- Written by Amy Milshtein
- Published in Real Estate
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Often empty, used for storage, or slowly falling apart, the upper stories of historic downtowns’ buildings are finally getting some attention. Developers and officials hope renovations will further activate cities, but is the expense and effort worth it?
Mike Moore does not hold back when describing the Lamb-Swansen Building, a downtown Klamath Falls property he and his wife, Rachel, bought in 1998.
“It was the ugliest building in town,” he says about the 100-year-old, two-story structure.
The Lamb-Swansen Building, owned by Mike and Rachel Moore. Photo by Jason E. Kaplan
Mike, who is from Bend, and Rachel, who grew up in Klamath Falls, started making expensive improvements. The pair gutted the ground floor, added the second exit required by modern codes and built out two retail spaces: a Subway sandwich shop owned and operated by the Moores, and a studio they rent out to a photographer. The new storefronts fit well into an activated Main Street lined with bars, boutiques and restaurants.
But what about the second floor?
The Lamb-Swansen Building included four fully occupied, second-story apartments. Beyond ugly, these apartments were “in deplorable condition,” according to Mike. With no budget to improve the space, the couple waited, choosing not to re-rent the apartments after legacy tenants moved out. Eventually, all four units sat empty, despite a desperate need for housing.
This same story is playing out in in the upper stories of small cities and towns throughout Oregon and the rest of the U.S. Eager to leverage their best asset, local governments are investing in their historic downtowns, betting their authenticity and charm will draw tourists, shoppers and entrepreneurs.
“People want to go to places with soul,” explained Shawn Irvine, economic development director for the City of Independence, via email. “A walkable downtown with well-restored historic buildings creates a unique sense of place that sets it apart from more modern ‘town center’ developments.”
The idea, called the Main Street Approach, has been very successful. Designed and promoted by Main Street America, a program of the National Trust for Historic Preservation, this set of strategies has been used to preserve and revitalize older and historic commercial districts throughout the country. Oregon Main Street, a Main Street America Coordination Program formed in 2007, has also been successful. The organization reports that between 2011 and 2021 its work in the state’s historic downtowns resulted in $140.9 million worth of direct economic impacts.
Not bad, but true economic vitality requires 24-hour density: a critical mass of people ready to support storefronts after business hours and beyond the tourist season.
“You need as many people as possible living in close proximity to the downtown core,” Irwin says. “When you create upper-floor residential units in downtown historic buildings, you literally have people living on Main Street.”
Easier said than done. Activating ground floors is difficult, but it’s a piece of cake compared to renovating historic upper stories. Along with seismic upgrades, better plumbing and modern electrical systems, bringing a building up to residential codes demands expensive extras like elevators to meet ADA compliance, plus sprinkler systems and additional exits for fire safety. Local zoning requiring dedicated parking for each unit adds even more cost and complexity. And that’s only if you can find and convince the building owner that all this effort will pay off.
Oregon Main Street is trying to make the process easier. Along with support, education and access to vital grants, the group funded a report outlining the benefits, challenges and possible next steps of successful second-story development.
But even with awareness and support, these projects are undeniably complicated, unpredictable and expensive. Taking them on requires something extra. This special sauce may be a champion with a personal connection to the space, a community-wide commitment to a historic downtown or someone like Al Plute, an iconoclastic developer who thrives on risk.
Pendleton property owner Al Plute’s upper-story renovation in progress. Photo by Jason E. Kaplan
“Anyone can build a brand-new building,” says the 71-year-old. “This is more of an adventure. You never know what’s behind those walls until you get started.” A colorful character for sure, Plute claims to have flipped 41 houses in Northern California before moving to Pendleton. Since 2005 he’s developed nearly 200 units of upper-story housing spread out between three historic, multistory downtown buildings. A fourth renovation, slated to be finished in January 2024, will add a dozen more.
Plute paid for these projects with a combination of self-financing, a few bank loans and — most important — grants from the Pendleton Development Commission.
“These projects don’t pencil out without grants,” he says. “I wouldn’t break even without them.”
