The recent Covid-19 pandemic rapidly accelerated the ongoing trend toward remote work in the United States, with the percentage of employees working 5 or more days a week from home increasing from approximately 6% in 2019 to over 20% in 2024. This trend has been concentrated in the office sector, with vacancy and utilization rates among U.S. commercial office buildings increasing 30-40% over comparable pre-pandemic rates, with the increase even greater among central business districts of large urban areas. To respond to this dramatic and seemingly enduring drop in demand, the owners of underutilized commercial office properties have made a concerted effort in the past two years to diversify their occupancy mix by pursuing “adaptive reuse” conversions of office space into residential, hospitality, educational or other alternative uses.
Adaptive reuse conversions of office properties inevitably involve major interior, and sometimes exterior, renovations that need to be undertaken by the property owner rather than being outsourced to tenants. Because these renovations often are performed before the property owner has secured new tenants to occupy the renovated space, building owners will need to avail themselves of third-party financing to pay the costs of the adaptive reuse. Federal and state programs that provide for tax credits for the cost of improvements or make available loans for various property enhancements are attractive options for property owners to cover gaps in private financing for adaptive reuse developments and to preserve or enhance the value of their properties.
Several existing federal tax incentive and loan programs are especially useful for adaptive reuse developments where older underutilized office buildings are converted to residential or other non-office use. Among the most common is a program from the U.S. Department of Housing and Urban Development (HUD) to provide transferable 4% and 9% Low-Income Housing Tax Credits for the development or redevelopment of affordable housing units, based on criteria established by HUD for affordability within specific US metropolitan statistical areas. The U.S. Department of Treasury operates the New Markets Tax Credit program in which the Department designates “Community Development Entities” such as banks or non-profit institutions to obtain tax credits that can be sold to developers of housing or commercial real estate in certain US census tracts that meet specified economic criteria. Another long-standing tax-credit program is U.S. Historic Tax Credit Program, in which investors in qualified historic properties can receive a 20% tax credit against qualified rehabilitation expenses such as facades, roofing, floors and elevators. The Historic Tax Credit Program is available for buildings that are certified as historic, or are located within registered historic districts, by the U.S. National Park Service.
In addition to tax credit programs, there are numerous federal, state and local government loan programs that can be accessed by developers undertaking adaptive reuse of buildings. A recent prominent example is the HUD Green and Resilient Retrofit Program, which provides low-interest HUD loans to multifamily residential redevelopment projects which incorporate climate-resilient or utility-efficient measures (such as HVAC heat pumps, clean energy generation systems and green roofs) or are intended to achieve advanced green building certification as part of large-scale retrofit plans. These loans range from $750,000 per property for limited property improvements to up to $20 million per property for comprehensive energy-efficient retrofit projects.