Cities Use Variety of Tax Breaks to Entice Office Conversions

Jan. 31, 2025, 9:45 AM UTC

In Chicago, LaSalle Street cuts through a historic stretch of real estate lined with architectural high-rises and skyscrapers.

The corridor is the gateway to the city’s financial district, where offices make up more than 85% of the nearly 23 million square feet of leasable commercial space, according to a 2022 market analysis. But company exits and remote-work trends have hit the city and developers hard, sending office vacancy rates as high as 26%.

Chicago is banking on its Loop Revitalization Initiative to restore its downtown through conversions of privately held office buildings. The initiative uses tax increment financing to support the development of its office-to-residential conversion projects, using property tax revenue to subsidize economic activity.

Tax increment funding is one of several measures Chicago and other cities are using to entice companies to convert disused office buildings into new residences as they seek to shore up their housing supply and rejuvenate downtowns.

The result is web of subsidies, tax abatements, credits, and other incentives for developers to navigate—and the results are far from immediate. Across cities, officials acknowledge the complexity while practitioners caution patience on whether these efforts will pay off.

‘Lasagna Financing’

To qualify for Chicago’s TIF, developers must set aside 30% of units for people earning up to 60% of the area media income, said Cindy Roubik, deputy commissioner of the city’s Department of Planning and Development. Five projects, with costs ranging between $64 million and $241 million, are currently moving through the approval pipeline.

All are using TIF, Roubik said, along with a mix of other incentives, including federal historic tax credits, mixed income housing tax abatements, and low-income housing tax credits with tax-exempt bonds, among others. Roubik described it as “lasagna financing.”

According to city data, a reimagined LaSalle Street is expected to convert 1.6 million square feet of empty office space into more than 1,400 mixed-income housing units and more than 430 affordable residences. It’s also expected to generate an additional $5.8 million more annually in property tax revenue after conversion, a 49% increase from current levels, according to Emily Thrun, a city planner.

Roubik said there is “collective kind of agreement” that the incentives are working and having a domino effect benefiting the retail, office, and housing sectors. “We’re hearing not just from property owners that are converting their projects, but we have support from other property owners who are still staying as commercial use because they recognize this is gonna help position their projects and buildings as well,” she said.

DC’s Central Business District

Washington, DC, first announced its Housing in Downtown program in 2022, looking to stimulate residential development in a business district where office vacancies have increased from less than 10% in 2014 to 22.5% as of January 2025.

Updates to the program announced in March 2024 raised the cap to fund conversion projects from $6.8 million to $41 million and modified affordability requirements. Developers that make 10% of units affordable at 60% median family income or 18% affordable at 80% of MFI receive a 20-year residential property tax abatement.

Grant Steinhauser, a principal in the real property tax practice at Ryan LLC’s Washington office, said it’s “definitely too early” to tell if the city’s plan will work, because it can take up to five years for a project to be completed and for people to move in. One, offering up to 600 units, won’t be finished until 2028 at the earliest, he estimated. There are 12 total projects i n the city’s pipeline.

“Definitely, it’s a better outcome than without the conversion, but it’s going to be a long haul to really truly change the nature of downtown DC,” said Yesim Sayin, executive director of the D.C. Policy Center, a local think tank.

Slow Takeoff in Boston

Boston’s Downtown Residential Conversion Incentive Program started taking applications in fall 2023, with a goal to incentivize developers to transform their commercial buildings into much-needed housing.

Key features include a property tax abatement up to an average of 75% for up to 29 years, a requirement that 20% of units be deemed affordable, and a 2% transfer tax if the building sells within five years after the start of an abatement.

An initial application deadline of June 2024 was extended through December 2025, and the program added $15 million in state funding from Massachusetts. But as of last September, there were only 11 applications.

“There’s certainly been some interest, but not necessarily to the level that the city was looking for,” said Daniel Swift, a property tax principal at Ryan in Boston.

Swift attributed the lukewarm response to several factors, including buildings that still have current tenants, and structural features like “unconventional” floor layouts and limited natural light exposure. Consequently, developers would have to think about whether a building could be adapted for residential use, along with the high costs of construction, labor, materials, and debt financing.

Currently, office vacancy in downtown Boston is about 20%, and projected to increase to 30%. Office values are predicted to drop by at least 30% and cost the city over $1 billion in tax revenue, according to one analysis.

Swift said the city put “extremely tight deadlines” on the conversion program. He said it will be challenging for developers to meet the application deadline, and get a building permit and start construction by the end of 2026.

Judging the program is hard, Swift said, “because anything is better than nothing.” As for finding a suitable building for conversion, “It’s like finding a unicorn.”

To contact the reporter on this story: Arnesa A. Howell in Washington at correspondents@bloomberglaw.com

To contact the editors responsible for this story: Benjamin Freed at bfreed@bloombergindustry.com; Kathy Larsen at klarsen@bloombergindustry.com

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