Developers here increasingly are tapping Spokanes trove of historic buildings for construction and rehabilitation projects ranging from offices to residential lofts to hotels.


Like looking after an eccentric old aunt, however, shepherding a historic-rehab project through the development process comes with unique challengesand financing is a big one.


I think banks are somewhat leery of rehab projects because they tend to be unpredictable in what theyre really going to cost, says veteran rehab specialist Ron Wells, of Wells & Co. here.


Finding comparable properties on which to base appraisals also can be difficult, although that becomes less of an issue with each project thats completed here, Wells and others say.


On the plus side, tax incentives are available to developers who undertake some historic-rehab projects, which can offset substantially the cost of rehabilitation.


The bottom line, developers say, is that a project involving a historic building nearly always is more complicated than a new development of the same size would be. They add, however, that the increased difficulty is worth it.


Theres just more redoing everything on an old building. (But) you cant get the same character on a new building, either, says Marshall Clark, a Spokane real estate broker who is turning a brick building at 2320 N. Atlantic into a mixed-use development.


More effort for banks


Projects involving historic buildings range from gutting a structure and constructing an entirely new interior, to preserving or restoring a buildings original interior and exterior.


Wells, who specializes in the latter, says its been his experience that smaller banks and credit unions are more willing to take chances on historic projects than larger financial institutions are.


I think the farther away the headquarters of the bank is, the more difficult (it is) to do business with, he says, adding that there are exceptions to that rule.


Susie Luby, co-developer of the Blue Chip Lofts, an 11-unit condominium rehab development thats under construction at 1220 W. Railroad downtown, says, We did run into some challenges getting construction financing for the project. I think the biggest thing is that it wasnt a project that typically fit into any boxit hasnt been done in Spokane before.


Luby and partner Steve Thosath bought the building with private funds, but needed to borrow about $1.2 million to refurbish it and construct the condominium units, she says. Wheatland Bank, a small Davenport-based lender with a growing Spokane presence, supported the project on the condition that Luby and Thosath presell most of the units before construction could begin.


Preleasing a certain amount of space also was a condition imposed by Spokane-based AmericanWest Bank on Jimmy and Lori Grays redevelopment of the former Watson Co. office building downtown. In that case, the condition was required in order for the couple to convert their construction loan at AmericanWest to permanent financing. The Grays are nearly finished redeveloping the building, which once was the Lorraine Hotel, into an executive suites office project. Jimmy Gray says they went to three or four banks before finding one that would back their project.


Spokane developer Steve Schmautz says he also chose AmericanWest Bank when he was looking to borrow up to $4 million to rehabilitate the Legion Building downtown, because hed worked with the bank before and knew that it had arranged financing for several other such projects.


Dean Bellamy, senior vice president at AmericanWest, says theres a learning curve for arranging financing on historic properties, so once a financial institution has invested in man hours and research to complete one such project, subsequent projects are easier.


A key issue in financing historic projects is whether a developer plans to tailor a restoration to qualify for federal tax incentives, Bellamy says. While such incentives are substantialan income-tax credit equaling 20 percent of the amount spent on rehabilitationthey require that a developer follow federal restoration guidelines, says Teresa Brum, director of historic preservation for the city of Spokane and Spokane county.


To qualify for the federal program, a building must be at least 50 years old, be historically or architecturally significant, and be part of a historic district or recognized as a historic property.


In addition to the federal tax credit, Brum says a developer also can apply for a local program that grants a 10-year property-tax reduction equal to the amount spent on rehabilitation.


Generally, Bellamy says, a developer must decide whether he or she wants to spend more money on a restoration that meets federal guidelines to qualify for tax savings, or save money on construction and forgo tax incentives.


Bellamy consults tax and historic-preservation experts to help him evaluate projects involving historic buildings. In addition, AmericanWest evaluates historic projects as it does other commercial developmentson how well they make sense financially and, in a large part, on the track record of the developers. As a result, historic projects can take a lot of time from the banks perspective, he says.


Wells says his biggest aggravation in his 25 years of rehabbing historic properties has been obtaining good comps, or the comparable properties that a financial institution uses to gauge the value of real estate and projects on which its considering lending money.


Until recently, Spokane hasnt had many old buildings that have been rehabilitated or converted to new uses, so comparable properties have been lacking, he says. In some cases, he believes appraisers here have been too conservative in their estimations of the value of projects involving historic properties.


The reality is, just pick any competent appraiser in Seattle or Portland, and I can guarantee theyll have a much more positive attitude about Spokane than local appraisers, Wells asserts. They dont see the railroad as an automatic barrier to value. They dont see the freeway as an automatic barrier to value.


Scot Auble, president of Auble & Associates, a real estate appraisal firm here, says a lack of comps might have been a problem in the past, but every day theres more and more data generated in Spokane, available for analysis. Even when comps arent available, there are alternate methods of calculating value.


Nevertheless, appraising a historic project takes longer, is harder, and typically costs more than appraising a new project, Auble says. It just takes a lot more analysis and expertise to apply the data to these projects.


Pent-up demand


Despite their financing challenges, historic buildings increasingly are interesting developers.


Brum, the city-county historic-preservation director, says, We are so busy I can hardly keep up. Developers are starting to see that it works for other people and they want to get involved.


In response, her office is holding a workshop on May 8 to provide information on using historic-rehab tax incentives, she says.


Such projects are expected to continue to increase in frequency here.


Luby says she believes theres a lot of pent-up demand in Spokane for projects such as the Blue Chip Lofts. Despite having sold all 11 units in the building, shes still getting calls from people seeking information, she says.


Auble believes people who move here from cities that already have a number of rehabbed historic buildings are driving that demand, at least partially. Clark says hed consider taking on a project in another historic building after his North Side project is finishedif he can find another old structure to buy for a reasonable price.


I think (thats) going to get harder and harder to do because I think more people are looking at these buildings.