As we’ve previously discussed, the Washington legislature recently passed legislation to allow conversion of underutilized commercial office space to residential units. You may find that article here.
The federal government recently established and revised several grant and preferential loan programs to assist with funding those conversions and/or new residential developments if the residential units are close to major transit corridors.
The Housing and Urban Development office administers the Community Development Blocks Grants (CDBG) program. The funding is granted to state and local governments, who distribute money to CDBG applicants, as either loans or grants. The funds may be used to acquire, rehab, and convert commercial properties to residential and mixed-use properties.
The U.S. Department of Transportation administers two Transit-Oriented Development residential conversion programs. The first, the Transportation Infrastructure Finance and Innovation Act (TIFIA), provides preferential financing for projects that: (1) improve or construct public infrastructure within walking distance (i.e., 0.5 miles) of and accessible to a fixed guideway transit, intercity or passenger rail, intercity bus station, or intermodal facility; or (2) projects for economic development, including residential housing, that are physically or functionally related to a passenger rail or multimodal station which includes rail service, and that improves or adds public infrastructure. Projects must cost a minimum of $10 million. Up to 49% of project costs (if eligible) can be financed by a TIFIA loan. The rate on the loan is fixed and roughly equal to the yield on US Treasury securities with comparable maturity. TIFIA funds can be lent directly to a private entity with a public sponsor. Loans can secure a repayment period of up to 35 years. This program currently has more than $70 billion in lending capacity.
The Transportation Department also administers the Railroad Rehabilitation and Improvement Financing program. RRIF provides below-market financing for commercial-to-residential development near commuter rail or intercity rail stations. The funds are slightly more restricted than TIFIA funding. Costs that are eligible for RRIF loan financing must: (i) incorporate more than 20% private investment in total project expenses; and (ii) be physically connected to or inside one-half mile of a fixed guideway transit station, an intercity bus station, a passenger rail station, or multimodal station—provided the location includes service by a railroad. The applicant must demonstrate an ability to begin contracting within 90 days of the funds becoming obligated, and demonstrate the project will generate new revenue for the relevant passenger rail station. These loans may also have up to a 35-year repayment period. Unlike TIFIA, there is no maximum or minimum project cost, and up to 75% of eligible costs may be financed by an RRIF loan. This program currently has more than $30 billion it can lend.
As of January 3, 2024, both loan programs offered a 4.11% interest rate.
Although these funds are encouraging and may enable a project to pencil, experience has shown that current and impending building and fire code requirements can render a conversion project infeasible. Legislative and administrative code changes may be required—or at least advisable—to help make office-to-residential conversions a reality.