Grants also made the difference for the Moores in Klamath Falls. After letting their “deplorable” four upper-story apartments lie fallow for nearly 20 years, a $150,000 Oregon Main Street revitalization grant made the $450,000 project financially viable. After completing the work in spring 2020, the couple feared that COVID would make renting out the space difficult.
They were wrong. All four units rented out within a few weeks, and while there has been turnover, the apartments are never vacant. The Moores are proud of the hip, loft-like spaces they created, but they do have one serious complaint.
“Because it’s a mixed-use project, our insurance rates actually went up,” says Rachel. “It’s disheartening.”
Property owners Rachel and Mike Moore at the second exit they added to their downtown Klamath Falls building. Photo by Jason E. Kaplan
Insurance complaints aside, Klamath Falls fledged several successful upper-story renovations, guided by a 12-year-old strategic downtown-revitalization plan.
“We know these projects are complicated and expensive. No one wants to be the first to take on the risk,” says Kendall Bell, Klamath Falls City Council member and board member of the Klamath Falls Downtown Association. “But they are worth it. Increasing the residential presence brings so much value and vitality to downtowns.”
The additional housing is also desperately needed. All of Oregon is suffering a housing crisis, with state economist Josh Lehner estimating the state is short 111,000 housing units. Bell reports that Klamath Falls is presently 200 units short. Activating every available upper-story space downtown, including side streets, could yield 120 apartments. It’s not a full solution, to be sure — but walkable, trendy downtown living spaces would play a significant part of a long-term growth strategy.
Convincing a building owner to take on a risky second-story project is easier with a decade’s worth of guaranteed tenants in your back pocket. That’s the promise Oregon Health & Science University made to Amy McKay, owner of the McKay Building in Klamath Falls. Needing student housing for its Campus for Rural Health program, the school approached McKay with a specific ask: Build out 13 dorm-style units around a central lobby on the second story and they would sign a 10-year lease. The guarantee, along with two grants — one for an elevator and another for windows — made the deal work.
Amy McKay built housing in the upper floors of her building in Klamath Falls. Photo by Jason E. Kaplan
With the lease almost up, McKay is investigating her next steps. Happy to re-sign with OHSU, she is also sending out feelers to the nearby Oregon Institute of Technology. Creating an Airbnb-style boutique hotel offers another option.
The latest round of funding in Klamath Falls will produce even more lodging for the city. While not a strictly upper-story project, the $200,000 grant to restore the historic Arcade Hotel will save a historic building, catalyze community investment, create jobs, increase property values and create vibrancy. “The project checks all the boxes that this grant program is built on,” according to Bell.
The bulk of upper-story renovation projects are small, creating a few market-rate apartments.
Big projects, like the Merwyn Building in Astoria, however, only pencil out as affordable, or income-qualified, housing.
“Affordable housing is appraised differently,” explains Julie Garver, housing development director for Innovative Housing Inc. “We have access to beneficial financing unavailable to market-rate projects.”
Completed in 2021, the Merwyn required a combination of public and private grants, Oregon Local Innovation and Fast Track (LIFT) funds, and tax credits to meet its $7 million budget. Expensive for sure, but after sitting empty for 30 years, doing anything with the 94-year-old former hotel was going to be pricey. Even demolishing the Merwyn and starting over would cost too much.
“It’s a masonry building. Just hauling away tons of debris would have been expensive,” says Garver. She also points to other challenges specific to building a new structure in Astoria. “The city is built on a filled-in bay with complicated utility hookups and 100-year-old water and sewer lines. Renovation allows us to reuse much of the original building.”
Specializing in putting affordable housing in historic buildings (the organization built the Modern Rich Apartments and the Erickson-Fritz Apartments in Portland’s Old Town), Innovative Housing leaned on their experience to complete the Merwyn. Tapping a pool of skilled engineers, adept contractors and consultants, it delivered 40 apartments, 36 of which are income-qualified.
