of Real Estate: Adaptive Reuse, Tax Strategies, and Financing Innovations
Photo Courtesy: Darrow Everett

By: Maria Williams

The real estate sector is at a pivotal juncture where it faces challenges like the underutilization of commercial spaces post-pandemic and a significant housing shortage in urban centers. But the challenges present unique opportunities, like adaptive reuse, tax strategies, and creative financing.

By utilizing the proper strategies and receiving expert guidance, developers and investors can achieve success and contribute to the community and society.

Repurposing Through Adaptive Reuse

Adaptive reuse is the process of repurposing underutilized buildings, and it has emerged as a sustainable solution to challenges in real estate. As cities grapple with housing shortages and the changing dynamics of workspace due to the pandemic’s long-term impact, there is a significant need to find new ways to use existing real estate.

Transforming vacant office buildings into residential living spaces, as opposed to building anew, addresses the critical need for housing while revitalizing neighborhoods and preserving historical architecture.

Making adaptive reuse more appealing is the federal government, which has recognized its effectiveness and introduced incentives to encourage the conversion of commercial spaces into housing.

Programs such as the Railroad Rehabilitation & Improvement Financing (RRIF) and the Transportation Infrastructure Finance and Innovation Act (TIFIA) offer financial support for projects that contribute to economic development and community revitalization. These initiatives offer a win-win solution for communities and investors.

There are legal challenges associated with repurposing, requiring developers and investors to navigate zoning laws and secure government incentives.

“Compliance with zoning, housing and land use requirements is critical to the successful development of an adaptive reuse project, but integrating public incentives can be critical to financing the project,” said Keith Phillis, Chair of the Energy and Infrastructure Practice Group for DarrowEverett LLP. “Often, the local, state and federal law requirements are misaligned, however; this problem is best navigated by experienced counsel.”

Optimizing Tax Strategies

Real estate investment evolves rapidly, and tax incentives stand as one of the most important factors in maximizing returns and stimulating economic growth. Among these, bonus depreciation stands out as a potent tool for investors, allowing for the immediate deduction of a significant portion of the purchase price of qualified property. This accelerated depreciation method not only enhances cash flow in the short term but also encourages further investment and development within the sector.

But while bonus depreciation offers substantial tax savings, it requires sophisticated planning and a deep understanding of tax laws. The eligibility criteria for properties and the timing of deductions are areas where investors often need to pay close attention or seek out legal and tax professionals.

Worth noting is that there is a phased reduction and eventual expiration of bonus depreciation on the horizon. This means timely action is essential for investors looking to capitalize on the opportunity.

“There is a chance bonus depreciation rules will be enhanced and extended if the Tax Relief for American Families and Workers Act of 2024 passes through Congress; however, it’s worth considering taking advantage of the benefit as it currently exists,” says Christina Papillo, Commercial Real Estate Attorney at DarrowEverett.

1031 Exchanges

Another powerful strategy is 1031 exchanges. These offer real estate investors a way to defer taxable gains by exchanging one investment property for another, not only preserving capital but facilitating the strategic realignment of investment portfolios.

Seller financing does introduce an additional layer of complexity, but if structured properly, investors can maximize the benefits of the exchange without unintended tax consequences.

To that end, Delaware Statutory Trusts (DSTs) have emerged as a popular vehicle for investors seeking to participate in 1031 exchanges without the management responsibilities of direct property ownership. DSTs allow investors to pool resources into larger, potentially more profitable real estate ventures.

“1031 exchanges have evolved with new structures and the shifting debt and real estate markets,” says DarrowEverett attorney Michael J. Raposa. “1031 exchange-eligible DSTs can make it far easier for investors to access the benefits of 1031 exchanges while also diversifying their real estate investment portfolio and taking a passive approach. That said, those organizing DSTs should seek the advice of specialized legal counsel before setting up such investment vehicles, to ensure that they will be eligible for 1031 exchange treatment. DSTs do not inherently qualify, and the IRS’s rules on this subject are complex.”


Real estate will continue to evolve, presenting developers and investors with opportunities to innovate, invest, and grow. However, to take advantage of things like adaptive reuse, tax planning, and financing strategies, expertise is required. That is why turning to professionals in real estate law is a must, not only to save money but to act at the opportune time without risking compliance issues.


Published by Khy Talara


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