Hoteliers aiming to provide a memorable guest experience in a unique setting face a harsh reality: In most cities, the best real estate has already been developed. Developers have turned to adaptive reuse–converting an existing building to serve a function different from what it was originally designed for–to create unique hotels in unusual settings.

Turning a department store, city hall or post office into a hotel is not a new concept, but it has grown in popularity over the last 20 years. Most major hotel brands have added adaptive reuse projects to their portfolios, and several have projects in development. When successful, an adaptive reuse hotel can be one of the most talked about spots in a city, allowing the brand to command a premium from guests.

The success of such projects depends on more than an old building, but finding such a perfect spot is the first step. Converting old properties into hotels allows the use of existing architecture that would be too costly to replicate today on property that would not otherwise be available. The mix of location, architecture, amenities and other features can create unique properties that are much in demand.

One example of such a project is the Starwood’s The Liberty Hotel , which was created by converting Boston’s Charles Street Jail into a luxury hotel . With its striking architecture, history, Beacon Hill location, six restaurants and bars and 6,000 square feet of banquet space, The Liberty commands room rates starting at 33 percent more than the nearest premium hotel.

Adaptive reuse isn’t exclusive to the biggest hotel brands. Boutique hotels with smaller budgets are getting involved too. The $32 million 72-room Wythe Hotel opened in a 1901 cooperage on the Brooklyn, NY waterfront. The Wythe distinguishes itself by using the building’s characteristics, such as exposed ceiling and brick walls, and mixes in local flavor like artisanal furniture and custom wallpaper to attract guests looking for something unique.

Adaptive reuse is happening outside the top tier markets too. HRI Lodging, developer for Hilton Garden Inn, Starwood’s Aloft, Marriott’s Residence Inn and Courtyards and Hyatt, is willing to consider the top 30 or 40 markets for such projects. HRI developed Richmond, VA’s Hilton Garden Inn in the shell of the former Miller and Rhodes department store as part of a larger revitalization of the downtown area. The building was carved up into a 250-room hotel with the rest of the space going for apartments, a restaurant and a bar. HRI and Hilton Garden Inn kept the local feel of the department store by incorporating building artifacts into guest rooms and including menu items from the department store’s original restaurant in the restaurant.

Adaptive reuse often is a part of a larger urban renewal project or effort to save a National Historic Landmark. One of the biggest and most talked about recent projects has been the plans for the Old Post Office building and annex on Pennsylvania Avenue in Washington, DC. The General Services Administration announced earlier this year its plans to convert the space into a 250-room luxury hotel with spa facilities, restaurants and meeting space developed by the Trump Hotel Collection.

Working with these unique buildings has their own equally unique challenges. Buildings marked historic by governments often have restrictions on what can and cannot be done to the buildings during renovations. Working around such restrictions or incorporating them into the design is crucial. Failing to do so can add lots of time and cost to a project.

Developers working within such demands can take advantage of significant tax credits like the Historical Rehabilitation Tax Credit and the New Market Tax Credit. Tax credits like these enable such expensive projects to take place, generating a lot of jobs, restoring historic buildings and reviving declining areas in many cities. Without these credits, adaptive reuse projects might grind to a halt.

The results are usually worth the added expense because the right building in the right location can, for the right brand, deliver a unique experience to hotel guests. For developers and hotel brands willing to take the risk, adaptive reuse projects can provide substantial windfalls.

Click here to view Sal Viglica’s HotelInteractive.com article.

MCB has over 35 years of hospitality accounting experience providing audit, tax, accounting, due diligence and employee benefit plan audit services. Contact an MCB Adviser today at info@mcb-cpa.com or call 703.218.3600 to discuss your hotel accounting and tax needs or to receive a proposal for your next financial statement audit.

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