“It’s the ‘greenest’ type of redevelopment,” says Garver. “We reused almost all the wood and exterior walls, most of the framing and floor systems, and the historic windows and staircase. It’s unique and has lots of character.”
Forty new apartments in downtown Astoria is good news, but even a fully restored Merwyn Building only takes a small nibble out of the area’s need. “There’s a housing crunch,” says Jessamyn Grace West, executive director of Astoria Downtown Historic District Association. “We’re lacking 500 units across all income spectrums.”
More upstairs development could provide some relief. The city is committed to revitalizing its downtown, and its commercial spaces are pretty full to date, according to Grace West. But even if someone is interested in rehabbing a second story in Astoria or anywhere in Oregon, plenty of barriers remain. One of the hardest to overcome is owner apathy.
Often the owners of historic downtown buildings don’t live in the same town, or even in the same state.
“They don’t have those community connections,” says Aniko Drlik-Muehleck, project coordinator at the University of Oregon’s Institute for Policy Research and Engagement. (Drlik-Muehleck and her students helped create Oregon Main Street’s playbook for activating upper stories.) Distant family members, not interested in the legacy of their great-great-grandfather’s old business, are happy enough collecting rent from a ground-floor tenant.
Such was the case for the J.S. Cooper Building in downtown Independence.
“The second floor of the J.S. Cooper Building sat vacant for over 20 years, not because of the economy or demographics but because of an absentee owner with no vision to breathe life back into it,” says real estate investor/developer Bodie Bemrose.
An Independence native, Bemrose helped install five apartments and three executive office spaces into the second story of the J.S. Cooper Building. Like Pendleton’s Plute, Bemrose got his start flipping houses and found his niche. He understands the complexity of this work and is willing to go the extra mile to shake owners out of their apathy.
“I wanted to buy a building in downtown Oregon City that was empty for years, but the owner was not interested,” he recalls. Bemrose met the man for six months’ worth of 6:00 a.m. breakfasts, teasing out what happened to his old business and why he was unwilling to sell. “I was basically his counselor, but he eventually agreed.”
Housing is a great use for renovated second stories, but there are other applications too. The Astoria Arts & Movement Center, a nonprofit dance school and community space, rented out the second story of the Odd Fellows Building. When the building went up for sale in 2017, it became clear the school’s owners, including Grace West, would have to buy the building or be displaced.
Jessamyn Grace West, executive director, Astoria Downtown Historic District Association and co-owner of the building that houses the Astoria Arts & Movement Center.
Photo by Jason E. Kaplan
“This school is my passion,” she says. “And there is no other space like it in Astoria.”
So even though Grace West “worked two jobs, lived in an apartment and drove a 1999 Honda Civic,” she and her two business partners bought the building. A $150,000 National Trust for Historic Preservation grant and donations allowed the three women to repair upper-story windows, replace crumbling concrete and repaint the entire exterior.
The former Oddfellows building that houses the Astoria Arts & Movement Center. Photo by Jason E. Kaplan
The Main Street Approach continues to invigorate downtowns throughout the state, and focusing attention on upper stories seems like a logical next step. Banks might even become more willing to help finance these ambitious undertakings. “These projects are not as ‘crazy’ as they were 10 years ago,” says Klamath Fall’s Bell. “We are working to create more awareness with our local banks. They are more open to the idea.”
But some small developers don’t look to banks for financing.
“We actually prefer not using banks,” says Bemrose. “We either use our own cash, bring in partners with some cash or use private lenders. After we finish the projects, and they are leased up, then the bankers all of a sudden want to loan you money.” Bemrose also relies on government grants to complete his projects.
Still, these examples provide the proof of concept: There is a lot of untapped potential hiding upstairs in historic downtowns. Survey results in the Institute for Policy Research and Engagement’s report show only 50% of upper-story spaces in Oregon downtowns are used for apartments, offices, or community space, leaving lots of opportunities for developers of all sizes and in every corner of the state.
Getting full value out of an old building is hard but not impossible. And the benefits are amplified throughout the community.
“Yes, it’s expensive,” says Bell, “but the bones are there.”
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