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Office Conversions Gaining Momentum
Can a new ‘affordable housing conversion tax credit’ help languishing office buildings? By Craig Miller Duffy+Duffy Cost Segregation
ith the pandemic-induced shift to remote work and the slow return of office workers, the number of employees commuting to central business districts may never return to pre-COVID levels. Office towers are struggling, and new office leases are dramatically down again in 2023. Nationally, over 20% of the available office space is vacant.
they have more people living in and around them. The economics of office to residential conversions are not favorable in many cities, although many cities have grown the urban city populations with public support and subsidies in recent years. Proponents of a new tax incentive believe that a right-sized adaptation of offices to
adopted, proposes a 30% tax credit for low-income census tracts. The bill authorizes and caps the tax credits at $10 billion through 2027. Office buildings at least 20 years old would be eligible for the 20% or 30% tax credit for the construction costs required
to change the use to housing. The new tax credit can be coupled with the other existing tax credit and tax deduction incentives like HTC and EPAct 179D. There is widespread support from a coalition of real estate partners, including NAIOP, the Real Estate Roundtable, the National MultiFamily Housing Council, the National Association of Home Builders and many others. Proponents agree that increasing the supply of new urban housing can create greater housing stability and affordability for renters at a variety of income levels for decades to come. REITs will be able to take advantage of the proposed ability to monetize the new tax credit (owner can sell/transfer the tax credits). Requirements include a set-aside for affordable market rate units. Mixeduse is allowed. Buildings must be 20 years old, and the tax credit allocations are to be made by state based on population and pursuant to a conver-
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Estimates are that 70% of the office stock in the U.S. is either obsolete or heading toward obsolescence. Concerns for plummeting commercial real estate rents and property values are real, and many are expecting lower property tax collections for state and local government over the next few years. Developers with troubled office towers have few options. Buyers are scarce, and capital markets have been frozen.
housing will strengthen demand for the remaining office inventory, therefore creating a stronger downtown that anchors a stronger city and region For languishing office properties, a new “temporary” 20% Housing Conversion Tax Credit Bill is gaining momentum in Congress. The bill, if
Nationally, Cleveland has the highest percentage of its office stock – A new $10B temporary tax credit bill 11% of total inventory – planned for adaptive re-use or underway for a conversion [to Several studies suggest that downtowns do better as job centers when residential or mixed-use].
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Properties | November 2023