Navigating Federal Resources for Office-to-Residential Conversion

Real estate developers are typically experts at navigating local government and accessing state and city subsidies to make complex projects pencil. Yet local incentives have, in most cities, been insufficient to spur the wave of office-to-residential conversions that some predicted would save downtowns from an “urban doom loop.”

Since the onset of the pandemic, Gensler has studied the conversion potential of 1,400 office buildings in 115 cities. While around 32% of the buildings Gensler studied are, in theory, physically viable as housing, only 5% are in the process of converting today. That’s largely due to the financing gap between the cost of office-to-residential construction, and the anticipated revenue derived from future rent or sale of apartments.

As owners face the increasingly dire prospect of defaulting on office buildings, many are turning, for the first time, toward the federal government, in the hopes of a financial lifeline to make almost-there conversion projects a reality. In response, last Fall, the White House released a 54 page guidebook to a medley of programs — federal loans, grants, guarantees, and tax incentives — that owners might be able to utilize to help cover conversion costs.

However, none of the 20 programs contained in the guidebook are specially tailored for office-to-residential financing. Rather, each was originally developed to promote adjacent social goals, like transit-oriented development, emissions reduction, and the preservation of historic property. The hope is that these complementary programs can be creatively repurposed to also cover conversion activity.

The results, so far, have been mixed, with asset owners discovering that accessing federal funding may trigger additional reviews — like the lengthy environmental assessments prescribed in the National Environmental Policy Act (NEPA) — or requirements like Buy America, which mandates domestic procurement of construction materials.

To help cut through the noise, below, we provide an overview of some of the programs that have garnered the most buzz, and the feedback we have heard on areas for program improvement. Check out the White House’s full guidebook for complete information.

For Projects Near Transit

Key Programs
Transportation Infrastructure Financing and Innovation Act (TIFIA) provides low interest loans for Transit Oriented Development projects. The Railroad Rehabilitation & Improvement Financing (RRIF) is like TIFIA but more restrictive, in that applicants must have a rail component, and apply as a joint venture with a public entity. Application processing for both programs takes at least 12 months, and triggers NEPA review, Buy America, and David-Bacon wages, among other conditions. The programs have a limited track record of use for office-to-residential conversion.

The Feedback We’ve Heard
Developers have advocated for the DOT to issue a NEPA categorical exclusion for office-to-residential conversion projects, eliminating the need for lengthy environmental reviews for projects that have limited impact on the building’s footprint. They have also advocated for expediting application review timelines to match the 2- to 3-month loan review cycle that is typical for the real estate industry. To help facilitate a shorter review cycle, it would be helpful to develop a template loan document specific to conversions, as the current DOT loan templates are intended primarily for financing transit projects.

For Energy Efficient Retrofits

Key Programs
The Energy Efficient Commercial Buildings Deduction (179D) provides a tax deduction of $.5 -$5 per square foot, for buildings over five years old and greater than three stories. The Energy Efficient Home Credit (45L) provides a tax credit of $500-$5,000 per unit for homes that meet EPA’s Energy Star certification or DOE’s Zero Energy Ready Homes certification. In both cases, the higher credit or deduction is available when prevailing wages and other requirements are met. For concessionary loans, asset owners should look to the Department of Energy, which, under the Title 17 Clean Energy Financing Program, will issue loans to cover select costs on projects that advance clean energy deployment (e.g. through installing distributed energy resources). Lastly, the National Clean Investment Fund recently selected Power Forward Communities — a coalition of nonprofits — to distribute funding to support net zero building retrofits, at least 40% of which must be directed to disadvantaged communities. Application information is expected in Q4, 2024.

The Feedback We’ve Heard
While 179D and 45L are in use, developers have advocated for changes to make the tools applicable to a greater number of projects. They have advocated for 179D to be structured as a tax credit rather than deduction, mirroring the structure of 45L. They have also advocated for 45L to be secured at the time of building permitting, rather than at the time of building lease up, as permitting is the stage at which energy efficient design decisions are made. The Department of Energy is currently processing the first Title 17 loans for office-to-residential conversion projects and developers are waiting to see which costs will be deemed eligible for coverage (i.e.: will coverage only be limited to energy infrastructure, or will it also include items like façade improvements).There is optimism that Power Forward — the administrator of the National Clean Investment Fund — might develop a program that is better tailored to real estate, and specifically the office-to-residential context.

For Historic Properties

Key Programs
The Historic Preservation Tax Credit is a federal tax credit for qualified rehabilitation expenditures for buildings that are listed in the National Register of Historic Places. Many states offer programs that mirror the federal credit, creating a stackable package that can offset project costs.

The Feedback We’ve Heard
Developers have had success registering their site and utilizing the Historic Preservation Tax Credit. While the federal credit is capped at $5M per project, this is an obvious tool for developers to use on eligible projects.